When news broke that Malaysia low-cost carrier AirAsia has signed an agreement to acquire Indonesia's Batavia Air, it took many - including the country's own transport ministry, by surprise.
While it is not often that low-cost carriers propose a complete buyover of another carrier, AirAsia appears to be taking a step in the right direction, analysts say.
For one, the deal, to be done in collaboration with AirAsia's Indonesian partner Fersindo Nusaperkasa, will give AirAsia immediate access to a fleet of 33 aircraft, trained pilots and crew, and more importantly, increasingly coveted slots at major Indonesian airports.
Capacity in Indonesia, as measured by ASKs, has doubled over the last five years - from 31.6 billion in 2007 to 65.8 billion in 2012, ICAO data shows. This means that there are now 489,430 domestic departures in Indonesia annually, up from 286,063 five years back.
Batavia Air now has about an 8.5% market share, trailing behind leaders Lion Air and Garuda Indonesia, while ahead of smaller players such as Merpati Nusantara Airlines, Mandala Airlines and Sriwijaya Air.
Indonesia AirAsia, rebranded and launched in 2005, has only managed to capture about 3% of the market so far.
"AirAsia decided to acquire Batavia because it is one of the few leading domestic airlines in Indonesia and has a strong domestic presence. It also has 4,500 ready-made distribution channels that AirAsia could utilise. Hence, we find all that attractive," says an AirAsia spokesman. He adds the acquistion of Batavia will give the carriers a combined 10% market share.
"Having a local partner in Indonesia is not just pragmatic but essential given the nature of business life here. Investing in Batavia immediately affords AirAsia entry into the lucrative domestic market where Batavia flies to over 40 destinations," says Standard & Poor's analyst Shukor Yusof.
While Yusof believes that it will still remain "almost impossible" for AirAsia Indonesia to break Garuda and Lion Air's grip on the market, Ascend's head of consultancy in Asia Paul Sheridan says that move will at least allow the low-cost carrier to "better compete" against the two largest players.
"The acquisition also adds scale and opens up markets to the purchaser while also removing a competitor," he adds.
AirAsia meanwhile has not revealed details of how the two airlines will work together after the buyover concludes in 2013, saying that it is still premature as due diligence on Batavia is yet to be complete. All that is known is that AirAsia will hold a 49% stake while Fersindo will take the remaining 51%, through an $80 million cash transaction.
"The low-cost carrier market in Indonesia is massive and still under-penetrated in terms of passengers over total population. There is ample opportunities for AirAsia to grow in Indonesia," says a spokesman.
Singapore's Tiger Airways, which in January completed the purchase of a 33% stake in Mandala says it will "watch and see how the combination will actually deliver in marketing presence and capacity into the market", taking into consideration that Batavia is already in the market today.
The deal however, will almost definitely place AirAsia in a stronger position when the Association of Southeast Asian Nations' (ASEAN) open skies agreement is implemented in 2015. Competition is expected to intensify further in the already stiff market when the policy kicks in, reducing barriers for airlines in the region to expand their networks.
Indonesia looks to be the most attractive market with its 240 million strong population and 17,000 islands. Passenger traffic in the country grows by at least 5% annually, driven by demand from the 35 million people from the middle class.
"The country's GDP growth rate, its geography, the growth of LCCs and the improvements in infrastructure all create a near perfect scenario for growth in aviation," says Sheridan.
Lion Air's president director Rusdi Kirana in December told Flightglobal that he targeting growing the carrier's domestic market share from 47% to 60% by 2013.
It now has a firm order for 201 Boeing 737 Max, 129 Boeing 737-900s and 27 ATR 72-600s. The turboprops are for its regional subsidiary Wings Air to develop new routes departing mainly from Sumatra, Kalimantan, Sulawesi and Papua islands. This will also make Wings Air the largest ATR operator worldwide.
Lion Air is also set to launch a new premium carrier Batik Air in 2013, further increasing its competitiveness.
Flag carrier Garuda meanwhile plans to grow its fleet to 194 aircraft by 2015. These include 50 A320s for its low-cost arm Citilink, 25 regional jets, 83 narrowbodies and 36 widebodies.
Its chief executive Emirsyah Satar has said that the narrowbodies will mainly be deployed for domestic and regional use. The carrier is also planning to acquire either the ATR 72 or Bombardier Q400 turboprops to serve low density routes in eastern Indonesia - a calculated move to take on Lion Air.
"The smaller players are running the risk of being swamped by Garuda and Lion Air even without AirAsia's proposed acquisition. It is very difficult to play catch up so the smaller airlines will need to find a niche and differentiate themselves from the main players," says Sheridan.
How successful such acquisitions will be however remains to be seen. "It's too early to say how AirAsia-Batavia will pan out as it is with Tiger-Mandala. Advantages are lower fares and lower yield management while disadvantages we'll have to wait and see, perhaps in the areas of punctuality and safety although these aspects have improved considerably in Indonesia," says Yusof.
Source: Air Transport Intelligence news
