A New King of the Asian Low-Cost Air Jungle?

A New King of the Asian low-cost air jungle?

In 10 years, there could be a new king of the Asian low-cost air jungle. Lion Air is emerging as the most serious competitor to Air Asia in the Asia-Pacific region. Indonesia’s largest airline by passenger volume has already aggressively expanded to service its country’s archipelago’s poor transport links. As the world’s fourth most populous nation with 230 million people, Indonesia has half the domestic air travel that Malaysia’s 28 million people have. With an emerging middle class and the fact that Indonesia is made up of Islands which makes air travel the only viable way to travel quickly around the country, there is great room for growth in one of the world’s fastest growing economies.

But the opportunities are not just in Indonesia, Lion Air want to expand in the Asian aviation market and there are plenty of opportunities here. Low-cost airlines have grown their market share in the region from 0 to 25% just over the past 10 years. There are now around 50 budget airlines servicing the Asia-Pacific region. Although low-cost airlines account for 25% of the total Asian air market currently, there is a lot of room for growth as in Europe and North America budget airlines account for 35% of the total air market. Furthermore, despite having 3 billion people in Asia compared to 300 million people in North America, North America has three times the number of planes that Asia has. Lion Air’s huge capital investments in aircraft and strong home market of Indonesia should ensure they capture a large cut of this growth. There is also simultaneous growth in the number of global air passengers hailing from Asia – 33% now and projected to increase to 37% or 877 million passengers by 2015 as the middle class continues to grow. This number is larger than any other geographic region meaning that Asia-Pacific will drive global growth in the air travel industry. In addition, the Asian air market has experienced strong growth in the past decade despite setbacks such as SARS, bird flu and the financial crisis impacting East Asian markets, Europe and the USA.

Lion Air ready for take-off

With projections of a 6.5% annual increase in low-cost air travel in Asia over the next 15 years, Lion Air and Air Asia have made the biggest orders of any low-cost carriers in Asia. Lion Air has placed orders for nearly 500 aircraft to be delivered over the next few years both from Boeing and Airbus. Once the two orders are completed, they will have 700 planes and, measuring by number of planes, could move ahead of Air Asia. Lion Air’s co-founder and CEO, Rusdi Kirana, has financed these new aircraft by selling them to a leasing firm which will then lease them back to him for a fixed period – by buying so many aircraft in two orders, Rusdi Kirana is keeping prices very low and thus enabling Lion Air to offer tickets for US$40-60. Another draw is that Lion Air has grown so fast since its founding in 2000 with only one aircraft; now it operates more than 100 planes, carried 32 million passengers in 2012, carries passengers to 72 destinations in Indonesia and South-East Asia, and boasts a 45% share of Indonesia’s domestic air travel market.

Perhaps there will be a new king of the Asian low-cost carrier market, but it will be interesting to see how Air Asia respond. For now, this is a good growth investment to watch. Lion Air has previously planned an initial public offering on Jakarta’s stock exchange, yet has delayed it until next year.