Lion Air’s new full-service carrier, Space Air, appears set to launch in 2012.

Industry executives familiar with the situation say the Indonesian carrier has applied for an air operator’s certificate for the new full-service carrier. The new airline will operate Boeing 737s, Lion Air President Director Rusdi Kirana said in a local report. Lion Air executives told Aviation Week that Rusdi wants the new premium outfit to compete head to head with Garuda Indonesia and that the move is partly a response to Garuda’s Citilink’s moving into the low-cost carrier (LCC) market.

Rusdi is also aware that in Indonesia there is relatively little competition in the premium segment. Garuda is the country’s only premium airline, so margins are higher.

“In Indonesia there is a large, wealthy population. There are a lot of Indonesians that simply will not fly a LCC. So he sees there’s a lot of business that goes to Garuda,” says an industry executive who has leased aircraft to Indonesian carriers. “There’s also a lot of wealthy Indonesians who fly Singapore Airlines (SIA) when traveling internationally, and that is why SIA still has a first-class cabin on its Jakarta route,” adds the executive. SIA charges $1,300-1,600 for a first-class, roundtrip ticket for Jakarta-Singapore, a 90-minute flight.

Lion has plenty of 737s it can use for this new business because on Nov. 18 it agreed to order 201 Boeing 737 MAX aircraft and 29 737-900ERs. Before this agreement, Lion had 114 737-900ERs and 12 Boeing 737-800s on order, according to Boeing’s figures. A Boeing spokesman declines to say if any of the aircraft from the earlier order will be canceled as a result. “This is an agreement to order. Boeing and Lion Air are [still] working to finalize the details,” says the spokesman.

Some industry executives say the new deal will replace some of the earlier aircraft orders. There is no way Lion can make use of 143 new 737-900ERs on top of the 52 it has already taken, they say. Signing a new aircraft deal with Boeing enables Lion to delay aircraft deliveries and take the more fuel-efficient 737 MAX, so it can remain cost-competitive, they add.