ANALYSIS: Have Lion and AirAsia over-ordered?

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There appears to be no simple answer to the question of whether Southeast Asia’s two giant low cost carriers have over-ordered.

Some of the gloss came off Southeast Asia’s LCCs in recent days. On 27 February, the same day that Qantas Airways said it would curtail the growth of its low cost Jetstar Asia unit, Malaysia’s AirAsia said it would defer 19 Airbus A320 aircraft.

The curtailment of Jetstar’s growth has far more to do with Qantas’s travails than Jetstar’s prospects in Southeast Asia. Unsourced reports that Tigerair Mandala is on the verge of being put out of its misery reflect more its tiny fleet size in the face of immense competition - and the growing impatience of its Singapore-based parent.

AirAsia’s deferral disclosure was tucked away on page three of the LCC’s decidedly downbeat earnings report, in which it revealed that 2013 net profits plunged 54% to M$364 million ($111 million). It attributed the profit shortfall to C-checks and lower fares, the latter of which could suggest AirAsia is feeling some heat from Lion Air’s new local unit, Malindo.

AirAsia’s deferral was quickly followed by news reports quoting two bosses of major lessors as saying that the region’s big LCCs might have bitten off more than they can chew with their aggressive ordering.

Air Lease Corp chief executive Stephen Udvar-Hazy said there had been “a little bit of over-enthusiasm” in placing the mega orders of the last few years. BOC aviation chief executive Robert Martin was quoted as saying there will “need to be some thinning of order books.”

As for the outlook for the order books of the region’s giant LCCs, Lion and AirAsia, opinions vary. Some analysts express deep reservations about the pair’s ability to absorb the large amount of capacity due to enter their fleets in the coming years. They cite a litany of issues, from finding skilled crews to slot issues at the region’s congested hubs.

Other observers are more sanguine, but irrespective of one’s personal views on the issue, one thing that cannot be argued is the impressive nature of the order books possessed by Lion and AirAsia.

According to Flightglobal’s Ascend Online Fleets database, Lion’s order backlog comprises 528 aircraft with deliveries scheduled out to 2026. AirAsia’s comprises 328 aircraft and also extends out to 2026.

For reference, Lion has 94 narrowbodies in service, and AirAsia 73.

Lion Air fleet and order book - 5 March 2014

(excludes regional units)

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AirAsia fleet and orderbook - 5 March 2014

(excludes regional units)

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An industry executive familiar with aircraft deals says the sheer size of these order books likely gives Lion and AirAsia an immense amount of flexibility in working with Boeing and Airbus to defer deliveries.

Nonetheless, he feels that deploying all this capacity will ultimately be contingent on the successful execution of the two carriers’ franchise plans. AirAsia has enjoyed some success with its Thai AirAsia franchise, but it has struggled in Indonesia and the Philippines. It has also yet to successfully launch a low cost operation in Japan. AirAsia previously had a joint venture with All Nippon Airways, Japan AirAsia, but this was dissolved in October 2013.

Lion has made no secret of its overseas ambitions with the successful establishment of its Malindo unit in Malaysia and its Thai Lion unit in Bangkok. Still, it will be some time before either of these new carriers achieves significant economies of scale.

Rob Morris, a consultant at Flightglobal’s Ascend Advisory service, says the overall Asia Pacific order book is not disproportionately large relative to the rest of the world, but that this backlog is heavily concentrated in three carriers: Lion, AirAsia, and India's IndiGo. These three carriers alone possess 30% of the Asia Pacific’s overall backlog.

He believes, however, that all this new incoming LCC capacity will turn out to be more of a problem for the region’s already-pressured legacy carriers.

“Lion Air will need 25% per annum compound traffic growth over the next five years to profitably assimilate its capacity on order and AirAsia 12.5%,” says Morris.

“Clearly the market is not going to grow at that rate, so if Lion and AirAsia are to succeed then there will be losers. If the European and USA benchmarks are to be believed then it is the legacy network carriers who will see their models struggle against the LCC insurgents.”