The entry of Malindo Air into the Malaysian market next year could see an intense price war if, as is projected to be the case, capacity growth rates far exceed what the market can take.
Malindo Air is the new venture by Lion Air (49%) and local aerospace company NARI (51%), expected to launch in May next year as a hybrid LCC operating Boeing 737s. It plans to grow its fleet by around 12 aircraft per year with an eventual fleet target of 100 aircraft.
It also plans to add 787s from 2015 for medium-to-long haul routes. Maybank warns that with domestic passenger growth averaging 5.5% over the last ten years, and international traffic growing at 9.2%, the natural growth rate in terms of aircraft is around five-to-six aircraft per year for domestic and international demand. "A net addition of 10 aircraft for whole Malaysian market is a fair number," says the investment bank.
Pointing to the planned 12-per-year rate at which Malindo plans to increase capacity, Maybank warns:"We don't think the domestic air traffic growth rate will be able to support this fleet deployment plan, given that AirAsia and MAS also have their own fleet growth plans."
"It is looking very likely that a fare war is in the making as oversupply in the system often results in this outcome. Everyone will try their best to capture or retain market share and they will compete on the basis of service and/or price. Since Malaysia can be defined as a fairly mature market, we think ticket prices will be the defining variable."
Pointing to the eight months where FireFly was operating as a hybrid carrier, Maybank says fares were cut by 10-20% on routes where there was overlap with AirAsia.
Lion Air believes there is plenty of room in the Malaysian market, arguing: "There is still a need for two-to-three more airlines with specific business models by 2030."
Pointing to Boeing figures which suggest that the Asia-Pacific region will need 185,600 pilots and 243,500 technicians by 2030, Lion Air says that Malaysia has the foundation to meet the training, supply chain management and MRO needs. The plan is for Airod to offer MRO services as part of the deal, including third party work.
Airod has traditionally focussed more on the defence industry, but its commercial aircraft capabilities include the Boeing 737 (classic and NG), Bombardier CRJ/GEX and ATR-42/72.