Sky's the limit? Southeast Asia budget airlines bet big on growth

Sun Mar 24, 2013 9:09am EDT
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By Anshuman Daga

SINGAPORE (Reuters) - Lion Air's record aircraft orders underline the ambitious plans the privately held Indonesian group is hatching to emerge as a pan-Asian low cost carrier, throwing a serious challenge to AirAsia Bhd, the region's biggest budget airline.

The rivalry intensified on Friday when Lion Air launched its first service in Malaysia, barging onto AirAsia's home turf, but the pace of expansion has raised questions about whether airlines are overextending themselves.

Financiers and industry executives, however, say the party is just starting, with the region's budget carriers just beginning on the rapid growth path enjoyed by Ryanair Holdings Plc and Easyjet Plc in Europe and Southwest Airlines Co, the pioneer of the model, in the United States.

"I think it's been pretty rational in the sense that it is underpinned by economic prospects," Eric Eugene, BNP Paribas's global head of transportation banking, told Reuters in an interview in Singapore. "It's underpinned by the number of people capable of paying fares and flying."

The staggering bets being placed by both airlines rest on the dominant market shares they enjoy in their home countries and the hope that rising disposable incomes will drive Asia's growing middle class to keep flying to new destinations.

Lion Air's co-founder Rusdi Kirana placed a blockbuster order for 234 medium-haul jets with Airbus this week, just a year after ordering a record 230 Boeing planes.

Despite the projections of sharp growth, some bankers and lessors have expressed concerns that the series of record-breaking orders risks flooding Southeast Asia with too many narrowbody planes.

"The one thing that we have to consider is that the delivery span of those aircraft is over, probably, 10 years," said BNP Paribas's Eugene.   Continued...

A Lion Air airplane takes off at Soekarno-Hatta airport in Jakarta March 18, 2013. REUTERS/Beawiharta