3 Comments

Malindo Air : Opportunities and Threats

This is a case study done by student of Bach. of Aviation Engineering Technology (Mechanical), Malaysian Institute of Aviation Technology – University Kuala Lumpur (UniKL MIAT). I select two individual work and combine it into single article, altering some words and publish it here with permission as we can read below. Hope we can get an eagle view on Malindo Air.

MALINDO AIR : OPPORTUNITIES AND THREATS

Writer: Ammar Amzar Hj Shuhaimi & Muhammad Ukasyah Che Azuhan

BACKGROUND

Malindo Air is a joint venture company between Malaysia’s National Aerospace and Defence Industries (NADI) which owned 51% of share and Pt. Lion Group from Indonesia which owned 49% of the share. This new carrier’s acronym ‘Malindo’ came from the name of respective Malaysia and Indonesia. (WIKIPEDIA)

Malindo Air is basically a result from the meeting between president director of the Lion Air which is Rusdi Kirana and Tan Sri Ahmad Johan, the chairman of Malaysia’s National Aerospace & Defense Industries (NADI).

Malindo Air has been launched by Malaysia’s Prime Minister Datuk Seri Najib Tun Razak on September 11, 2012.

Malindo Air, the new domestic low-cost carrier will start their operation on 1st May 2013 from the new KLIA2 terminal and will operate flights between Malaysia and Indonesia initially. However, Malindo Air has brought forward the launch date to mid-March 2013 and will begin with domestic flights: Kuala Lumpur to Kota Kinabalu. A month later, Malindo Air will expand to offer international flights with the first stop will be India (said PT Lion Grup chief Rusdi Kirana).

This new Low Cost Carrier which promotes itself as a hybrid airline would complement the local aviation industry ecosystem in addition to winning the rapid growth potential of the Asian market.

This joint venture is viewed largely as Lion Air’s first airline set-up in non-Indonesian shores. NADI will be a dormant shareholder and focus on areas they are strong at such as aircraft repairs, maintenance of the aircraft and also general services. Meanwhile the Lion Group will concentrate on airlines operations as well as aircraft acquisition and financing.

MALINDO AIR BOASTS BIG PLANS

For the first phase, a total of 12 Boeing 737-900ER aircraft are expected to operate under Malindo Air which connecting Kuala Lumpur to the major cities in Indonesia. Kuala Lumpur International Airport 2 (KLIA2) will be used as a hub and a carrier to the ASEAN countries and ASIA, including Thailand, China, India, Hong Kong and Philippines.

Malindo Air plans to acquire 12 aircraft per year and may grow to a fleet size of 100 aircraft within a decade. The fleet will consists of Boeing 737-900ER aircraft which are suitable for the short-haul flights and later will include Boeing 787 aircraft, which the aircraft are suitable for the medium to long-haul routes. Malindo Air aspires to become Malaysia’s next full-fledged national airline.

Several interesting key point:

  • Malindo Air will provide a hybrid service (Hybrid is an airline service concept which combine together both LCC and Premium service).
  • Malindo Air will take off earlier from the original schedule in mid-March with 12 Boeing 737-900ER with 12-business class seats and 168 economy seats with the In-Flight Entertainment and Wi-Fi.
  • Number of domestic flights destination in Malaysia will increase from time to time.
  • Boeing 787 will be introduced in 2015.
  • Ticket fare and the services is aimed to be on par if not lower that Air Asia.

OPPORTUNITIES

This part will try to explain briefly on the opportunities that will arise with the introduction of Malindo Air. There are a lot of opportunities that will be brought in with the introduction of Malindo Air.

Job Opportunities

The newly formed of Malindo Air has opened up huge job opportunities in Malaysian aviation industry such as: pilot, cabin crew, maintenance engineer and also technician for the local people. For the first phase, “Malindo Air will recruit about 800 people but will eventually employ 5000 people within five years”, said Malindo CEO Chandran Ramamuthy.

In Malaysia, there are about 1714 unemployed pilots in the country. With the introduce of Malindo Air and as said by Malindo Air CEO that the airlines needs more pilots because of the sizeable fleet that they have ordered and this could solves the unemployment problem of the pilots in Malaysia.

Malindo Air also opened up job opportunities for cabin crew as well as maintenance engineer and technician. Right now in Malaysia, there are several maintenance training schools that produce graduates which qualify to maintain an aircraft. With the launched of this new LCC, hope that they will provide jobs for the graduates.

According to BK Sindhu(New Straits Time,2012), over 2,000 people looking for jobs showed up at the walk-in interview at Malaysia’s newest low cost airline, Malindo Air office at KLIA on the first day of interview session. So, with the introduction of Malindo Air in Malaysia airline industry, it is expected to reduce the unemployment rate in Malaysia thus will generate the economic in the country without wasting the human resources.

