Monday, March 25, 2013

Lion Air-backed Malindo Air launches in Malaysia: will destabilize balance of AirAsia and Malaysia Airlines

Malindo Air (OD) operated its first flight on 22 March from Kuala Lumpur International Airport (KLIA) to Kota Kinabalu in Malaysia. The airline is a joint venture between the largest and promising Indonesian LCC Lion Air with a 49% stake and National Aerospace Defense Industries (NADI) of Malaysia holding 51%. It also inaugurated a route to Kuching and operates a fleet of two Boeing 737-900ER large narrowbodies, one of which is the 7,500th 737 to come off the production line. The -900ERs are extensively used by Lion Air as well. Lion Air also sent an -800 to OD before the delivery of the larger variants.

The airline had been set up relatively fast, as it was only announced mid-2012. Its officials even expected to begin operations two months later than today, in May. It obtained an Air Operator's Certificate less than a month ago. Lion Air and NADI will jointly invest in the establishment of an aviation training center in Malaysia, and NADI will also carry out maintenance, repair and overhaul for OD. The "Malindo" name is derived from the first letters of Malaysia and Indonesia.

OD will soon start adding more services as it plans to serve 12 destinations by the end of the year. It will take delivery of two more 737s in June and expects to end the year with a fleet of 12, expanding to 100 by the end of the decade. Boeing 787-8 widebodies will also be operated by the airline after the planned deliveries in 2015, but Lion Air has not yet determined how many as some 787s will be forwarded to the airline’s soon-to-launch Indonesian long-haul subsidiary Batik Air.

Kota Kinabalu and Kuching are served three and four times daily respectively. The start-up says it is satisfied with forward bookings for the routes on offer now, although its first flight recorded a mediocre 70% load factor. It offers two classes and a fare level for each, but also shows a "Promo" fare level on its website (Airline Industry Blog can not confirm whether this is a true fare level or just a temporary promotional airfare). The start-up offers a generous seating configuration with only 12 seats in business class and 168 in economy. This is good news for travelers, but some analysts are rightfully concerned about the economics.

KLIA will be OD's main hub, and it plans to develop Kota Kinabalu as an important secondary hub. The latter city already sees services from AirAsia and Malaysia Airlines to domestic and international gateways. The airline will remain on routes not longer than 5.5 hours of flight time from its hubs.

It remains to be seen whether OD will develop a true hub-and-spoke system, which would differentiate it from AirAsia. On the other hand, by keeping its costs low and offering lower airfares, it could also distance itself from the country’s FSC Malaysia Airlines, meaning that the airline could be positioned between these two carriers which dominate the country’s market. The start-up did announce that it could go for a hybrid carrier model (its slogan is "not just low cost") and it implemented some elements that suggest that it will indeed not take a pure LCC model, such as two seating classes and free checked baggage (15kg for economy and 30kg for business class passengers). It also uses KLIA's main terminals, unlike AirAsia which utilizes a farther-away terminal dedicated to LCCs.

Lion Air Boeing 737-900ERDomestic expansion will not be overlooked by OD, but the airline is keen on launching international routes soon, and Delhi could become the first one by mid-2013. Growth markets like India, China and Indonesia, but also Thailand, Japan, Australia and Korea, are of particular interest to the start-up.

Lion Air recently placed an order for 234 Airbus narrowbodies, although it was so far a loyal Boeing customer which had placed a similarly sized order for Boeing aircraft a year earlier. Some of these aircraft will be used for more subsidiaries which Lion Air intends to launch in Asian countries, but no firm plans have been announced. OD is its only subsidiary outside Indonesia. This might further challenge AirAsia, as it has subsidiaries in Indonesia, Japan, the Philippines and Thailand.

Naturally, OD's entry is great news for Malaysian travelers as it will provide more variety and lower airfares. But it is not so great news for AirAsia and Malaysia Airlines. And while AirAsia will likely only get a bit of a challenge, Malaysia Airlines could be more impacted as it is trying to reach profitability. Malaysia Airlines has joined oneworld this year, which will definitely help in dealing with OD.