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Editorial: Concern over Lion’s expansion

The move by Lion Air, Indonesia’s second largest air carrier, earlier this week to expand its fleet by 234 jetliners of the A320 series worth US$24 billion once again shows the huge potential market for air travel within the world’s largest archipelagic country

The Jakarta Post
Thu, March 21, 2013

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Editorial: Concern over Lion’s expansion

T

he move by Lion Air, Indonesia’s second largest air carrier, earlier this week to expand its fleet by 234 jetliners of the A320 series worth US$24 billion once again shows the huge potential market for air travel within the world’s largest archipelagic country.

 The giant Airbus order, made only one year after Lion’s purchase of 230 airplanes of the Boeing 737-800/900 series valued at $21.7 billion, has certainly gained worldwide publicity, putting Lion Air, which was little known even in Indonesia before 2000, in the global list of high-growth budget carriers.

 However, the capacity jump also raises concerns over the safety of air travel in Indonesia and the commercial viability of such an aggressive, if not reckless, fleet expansion in view of the big risks of unsustainable debt burdens.

Such concerns are reasonable in view of the acute shortage of air transportation infrastructure in the country and the inability of local training facilities to meet the steep rise in the demand for pilots and other technicians for the rapidly expanding airline industry.

 The Indonesian airline industry has seen fewer fatal air accidents in the past two years but still has not improved regulation sufficiently to be upgraded. The European Union, which in 2009 lifted its blanket ban on Indonesian-flagged aircraft, last December noted sound progress in Indonesia’s air safety performance but said the government should continue efforts to make the civil aviation system fully compliant with United Nations standards.

Lion Air’s chief executive officer Rusdi Kirana said at the deal signing in Paris on Monday that the additional A320 aircraft would be operated by two new budget airline companies Lion Air would set up in the Asia Pacific region and
a full-service airline to be established in Indonesia in 2014.

The Asian region, especially China, India, Indonesia and Malaysia, now constitutes the fastest-growing region in the world for air traffic and a significant market for air passengers.

But while Lion Air has controlled nearly 45 percent of the domestic market, it has yet to show its competitive power on the international market. Lion, besides having to face keener competition from other domestic low-cost carriers such as Citilink, Sriwijaya Air and Mandala, is meeting big challenges from AirAsia, Tiger Airways, Jetstar and Spicejet in the Asian region.

 The emergence of many budget airlines has made air travel affordable to a large number of people, further fueling growth in air travel across Indonesia. However the profit margins remain quite thin while the labor-intensive airline business requires huge capital and high technology.

In an industry that produces a highly perishable product — an empty passenger seat is wasted once a plane takes off — carriers can easily resort to a price war. Worse still, fuel, the price of which is highly volatile, accounts for one third of airline operating costs.

 The quantum jump in Lion Air’s fleet could be a strategic move to gear up for fierce competition from our neighboring countries, especially in facing up the open-sky policy in the ASEAN region in 2016.

But questions still linger as to whether Indonesia’s market is large enough to drive most of Lion Air’s growth, or whether the carrier needs to come up with another successful business model if it wishes to expand aggressively overseas, thereby exposing it to the fierce competition in long-haul routes.

We wonder how many new domestic and international routes Lion Air can develop within the next five to 10 years when it will gradually take delivery of the 230 Boeings and the 234 Airbuses.

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