Even before Malindo Air takes off, its rivals appear to be bracing for the impact of its entry into the Malaysian airline market.
When low-cost carrier AirAsia announced last week that it had tripled its net profit for 2012 to ringgit (M$) 1.88 billion ($606 million), analysts were instead busy forecasting that the figure would take a tumble once Malindo comes on board.
"We expect AirAsia Malaysia's core net profit will grow just 3% in 2013, before falling 4-10% in 2014-15 due to Malindo's entry," CIMB Research analyst Raymond Yap said in a report.
Malindo, a joint venture between Indonesia's Lion Air and Malaysia's National Aerospace and Defence Industries, received its air operator's certificate on 21 February.
Malaysian Prime Minister Najib Razak was the guest of honour last September at an event in Kuala Lumpur, where Lion's president director Rusdi Kirana announced plans to set up its first overseas subsidiary.
With that, Lion Air declared war as it stepped onto AirAsia's turf, just two months after AirAsia revealed plans to acquire Batavia Air to grow its network and fleet in Indonesia.
While the Batavia deal fell through, Malindo has brought forward its launch date by two months to March. This is because of Lion's need for a hub that can channel its feed to major destinations in the north, Kirana tells Flightglobal.
The carrier has also decided on its two initial routes - Kuala Lumpur-Kota Kinabalu and Kuala Lumpur-Kuching. It will operate thrice daily services on both routes, using Boeing 737-900ER aircraft. The aim is to grow its fleet to 10 aircraft by end-2013, and to 100 within 10 years.
Both routes are dominated by flag carrier Malaysia Airlines (MAS) and AirAsia. MAS and AirAsia operate 76 and 105 weekly services respectively on the Kuala Lumpur-Kota Kinabalu route, and 54 and 105 weekly services respectively on the Kuala Lumpur-Kuching route.
Analysts believe that Malindo will do better, when it starts offering services between Malaysia and Lion's home ground in Indonesia, where they are familiar with the market and have a good following.
"I'm a little surprised by the two routes they picked. There is already a full-service carrier and a low-cost carrier [LCC] operating there. These are difficult routes to penetrate because I don't see much new demand that can be generated," says Sagar Shahane, aerospace and defence consultant at Frost & Sullivan.
"Going forward, I believe their strategy would be to provide connectivity to major cities in Indonesia, where they have a good understanding of the region."
This is in line with what Kirana has previously said - that Malindo is not intended primarily as a Malaysian domestic carrier, but as an international one that will serve passenger feed from Lion's hubs in Indonesia such as Medan, Jakarta, Surabaya, Bali and Makassar.
Flightglobal data shows that AirAsia and its Indonesian operations dominate services from Kuala Lumpur to Medan and Surabaya. In addition to AirAsia, MAS, Garuda Indonesia, Mandala Air and Lion also operate a substantial number of services on the Kuala Lumpur-Jakarta route.
While Lion's foray into Malaysia is unlikely to affect AirAsia's dominant position in the country, analysts say this could erode its profits. MAS, which is trying to restructure itself and return to profitability, however, could struggle if Malindo sticks to its promises of frills and comfort at low prices, they add.
On its part, AirAsia says it will add 10 aircraft to its Malaysian unit's fleet this year and ramp up capacity, after years of holding back growth to allow for the expansion of its associates in the region. This will allow the carrier to start services on new routes, and also increase frequencies on popular ones such as those between east Malaysia and Johor.
Although MAS is expecting increased demand in 2013, the carrier foresees that LCCs will put pressure on yields.
Kirana has promised that as a newcomer, Malindo will offer ticket prices lower or at least on par with that of AirAsia's, which will likely spark a price war. Its aircraft will also be fitted with fewer seats, allowing for wider seats, and have in-flight entertainment systems.
The journey for Malindo, however, is not expected to be all smooth sailing.
"We expect AirAsia's core net profit to experience year-on-year declines from 2014 onwards, until the moment arrives when Lion decides to call off the Malindo venture in view of what we expect to be relatively large losses," says a CIMB research report.
Adds Shahane: "My feeling has always been that the Malaysian market is too saturated for new blood."
Source: Air Transport Intelligence news
