Low-cost airlines stake claims for supremacy in southeast Asia

The airline industry is no stranger to personality-driven battles. Now, two southeast Asian heavyweights are facing off, as Tony Fernandes, the big-talking Malaysian founder and chief executive of AirAsia, takes on Rusdi Kirana, the publicity-shy founder of Indonesia’s Lion Air.

The two biggest and fastest-growing low-cost carriers in Asia have become important customers for airliner manufacturers Boeing and Airbus, with hundreds of aircraft on order between them, and their ambitious expansion plans are pushing them to compete head-to-head.

Last year, Lion entered AirAsia’s home market after setting up a joint venture, called Malindo Air, with Malaysia’s National Aerospace & Defence Industries, while AirAsia has been trying to expand in Indonesia after the jet-setting Mr Fernandes symbolically acquired an apartment in Jakarta.

In an industry where profit margins are thin and susceptible to volatile outside factors such as oil prices, will intensifying competition between Lion and AirAsia develop into a Darwinian battle of survival? Or is there enough demand from the fast-growing middle class in this region to keep both going strong?

Raman Narayanan, AirAsia’s head of government relations for southeast Asia, says his airline is convinced that, with the air travel industry still so under-developed, there is plenty of room for both to thrive.

“The market is definitely big enough,” he says. “Southeast Asia has 600m people who are divided by large bodies of water. Compare that with the US, where there are 320m people and a fantastic highway network. Or Europe, where there are 400m people and fantastic rail networks. And yet, while the US has 7,050 commercial aircraft in use and Europe has 4,200, southeast Asia still only has 1,050.”

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It is no surprise, he adds, that this region currently has 1,200 more aircraft on order, led by Lion and Air Asia.

Underpinning his bullish view are the robust rates of economic growth in the region’s big emerging markets – Indonesia, Vietnam and the Philippines – and the large middle classes in these countries.

In Indonesia, southeast Asia’s biggest economy, the middle class will nearly double from 74m to 140m by 2020, according to projections from Boston Consulting Group, which defines this grouping as those households spending more than Rp2m ($164) a month.

“Over the next 10 years, there will be more competition, but the region is growing quickly and more people will be able to afford to travel,” says Mr Narayanan. “When people get money in southeast Asia, the first thing they do is buy a car and then they take their family on an overseas holiday. It’s all about status.”

Brendan Sobie, a Singapore-based analyst at the Centre for Aviation, a consultancy, agrees that, against this macroeconomic backdrop, competition between Mr Fernandes and Mr Kirana is “not necessarily a zero-sum game”.

But, he says, while the tycoons’ airlines supplement each other in some areas, helping to deepen the air travel market, they are going head-to-head on some routes.

“Lion has gone into AirAsia’s two largest markets in Malaysia and Thailand and AirAsia is trying to expand in Lion’s largest market,” says Mr Sobie.

Taking on a powerful incumbent is never easy. AirAsia tried to get a leg-up by taking over Batavia Air, an Indonesian carrier, in 2012. But it aborted the $80m deal because of corporate governance issues and its 49 per cent owned local affiliate, Indonesia AirAsia, remains dwarfed by Lion.

There are also questions about Lion’s Malaysia venture, according to Shukor Yusof, an aviation analyst at Standard & Poor’s Capital IQ, part of the debt rating agency.

“In the first six months, their numbers were terrific but then they’ve come to a point when they need to make money instead of just winning volume,” he says.

The biggest victim of Mr Kirana’s aggressive strategy in Malaysia seems to be Malaysia Airlines, the state-owned flag carrier, not AirAsia.

Over the next decade, analysts expect full-cost legacy carriers to be the main losers from the rise of low-cost operators in southeast Asia.

Low-cost carriers already account for more than half of the capacity in price-sensitive Indonesia, Malaysia, the Philippines and Thailand, compared with just 30 per cent in North America and 37 per cent in Europe, according to the Centre for Aviation.

Yet, despite the sense that there is sufficient growth to go round, the future dynamics of the AirAsia and Lion rivalry are hard to predict, given the lack of information about Mr Kirana’s business.

While AirAsia is listed on the stock market in Malaysia and Mr Fernandes regularly gives interviews about his plans, Mr Kirana rarely talks to the media, his privately owned airline does not divulge financial information or statistics and his occasional public pronouncements tend to be aimed at beguiling rather than elucidating.

“Given their scale, their sizeable order books and what’s behind them, it would be smarter to continue picking on the weak guys rather than each other,” says Mr Sobie. “But egos always come into play in the airline industry.”