ANALYSIS: Delivery race between Lion and AirAsia intensifies

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Asia's fast-growing low-cost carriers have shown that they have no intention of slowing down in the next few years, at least judging by their order books.

Lion Air's recent order for 234 Airbus A320 family aircraft takes its total backlog of both Boeing and Airbus aircraft to 563.

That leapfrogs ahead of the other low-cost powerhouse in the region, AirAsia, which has 338 on order.

Flightglobal's Ascend head of consultancy Asia, Paul Sheridan, says that the rate at which Lion will receive its aircraft should allow it to integrate the A320s into its fleet without adding significantly to the carrier's cost base.

"It's a fleet in its own right, there are economies of scale in both fleets and they get their aircraft faster," he says.

An analysis of the delivery dates from Flightglobal's Ascend Online database shows that the new order will allow Lion to grow at a faster rate than AirAsia from 2016 onwards.

Lion Air

2013

2014

2015

2016

2017

2018

737-800 11 4
737-900ER  10 24 36 32 7
737Max 20 23
A320 6 16 38
A320 neo 24
787-8 5
TOTAL 21 34 57 70 27 47

Source: Ascend online database

AirAsia

2013

2014

2015

2016

2017

2018

A320 30 26 39
A320neo 4 14 18
TOTAL 30 26 39 4 14 18

Source: Ascend online database

This year and the next will see AirAsia take delivery of more aircraft than Lion. Most of those aircraft came from AirAsia's landmark order in 2007 when it chose the A320 to replace its 737 Classics.

For AirAsia, its deliveries will peak in 2015 when its last 39 baseline A320s are handed over, and after which, it will start to exclusively receive A320neos.

But in that year, Lion will also gain the upper hand over AirAsia in the delivery race, with 36 737s and 16 A320s to be handed over, in addition to the five Boeing 787-8s it has on order.

The big delivery numbers for both carriers in 2015 are a direct result of the implementation of the Association of Southeast Asian Nations open skies. As was the case with the European Union open skies, Sheridan expects that this will be the catalyst for both carriers to open new bases across Southeast Asia.

In particular, it will present an opportunity for Lion to catch up with AirAsia, which already has a strong presence across the region through its operations in Malaysia, Indonesia, Thailand and the Philippines.

"AirAsia is already there and flying," Sheridan says. "Lion only flies to about half the number of destinations because they are very Indonesia-centred, but they will become a Southeast Asian carrier."

Lion is obviously planning to gain some momentum from that. In 2016, it will take delivery of an astonishing 70 aircraft. AirAsia's scheduled delivery of four A320neos pale in comparison.

In that year, Lion will significantly ramp up the number of A320s in its fleet. That may be an indication that the airline plans to use the smaller capacity of A320 aircraft, compared with the 737-900ERs (180 versus 220 seats in an all-economy layout), to grow its network.

"The -900ER is a pretty big plane, so going for an A320 that is slightly smaller gives you a more flexibility to open up new routes," Sheridan says.

From 2017, Lion will start receiving its new generation aircraft 737 Max, with the A320neos following a year later. Both carriers seem likely, from then, to be focused on replacing their existing fleets with the newer, more fuel-efficient aircraft.

Replacements aside, Lion has given every indication that it will spread its wings possibly further than AirAsia.

Speaking to Flightglobal the day after the Airbus order was announced, Lion chief executive Rusdi Kirana has said that he intends to grow the carrier's network around the wider Asia-Pacific region, but would not be drawn on where the new bases are going to be.

Lion is also likely to use a number of its deliveries to more readily compete in the full-service market, which could allow it to avoid a bloodbath against AirAsia in markets where its competitor may be stronger.

Its Indonesia-based full-service carrier, Batik Air, is expected to launch operations in April, and will initially focus on domestic flying within Indonesia before expanding across the region.

That follows the launch of flights by Malindo Airways on 21 March. Kuala Lumpur-based Malindo plans to offer a full-service product, but with low fares. It appears that Malindo's hybrid model will allow the carrier to differentiate itself from AirAsia.

For his part, AirAsia chief executive Tony Fernandes does not seem concerned by Lion's rapid rate of aircraft deliveries. In a recent television interview, he said that compared with the USA and Europe, which both have smaller populations, the fleet in Asia is relatively small. As such, the capacity coming into the market over the next few years should be readily absorbed by growing demand.

Sheridan believes that the two carriers will - at least initially - compete against the legacy carriers in the region in the same way that Ryanair and Easyjet have done in Europe. Nevertheless, he adds that "they will end up inevitably competing".

Citi analyst Rigan Wong predicts that competition will be a challenge to the profitability of the two carriers over the short term, especially in their home markets.

In a February briefing note, Wong warns that the "continued jostling for Asian low-cost carrier dominance by Lion and AirAsia to lead to low-cost carrier overcapacity in Malaysia and Indonesia and weak yields and load factors for players in these markets".