Indonesia's Lion Air roars with record Boeing order

on November 18 2011 12:04 PM
Lion Air
A brand new Boeing 737-900 ER series plane is seen before take off during its official launch by Indonesia's Lion Air at the Halim Perdana Kusuma Airport in Jakarta April 30, 2007. REUTERS

Little over a decade ago, Indonesian budget airline Lion Air served a single route on remote Borneo island. On Friday, it placed a $21.7 billion order with Boeing (BA.N: QuoteProfileResearchStock Buzz), the airplane giant's biggest commercial order on record.

PT Lion Mentari was founded with just $10 million in start-up capital in 1999 by Kusnan and Rusdi Kirana, who ran a travel agency until they spotted a growth opportunity when the Indonesian government deregulated the aviation industry.

Lion Air -- 48-year-old Rusdi is now CEO, and Kusnan is president commissioner -- was one of dozens of new carriers to emerge around that time in Southeast Asia's biggest economy, including Sriwijaya Air and the now bankrupt Adam Air.

The Boeing deal for 230 short-haul jets takes Lion Air's orderbook to more than 400 planes, which they aim to use to fly across an Asia-Pacific region still seeing robust passenger growth despite the shaky global economy.

The deal includes options for another 150 aircraft valued at $14 billion, bringing its potential total value to $35 billion.

The aggressive buying spree comes ahead of regional air liberalisation in 2015, part of a planned Southeast Asian free trade economic community. At the moment, some Southeast Asian nations shut out airlines to protect their national carriers.

If you're looking at a short term view, people will call us nuts, but we're talking about an opportunity here and we're taking a long term view, said Edward Sirait, a Lion Air director.

Look at the growth in the region -- China, India and Southeast Asia. It's tremendous and what we're doing now is to anticipate 5-10 years ahead, he told Reuters.

FINANCING

The deal for 201 of Boeing's updated 737 MAX planes and 29 Next-Generation 737-900 extended range planes -- announced as U.S. President Barack Obama attended a regional meeting in Indonesia -- will be financed in part by the U.S. Exim Bank, Sirait said.

The rest will come from a consortium of international banks, which is still being finalised.

Delivery of the planes will be in 2017-25.

Lion Air plans an initial public offering next year to raise more than $1 billion through the sale of a 20-30 percent stake, to help finance its rapid expansion. It aims to fly to China, India, South Korea, Japan and Australia.

Much of the growth in Asia's air travel industry has been driven by budget carriers, but Lion Air plans to use the blueprint of regional leader AirAsia (AIRA.KL: QuoteProfileResearchStock Buzz) and set up a premium airline, too. PT Space Jet is expected to launch in a year's time.

Lion Air operates 92 planes and has a load factor of above 80 percent. The latest order comes on top of a $14 billion deal signed in 2008 with Boeing for 178 737-900s, which will be delivered in stages until 2016.

Apart from flights around the sprawling Indonesian archipelago, Lion Air flies to Jeddah and Singapore, but is banned from flying to the European Union because of safety concerns. The EU last year allowed flag carrier PT Garuda Indonesia (GIAA.JK: QuoteProfileResearchStock Buzz) to resume flights after a similar ban.

No Lion Air plane has crashed in a domestic industry that regularly sees deadly aviation disasters, but its planes have skidded off runaways and it has been criticised for regular flight delays.

As the air industry takes off, analysts say Indonesia must revamp overloaded and dilapidated infrastructure, including airports and power supply, to sustain current growth levels.