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Saturday September 15, 2012

Malindo Airways expected to give AirAsia a run for its money

It was a marathon meeting lasting 24 hours in a hotel in Singapore over two weeks ago that resulted in the creation of Malindo Airways.

The meeting was between Rusdi Kirana, president director of Indonesia's largest privately owned airline Lion Air and Malaysia's National Aerospace & Defense Industries (Nadi) low key businessman Tan Sri Ahmad Johan.

Both had desires to expand their empires. One to set up an airline in Malaysia the same way AirAsia has set up airlines in several countries, and the other wanted to get the regional MRO business because they had “scalability and expertise.''

All this started three months ago, according to those in the know.

It is no secret that Rusdi has been wanting to set up an LCC in Malaysia. Two earlier attempts, a courtship with Firefly and later with Berjaya Air, fell through. And Nadi wanted a slice of Lion Air's MRO business. An introduction took place and both realised that they had something to offer.

This was also about the same time Ahmad Johan was rumoured to be preparing a paper to buy over a majority stake in Malaysia Airlines (MAS), perhaps, on the hindsight, it may have been Malindo Air and not MAS.

Before the marathon meeting two weeks ago, both parties met high-ranking government officials for the official blessing. That was necessary since the Government has a golden share in Nadi and Minister of Finance Inc holds a 5.74% equity stake in Nadi. An 83.73% stake in Nadi is held by PJS Industries Sdn Bhd, a company controlled by Ahmad Johan and the remaining 10.53% is held by Rantai Wawasan.

Nadi has been involved in maintenance and provision of services for the Royal Malaysian Air Force fleet. “It is a nice fit, both had something to offer the other and both were passionate about it. So that is how Malindo Air came out but everything happened very fast,” said a source.

But the relationship does not end at just setting an LCC. There will be the MRO business where Nadi will enter into a joint venture to undertake MRO works for all of Lion Air's 100 aircraft. Plus there is also the training element.

Lion Air is the largest airline by market share and fleet size in Indonesia and although its current fleet size is 100 aircraft, it has ordered 382 aircraft. That makes Lion Air one of Boeing's biggest customers in the world with deals topping US$22bil, says an analyst in his report.

Lion Air has been in the business since 2000, and flies to 73 destinations across five countries. By March 2013, it will begin a long haul service via Batik Air. It is owned by Indonesia's tycoon brothers, Rusdi and Kusnan Kirana and corporate personalities say “the Kirana brothers are seasoned businessman and politically well-connected individuals.”

Nadi has been in the MRO business for many years and Airod is its unit. Nadi recently hired former MAS MRO chief Mohd Roslan Ismail as managing director of Airod Aerospace Technology for its regional expansion.

Under the deal, Nadi holds 51% stake in Malindo Air while Lion Air's parent, PT Lion Grup will hold the remaining 49%. The driver for the airline operations is Lion Air as it has the expertise and Rusdi's right hand man, Chandran Ramamuthy has been appointed CEO of Malindo Air. Since Lion Air has a big order of Boeing aircraft, it will push some of its aircraft deliveries to Malindo Air, which will acquire 12 B737-900ER aircraft per year to have a fleet size of 100 in 10 years or by 2023.

Both Rusdi and Ahmad Johan declined to discuss how much of money they will put into the venture and where are their sources of funding.

These aircraft will be used for short haul flights within Asean, connecting the region with Indonesia. KLIA2 will be the main hub for Malindo Air and it would have a secondary hub in Kota Kinabalu and Asean cities will be its target routes. It will also fly domestic routes in the country.

According to a Maybank Investment Bhd report, Malindo Air's fleet by 2015 will include the B787 which will be suitable for medium to long haul routes.

“Based on the management presentation, it (Malindo Air) aspires to become Malaysia's next full fledged national airline,” Maybank says.

The report adds that Malindo Air should be able to leverage on its parent's infrastructure to build an efficient operations quickly. Lion Air is a formidable opponent to AirAsia in Indonesia; its ticket fares are often more competitive and it enjoys popular support among local Indonesians.

“Malindo Air's seat pitch of 31 inch is 7% roomier compared with AirAsia's and it provides complimentary frills such as light snacks, drinks, in-flight entertainment and uses the aerobridges. In addition, we estimate Malindo Air's Boeing 737-900 aircraft has superior cost economics for flights which are above two hours against AirAsia's Airbus A320 aircraft,” Maybank says.

“We are confident that Malindo Air will be able to be profitable quickly (less than one year) on domestic Malaysia and Indonesian routes given the strong demand and existing client base to tap onto. Other international destinations may consume longer period (two to three years) to turn profitable.”

The house adds that with the entry of Malindo Air, AirAsia's virtual monopoly ceases and yields are set to decline and profit contribution from AirAsia's biggest market will recede.

Note that AirAsia Indonesia's operations are significantly less profitable compared with its Malaysian operations.

“We think this is due to Indonesia's more competitive landscape (whereby Lion Air is the key competitor), and higher cost base. What we see in AirAsia Indonesia's profit margin could possibly happen in AirAsia Bhd going forward.”

Reports have suggested that by 2030 there will be 2.2 billion passengers in Asia Pacific and from this Malaysia will have 200 million, so there is room for more players so long growth in Asia continues.

An aviation expert points out that if other Asean countries can have more than two LCCs, then there is plenty of room for Malaysia to have another LCC.

The onus now is really on Rusdi and Ahmad Johan to deliver.

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