ANALYSIS: Lion Group bids to boost local share

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Lion Group is confident it will be able to capture a 60-65% share of the Indonesian market by the end of the decade, supported by a 527-aircraft orderbook delivering through 2026.

“It is something I see happening in the next three to five years,” said the group’s chief executive officer Rusdi Kirana, formerly chief executive of Lion Air, in an interview with Flightglobal earlier this month. The airline currently has 40-50%, he says.

Efforts to boost the share are supported not only by growth in the domestic market, but also by weakness at the group’s competitors.

“In Indonesia, we see a few airlines not doing quite well, so they are leaving capacity like Merpati Airlines, and hopefully Mandala Airlines, and we have other airlines that are also reducing operations, so that is capacity we can cover with our fleet,” says Kirana.

Last year, Lion Group flew more than 38 million passengers across its three Indonesian subsidiaries – Lion Air, Wings Air and Batik Air.

“We reached our biggest market share last year, and we expect the airline to keep growing to keep the majority,” he says. “We hope to grow in Malaysia and Thailand, and we expect we can create other airlines in other countries next year.”

Lion Group, he says, will take 38 jets and 12-14 ATR 72 turboprops this year to support its growth. None of the aircraft will be used for replacement.

As long as tickets are affordable, growth is possible, says Kirana: “If people can afford to pay for the airfare, the market is here. Now only 20% of the people fly, and we hope it can it go to 50%.”

By June, Jakarta’s congested Soekarno-Hatta International Airport will increase to 72 flights per hour from 64, meaning another 200 aircraft can be accommodated at the airport, he says.

But increases in aircraft capacity will make it tougher for “airlines that are not really economical in scale”, he argues: "They will need to lift capacity, so they will stop flying or they will have to consolidate.”

Slot capacity is a major issue facing the group’s growth plans. “We cannot advance the government to build an airport, so we are interested in building our own airport,” says Kirana, adding: “We are serious and studying plans.”

Even with capacity issues, Kirana is optimistic that Indonesia will meet its growth targets. He acknowledges there is no alternative plan in place for the group, such as entering the Chinese market, to support its massive backlog; instead, its Singapore-based lessor, Transportation Partners, is its “contingency plan”.

“The potential is here in Indonesia, and Singapore-based Transportation Partners is there in case there is a problem, or the market doesn’t grow as fast as expected,” he says. “Through Transportation Partners we can lease our excess aircraft to third parties if the market can’t grow, but it was not established to lease to third parties.”

Kirana would not be drawn on how much third-party work is expected at Transportation Partners.

“We can’t say how much as Transportation Partners’ purpose is to finance for the group,” he says. “A lot depends on how the group grows. If it keeps growing, then we don't have to give many aircraft away. “

Transportation Partners will also manage Lion Group’s fleet rollover. This, he says, will result in “a lot of the growth” at the lessor in the next four to five years: “The aircraft we operate today will be 12 years old in the next five years, so do we sell or lease these aircraft? And how do we replace the fleet? This will result in a lot of growth for Transportation Partners, so the company is building up for that plan.”

The group’s goal is to “balance the fleet by the end of the year” with 50% financed and the remainder obtained through operating leases. The fleet is “mostly financed” at the moment, he says.

To expand the domestic market, Lion Group plans to order widebodies in a year’s time, but Kirana would not identify types the carrier is considering: “We cannot say anything at the moment, but we are looking at a widebody order.”

To finance its upcoming orders, Lion Group will continue to use, as it has in the past, bank debt, export-credit agency support and, when available, bond financing backed by export credit.

In July 2013, Lion Group secured its second bond financing with US Export-Import support to fund four Boeing 737-900ERs. BNP Paribas and KGS Alpha, an affiliate of Apple Bank, structured the bond deal, working closely with Transportation Partners.

The group closed a similar deal – led by BNP Paribas – in April 2012. The $138 million, 10-year bond carried an attractive coupon of 1.92% and also financed four new 737-900ERs.

The financings follows Ex-Im's approval in March 2013 for $1.1 billion in support for Lion Group's outstanding orders for 230 737s ordered in November 2011.

Enhanced equipment trust certificate (EETC) offerings have become a successful form of financing for international carriers, but Kirana does not anticipate using them anytime soon.

“This doesn't work here, not yet. We would be happy if it did, but for now will focus on commercial and ECA financing as well as the bond market.”

Although interest rates are likely to rise sometime in the not-too-distant future, Kirana says the group has no plans to lock in financing ahead of any change.

“We are fine at the moment and don’t have any obligations due,” he says, adding: “We usually fund our fleet one year ahead of deliveries,” he says.

Kirana acknowledges certain market observers may have doubts about the group’s growth and fleet targets, but he remains undeterred.

“We respect what people have to say, but we have reason for this growth. The same thing happened when we first ordered aircraft, but today we have more than a hundred aircraft, and we have never rescheduled and we still need more aircraft.

"When people were talking about going to the moon, no one believed it, but somebody had to do it and somebody had to prove it. We can’t blame people for questioning, as only we know what we are doing.”