17 November 2012
RUSDI Kirana is one of Indonesia’s wealthiest people. Together with his brother Kusnan, the Kirana brothers own Lion Air and are listed by Forbes as the 34th richest individuals with a net worth of US$580mil.
But there was an air of simplicity surrounding Rusdi when he sat down to give his story to StarBizWeek. There was no phalanx of bodyguards, no designer clothes or an expensive timepiece on his wrist. Dressed ordinarily, all he had with him was a nondescript haversack.
“I walk without bodyguards because I feel nobody knows me,” he says.
He spoke about his start in the business world where as a salesman, he earned US$10 a month and was hungry every day. The interview eventually gravitated towards why he is a man that the airline industry in Malaysia needs to pay attention to.
Starting Lion Air with US$1mil in seed capital when the Indonesian government liberalised the market, Rusdi seems to have found the magic touch most businesses dream about. Lion Air has been profitable from its first day of operations and today, together with Wings Air, control 50% of Indonesia’s domestic air passenger market.
A regional expansion is inevitable since there is a growing market for low cost travel in Asia. A courtship with Berjaya Air and Firefly fizzled out after two attempts but Rusdi eventually found a partner in little known Tan Sri Ahmad Johan of National Aerospace and Defence Industries Sdn Bhd (Nadi) to set up Malindo Air.
In the cut-throat airline business, one wonders if there is space for a third airline to operate out of Malaysia but Rusdi sees it from another perspective. He feels Malindo will be the bridge for all 240 million Indonesians who want to travel to the rest of Asean and the world.
“What we saw was an opportunity to do business in Malaysia. It is an expansion for the Lion Grup,” Rusdi, the president director of his flagship company, PT Lion Grup, says in an exclusive interview.
PT Lion has 49% stake in Malindo and Nadi 51%.
Rusdi is not the normal airline boss who will present papers at conferences or be seen at airline events, wrote Maybank Investment Bank in a report. However, this man and Lion Air shot into the limelight when he stood next to US President Barack Obama to sign a record 230 aircraft order with Boeing in February. It was the first time an airline has placed such a big order.
Malindo will take off earlier than planned, in mid-March instead of May and two weeks ago invited candidates to join the company. Around 3,000 people jostled for an interview to secure a job with the fledgling airline. Rusdi has promised to hire up to 600 of the 1,000 unemployed pilots in the country.
“It is good to remain unknown and that is why I avoid publicity, but I want people to know that I am serious about our venture in Malaysia and about employing pilots. It is not just an empty promise and we will offer fares same or lower than the competition,” he says.
A regional player
For more than a decade, Lion Air Indonesia’s largest privately-owned airline focused solely on the Indonesian market, carrying passengers and feeding those passenger to other carriers because it had too few rights to fly international routes.
It was going to launch Batik Air in March for its international operations because it needs the regional extension, but since setting up Malindo, the strategy has changed. Malindo will be Lion’s launchpad into the region.
This is the same strategy AirAsia, Jetstar and Tiger Airways have employed, first focusing on the home market. Those airlines later set up ventures in other countries, thereby giving them a bigger market.
Lion Air and AirAsia are two carriers that have placed large numbers of aircraft from Boeing and Airbus respectively and they come with very aggressive delivery schedules. Both airlines have strong support from their respective aircraft manufacturers, and are able to access financing from export credit agencies.
The aggressive order book delivery schedules of Lion Air and AirAsia put them squarely at the forefront in the fight for Asian LCC dominance, says an analyst in his report.
Lion has ordered 381 aircraft, both narrow and wide body including the Dreamliner and AirAsia over 300. Tiger Airways and Jetstar also have orders but doesn’t come close to what AirAsia and Lion Air have committed to.
Malindo has not begun flying and many do not see it as a real threat in the region. But those who know how Lion operates would not think so.
Lion has been able to control 50% of the domestic market share in Indonesia by flying the most number of routes, totalling 69 for now, and beats the competition with the lowest fares.
“The market has also not fully appreciated the impending entry of Lion Air into the regional low cost carrier space. We reviewed publicly available information on Lion Air and conclude that it has a fair chance of realising its regionalisation plans, putting it in direct competition with AirAsia in the pursuit of Asian LCC market dominance,” the analyst says.
“Lion may be better positioned than AirAsia to achieve regional dominance, even though AirAsia has a headstart. Lion has access to a larger hinterland and a faster growing market Indonesia to generate cash flows to fund its regionalisation strategy compared with AirAsia, which has primarily funded its regionalisation plans from its Malaysian operations.
While Lion has a smaller fleet than AirAsia, all its aircraft are based in Indonesia, which may allow it to generate strong cash flows vs AirAsia, which has only half its fleet in Malaysia.”
Whatever the analysis, the real test would be when Malindo takes to the skies. But Malaysia may not be Rusdi’s only stop; the region is his playground now.
“It depends on which country or government that wants to support us. We just want to do business, not lobby or try to provoke,” he says.
For Rusdi, the entry to Malaysia is about providing Indonesians with a window to the world.
Jakarta is now the main hub for travellers in Indonesia, that geographically has 1,750 islands. For some islands, the only link is by air. Being the fourth most populous country in the world, its growing middle class is travelling more than before.
Rusdi says GDP growth in Indonesia last year meant about 35 million people joined the middle class, and it is this group that is keen to travel. No doubt Lion Air now flies to Singapore, Malaysia, Vietnam and Saudi Arabia, but routes are limited and it is predominately a domestic carrier.
“We fly to 69 cities within Indonesia from our eight hubs and have more than 600 take-offs and carry over 100,000 passengers a day. Anyone that lives in Medan, Balik Papan, Pekanbaru or even Surabaya has to go to Jakarta now to go abroad, and that would cost them more in air fares and take more time.
