Business

Saturday September 15, 2012

Malindo can be a threat to AirAsia

A QUESTION OF BUSINESS
By P. GUNASEGARAM
starbiz@thestar.com.my


AIRASIA supremo Tan Sri Tony Fernandes has to be publicly sanguine about the threat that Malaysia's newest and second low-cost airline (Firefly does not count as one in our books) Malindo Airways poses.

But the shrewd operator that he is, he is much more likely to take the threat seriously in private and no doubt has his plans to reduce the threat and keep it to a minimum. It will not be at no cost though for a competitor puts pressure on margins and hence profits.

Perhaps the market has over-reacted with AirAsia's price, in the wake of the announcement of Malindo's formation earlier this week, being beaten down to its lowest levels this year but there is no denying that analysts have lowered forecasts for AirAsia.

Rusdi delivering his speech at the signing ceremony between Nadi and Lion Air to form Malindo Airways on Tuesday. The Lion Air group will provide the money needed for the airline to grow and is targeting 12 planes a year over the next 10 years. – Reuters Rusdi delivering his speech at the signing ceremony between Nadi and Lion Air to form Malindo Airways on Tuesday. The Lion Air group will provide the money needed for the airline to grow and is targeting 12 planes a year over the next 10 years. – Reuters

With Malindo promising to have fares comparable or lower than AirAsia's and other low cost carriers (LCCs) such as Jetstar increasing capacity in the region, the competition is already here to stay.

But that is a given considering open skies from 2015. Malindo's entry is just helping to hasten the process and it is only to be expected that the pace of competition will heat up ahead of full-blown access.

There are some factors which continue to favour AirAsia, not least of which is its brand, its safety record and its already well-established network.

Malindo, however, has problems in all these areas.

Malindo is a joint venture owned 51% by Malaysia's National Aerospace and Defence Industries (Nadi) and Indonesia's LCC and largest airline Lion Air which owns the remaining 49%.

Information on both shareholders is scarce but Nadi owns Airod which maintains aircraft from Malaysia's air force, navy and other government departments.

But information on Nadi itself is lacking, with CIMB Equity Research saying in its analysis that the company has not filed any reports to the Companies Commission from 2007. Tut, tut! Most of Nadi's directors (from its website) are former armed forces top brass. Nadi was at one time at least owned by government investment arm Khazanah Nasional and the Ministry of Finance Inc.

Its political links are no doubt very strong as shown by the presence of the Prime Minister at the announcement of the joint venture. Also present were Nadi's president Tan Sri Ahmad Johari and Lion Air's president Rusdi Kirana.

Malaysian registered Malindo will begin operations in May next year and is scheduled to start from the new low cost terminal at KL International Airport slated to be completed by then.

As such it can potentially do domestic routes as well in Malaysia although that does not seem to be on the cards initially.

It is no small operation because it will start services with Lion's 12 Boeing 737-900ER aircraft, the latest in Boeing's 737 range. It will initially fly to Indonesian cities such as Jakarta, Medan, Bali, Palembang, and Balikpapan.

It also plans to use Kuala Lumpur as an intermediate destination for Indonesians going on to other destinations such as Manila, Bangkok, Hanoi, Guongzhou, Shenzhen and Xiamen.

It is more than clear that it is a direct threat to AirAsia.

According to press reports quoting Rusdi, the Lion Air group will provide all the money needed for the airline to grow and is targeting to grow Malindo by an annual 12 planes over the next 10 years, an ambitious target indeed.

There are very little financials available on Lion Air but Rusdi and his brother Kusnan are on Forbes' list of the 40 richest in Indonesia at 34th with an estimated net worth of US$580mil.

That puts them in the same league as Fernandes whose net worth is estimated at US$615mil by Forbes, the 15th richest in Malaysia.

One cannot therefore underestimate the financial prowess of the Kiranas.

Lion Air is a sizeable airline. According to a CIMB Equity research report, it currently operates 85 planes mostly in the domestic Indonesian market while the AirAsia group operates 105 planes across Malaysia, Indonesia, Thailand, the Philippines and Japan. This excludes long-haul low-cost carrier AirAsiaX.

But the group is in the midst of a major expansion and with orders of 342, against AirAsia's 275, stands poised to overtake the latter.

However, CIMB says that if as expected AirAsia raised its orders, it might yet continue to be larger in terms of fleet size.

While Lion Air in Indonesia has had safety concerns in the past, it has moved quite fast to fix that and is increasingly accepted in terms of its safety standards. No doubt it will start pushing its brand overseas too.

Which all goes to indicate that the competition is really heating up on the low-cost sector. For the public, cheaper fares may be on the horizon for regional destinations but for the airlines there will be considerable jostling for market share and profits and some will fall and get hurt, even fatally.

But the strongest at the moment is undoubtedly AirAsia with a great regional presence, brand and innovative ways. And it is likely to maintain that position, even if it gets bruised in the process, so long as it is not too sanguine about the competition - the number one reason for the downfall of great brands through the ages.

P Gunasegaram (t.p.guna@gmail.com) lauds the democratisation of travel that low-cost airlines have brought about.

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