Some financiers question Lion's ambitions in the wake of Bali crash
Indonesian low-cost carrier Lion Air is among the rising stars of the global airline industry, but the crash of a Lion in Bali last month is prompting some to wonder if the carrier will be able to handle all that it aims to accomplish.
The airline has made headlines with multibillion-dollar orders for, and aircraft that would make it one of the biggest carriers in the world in the coming years. But it must still secure financing for some of those aircraft, and it will have to try to multiply in size in a very short period of time without diminishing the quality of its equipment and service. The emphasis on and perception of safety and quality are particularly important for low-cost carriers (LCC), which may be suspected of cutting corners.
The April 13 incident in Bali has raised questions about Lion's ability to manage its rapid expansion. The 737-800 on final approach to Ngurah Rai International Airport landed in shallow seas short of Runway 09, then broke in two and became stranded on rocks 50 meters (156 ft.) from the runway, which juts out to sea. All 101 passengers and seven crew onboard survived, although 46 were taken to hospital.
An aircraft financing executive says the crash alone is not cause for concern, but he stresses that quality control “is extremely important for such a rapidly growing airline, [and] we have some more questions about the viability of their extreme fleet-growth plans in a very competitive market.”
CEO and co-founder Rusdi Kirana will have to answer those questions, amid high stakes and in the international spotlight due to Lion's huge aircraft orders. He signed a contract in November 2011 for 230 Boeing 737s as U.S. President Barack Obama looked on, and two months ago, Rusdi signed an order for 234 Airbus narrowbodies at the Elysee Palace in Paris with French President Francois Hollande in attendance. Lion has also bought 60, some of which have been delivered.
While these are big commitments for the airline, they also represent strong vested interests on the part of Airbus, ATR and Boeing to ensure Lion's success.
Airbus was able to provide Lion a sizable number of 2014 delivery slots, making a strong argument for the narrowbody order that followed the commitment with Boeing. Recognizing the big potential in the Southeast Asian air travel market, Lion needed to secure early delivery slots to enable it to expand more quickly than its competitors. No single manufacturer would have been able to deliver as many aircraft as Lion wants.
Along with subsidiary Wings Air, Lion controls 48% of Indonesia's domestic market, which is Southeast Asia's largest aviation market and growing at 15% per annum. Lion and Wings have a combined fleet of 122 aircraft, according to the Aviation Week Intelligence Network Fleet database, a huge number for an airline that only started operating 13 years ago, with two leased Yakovlev Yak-42Ds and a Boeing 737-200.
None of the major aircraft lessors or financiers were prepared back then to do business with Rusdi, who had start-up capital of $900,000. But Lion has been able to win over the financial community. Those that have helped finance Lion's aircraft include Apple Bank for Savings (New York), BNP Paribas, Cathay United Bank, Citibank, Credit Agricole, DVB Bank, Korean Development Bank and Natixis.
With the new aircraft, Lion aims to expand its domestic and international network as well as add frequencies, particularly on domestic trunk routes. To fend off competition, the airline operates its major routes like shuttle services, with flights leaving every half-hour.
Only a few of the many aircraft Lion has ordered are intended to replace older types. The carrier still has seven Boeing MD-80s and seven 737-300/400s. But the orders for the Airbus and Boeing narrowbodies are also spread over many years. For example, the first Airbus narrowbodies will be delivered next year and the last in 2026.
Prior to moving into the airline business, Rusdi and his brother and Lion co-founder, Kusnan, owned and ran a travel agency, a business that is still very important to the airline industry in Indonesia. Internet penetration is low in the country and many people do not have credit cards, so travel agents account for the bulk of many Indonesian carriers' ticket sales.
In addition to its focus on the Indonesian market, Lion is establishing new airline ventures overseas. In Malaysia in March it launched Malindo Air, which operates two 737-900ERs. Rusdi told Aviation Week in early March that Malindo would have 10 737-900ERs by year-end. The director general of Malaysia's department of civil aviation, Azharuddin Abdul Rahman, says Malindo also plans to operate ATR 72s from Kuala Lumpur's Subang Airport.
Industry sources say Lion is looking at starting an airline in Australia as well, though its weak image overseas may make it hard for the carrier to win over the Australian public.
Lion is expanding beyond the airline business, too. Last year, it established Transportation Partners, an aircraft leasing company in Singapore. The company has a remit to lease to Lion group carriers, but also to third-party airlines. Because Lion has ordered so many aircraft, it has a competitive advantage—it is paying lower prices than aircraft leasing companies and other airlines. And having both Airbus and Boeing aircraft helps Transportation Partners attract a broad customer base and minimize risk. Purchasing aircraft in bulk, at low prices, also gives Lion and Transportation Partners the flexibility to sell their aircraft to realize a quick profit.
The 737-800 involved in the April 13 incident, and which was delivered to Lion in February, was owned by Irish lessor Avolon. Prior to delivery, Lion did a sale-leaseback deal with Avolon on six 737-800s.
Rusdi insists the recent crash will have no effect on aircraft deliveries. Lion will continue to receive 24 737-900ERs and 12 ATR 72s this year, as planned. However, it delayed the envisaged April launch of its new premium carrier, Batik Air. The first flight is now scheduled for May 3.
Part of the concern about Lion's quality control is the doubt, even expressed by aircraft-makers, about whether Indonesian carriers can find enough pilots and maintenance engineers to support such massive fleet expansions. Rusdi says his company can source enough pilots and maintenance staff because it has its own flying school, as well as a training facility for maintenance engineers. The airline has received assistance in training and safety over the years from Boeing. Lion will continue to recruit some foreign pilots in the near term, but in the long term it wants all of its pilots to be local hires.
Another hurdle for Lion is passing the's Operational Safety Audit (IOSA). Nearly all airlines in Indonesia—including Lion—are banned from European and U.S. airspace because of and U.S. concerns about the Indonesian Directorate General of Civil Aviation's ability to provide proper regulatory oversight. Lion is well-advanced in its efforts to pass the IOSA, however, and hopes it will soon be exempted from the European Union ban.
Lion has had one fatal accident: in November 2004, an MD-82 slid off the runway at Surakarta. Its last incident before the one in Bali last month was in November 2010, when a 737-400 overshot the runway at an airport in Pontianak, Indonesia. There were no fatalities and only minor injuries.
|Source: Aviation Week Intelligence Network Fleet Database|