“So the main purpose is to make either Singapore or Malaysia a gateway to carry Indonesian passengers onward. Now we have Malindo, which is going to be our gateway to fly to KL and beyond,” Rusdi says.
Lion Air estimates it will ferry 30 million passenger this year and 35 million next year. Garuda International holds 23% of the domestic market share and AirAsia 2.2%.
“We plan to fly from our west hub into KL and east hub to Kota Kinabalu, and the traffic is about the same for both the hubs. Malindo will offer 500,000 to 600,000 seats in the first year,” Rusdi says, adding that Malindo will have hubs in klia2 and Kota Kinabalu.
Hence, he is not so worried about traffic and not so focused on the Malaysian traffic. He feels Indonesian traffic will fill his planes.
For a start Rusdi is talking about having two aircraft that are meant for Batik Air to be diverted to Malindo, and each month onwards Malindo will add two more to get 12 next year and in 10 years, Malindo is projected to have 100 aircraft. By then, it would have covered much of Asia and perhaps even gone beyond Asia when five Dreamliner aircraft are channelled to Malindo.
Since the focus is to grow Malindo, Batik will take a back seat and the launch has been delayed to second half of 2013. Malindo will be Lion’s international arm while Batik will be a full service carrier for the domestic Indonesian market and Wings Air flies the ATR type of aircraft and ply the very remote routes as a feeder service to Lion Air’s trunk routes.
Creation of jobs
For a start, Malindo will hire 700 people, of which 100 will be pilots, 250 crew and the rest engineering and general support staff, says Malindo Air CEO Chandran Ramamuthy.
Chandran expects the airline to hire about 5,000 people over the next 5 years.
Besides creating jobs, there will be other spill off businesses in the travel trade. All points to more vibrancy in the economy. About 3,000 people attended Malindo’s walk in interview on November 1 to 3 and of that about 600 pilots will be hired in stages, according to Chandran.
“We are in the midst of finalising the recruitment of our senior management team,” he added.
“We (Malindo and Lion Grup) have the capacity to absorb up to 1,000 pilots given our growth plans and our plane orders,” Rusdi adds.
Malindo will operate initially from KLIA and move to klia2 when it opens its doors on May 1 next year. klia2 is more than 60% complete now. Malindo is likely to take up 3,000 sq m to 4,000 sq m of space at klia2 once it starts operations. It is renting about 400 sq m of space at KLIA now.
Rusdi says Malaysia Airports has offered 10 acres of land to Malindo near klia2 for its office building and a training centre.
“We are going to see the land that we will lease from Malaysia Airports to build a training centre and also our headquarters. We will duplicate the centre like the one we now have in Jakarta,” Rusdi says.
It will take time to build the facility but by mid next year the airline will move a simulator meant for Jakarta to KL so pilots can be trained here instead of going to Jakarta. Another simulator will be added if there is a need.
Besides AirAsia, Malindo and Lion Air, klia2 will have other tenants such as Zest Airways, Tiger Airways, and Cebu Pacific Air.
Low, low fares
Rusdi has promised “fares will be same or lower than competition” as competition will often lead to a drop in ticket prices.
But Malindo is not going to just compete on fares, it would provide larger seat pitch, light meals, in-flight entertainment and WiFi facilities and free baggage allowance.
“In our view, Malindo’s hybrid product offering is closer to MAS than AirAsia. However, ticket prices will be lower or on par with AirAsia and we see Malindo’s entry into Malaysia as breaking the airline duopoly.
“More than trying to be a keen competitor in what is already a well-penetrated Malaysia LCC market, we think Lion Air’s intent behind its new Malaysia JV airline is to firstly dampen sentiment towards AirAsia’s regionalisation plan, and secondly to weaken the monopoly LCC position of AirAsia Malaysia,” wrote an analyst in his report.
But AirAsia has grown stronger over the years and is now one of Asia’s biggest LCC. But still, analysts argue that Malindo is going to adopt the same strategy that it did in Indonesia to win passengers in Malaysia by offering fares that are lower.
As such, Lion may not be the “rational competitor” AirAsia hopes for.
“We think Malindo’s fares may be set much lower than AirAsia’s as Lion employs the same “funding strategy” by using Indonesian domestic profits to subsidise its pre-emptive regionalisation strategy,” wrote the analyst.
But Rusdi says that “if we do not have a better cost base how could we (offer low fares).”
He says he is able to offer low fares because Lion Air operates a new fleet and there are manufacturers’ guarantees.
“It’s like a honeymoon period, and we also fly our aircraft an average of 14 to 16 hours a day (versus the competition which is 10-12 hours) and that means we are getting better utilisation of our aircraft versus many other airlines.
“We can do that because our aircraft are new and they do not need a lot of maintenance but if they are old, maintenance cost is higher and that adds into airline cost,” he says.
He reiterates that the maximum flying range of his aircraft is between five and six hours because they have extended range and it is due to all these factors that they can offer better fares than the competition.
“You should know your people. We can buy aircraft and spares and make passengers happy, offer low fares and build facilities. But the most difficult thing is to mange your employees and that is one of the reasons why we are giving our employees facilities. We just want them to work honestly,” he says.
That may be his challenge but as more aircraft are delivered to LCCs in Asia, overcapacity is inevitable.
A report says Lion Air and AirAsia are expanding their combined fleet by 17-20% per year over the next three years, which may exceed the industry demand growth of about 15% per annum.
Consolidation is inevitable as smaller country focused airlines without a dominant market share become attractive targets for regional-focused airlines keen to expand market share and gain access to limited airport slots.
An analyst said that he doubts Jetstar and Tiger will become leaders in the Asian LCC industry in their own right (because of their own reasons), and he feels the real fight for dominance will be between Lion Air and AirAsia.