Enhancing the MRO Industry in Malaysia

Maintenance, repair and overhaul are growing fast in Malaysia. With the introduction of the new set up airline, it is expected to bring more business to the MRO industry thus will generate the economics in Malaysia. As we all know, Lion Air that runs Malindo Airways with NADI is the biggest Boeing’s aircraft operator in the world and NADI is a major player in Malaysia’s maintenance, repair and overhaul (MRO) industry. Companies under Nadi group are Airod, Airod Aerospace Technology, Airod Techno Power and Aerospace Technology System Corp, SME Aerospace and SME Ordinance.

Nadi has been involved in the MRO industry as the major player to maintain the fleet for the Air Force. According to source said that “It is a nice fit, both had something to offer the other and both were passionate about it. So that is how Malindo Air came out but everything happened very fast”. But the relationship does not end at just setting an LCC. There will be the MRO business where Nadi will enter into a joint venture to undertake MRO works for all of Lion Air’s 100 aircraft. Plus there is also the training element.

Lion Air is the largest airline by market share and fleet size in Indonesia and although its current fleet size is 100 aircraft, it has ordered 382 aircraft. That makes Lion Air one of Boeing’s biggest customers in the world with deals topping US$22bil, says an analyst in his report.

Lion Air has been in the business since 2000, and flies to 73 destinations across five countries. By March 2013, it will begin a long haul service via Batik Air. It is owned by Indonesia’s tycoon brothers, Rusdi and Kusnan Kirana and corporate personalities say “the Kirana brothers are seasoned businessman and politically well-connected individuals.” NADI has been in the MRO business for many years and Airod is its unit. Nadi recently hired former MAS MRO chief Mohd Roslan Ismail as managing director of Airod Aerospace Technology for its regional expansion.

Economic Growth of Malaysia

The entry of Malindo Air in the aviation industry will fortify the Aviation Business ecosystem both in Malaysia and Indonesia. Besides that, the joint venture will provide regional low-cost air travel market with healthy competition.

The Malaysian aerospace industry, which has grown tremendously over the last 20 years, will be well poised to meet the challenges as well as seized opportunities in the future if it was continuously nurtured.

According to Prime Minister, Datuk Seri Najib, “the aerospace industry generated RM26billion turnover in 2011, employing approximately 54000 workers. This was a testament to the success of the National Aerospace Blueprint (NAB), introduced in 1997”.

The introduction of Government’s Economic Transformation Program (ETP) further the bolstered of Malaysia’ Aerospace Industry. In that program, it has been identifying two Entry Point Projects namely “EPP1-Growing MRO Services” and “EPP2-Growing Large Pure Play Engineering Services” which were expected to contribute RM16.9billion to Malaysia’s Gross National Income (GNI) and create over 32000 jobs opportunities by 2020.

Boosting up the Malaysia Tourism and International Trade

With the increase of passenger traffic in and out of the Malaysia, it is one of the opportunities to growth the tourism industry and to develop more international trading in Malaysia. The figure below shows the number of arrival for the international tourism in Malaysia.

From the statistic above, we can see that number of arrival for the international tourism in Malaysia keep increasing from 2007 to the 2010 without slight drops in number. The number of arrival growth about 1 million in a year. Since Asia is the epicentre of travel in the world, here is where the growth is, and any airline that wants to be part of this growth, will make its way to Asia. So, basically it the introduction of Malindo Air, it will create more excess capacity to the market which could bring more tourists to Malaysia. In the other hand, it also could promote Malaysia in the international market to bring more international businessman to invest in this country. This will help to growth the Malaysian industry.

Price War

The creation of Malindo Air is one of the surprise elements when Malaysia still has room for another low-cost carrier (LCC). It is then materialize hence the deal got the blessings from the government. What excited the market place was that Indonesia’s largest privately-owned airline which is Lion Air is now was partnering NADI (National Aerospace and Defense Industries) because they are a success case in Indonesia to drive the new airline. It is seen as double war as Lion Air fighting AirAsia on its home ground which is in Malaysia, and the reverse is in Indonesia airline market.

With the emergence of Malindo Air, AirAsia  it will not be affected  and instead felt that MAS is the one that would be hit because Malindo will offer light snacks, drinks and in-flight entertainment. But this is an LCC and Lion Air president director Rusdi Kirana made it clear that Malindo will price its airfares on par with AirAsia or even lower for its marketing strategy. Rusdi said tickets prices will be competitive in the market either in the same range as rival AirAsia or even lower.

The airline’s planes will be fitted with a lower-than-usual 150 seats coupled with inflight entertainment and light meals. It aims to cover back the lower revenue per plane due to fewer seats with higher frequency flights. It is because lower revenue means loss to the airline and one of the ways to cover this loss is by increasing the frequency of the flight.

“The idea is to build passenger growth by giving them affordable prices and better service,” Rusdi told a news conference. The fight is inevitable and yields may be affected. However, these are still early days and we will have to wait till May 1 to see who wins more share.

THREATS

This part will try to explain briefly on the threats that will arise with the introduction of Malindo Air. As a new set-up airlines, there will be a few challenge need to be through by Malindo Air.

With huge challenges faced by airline industry today such as: including escalating operational costs and soaring fuel prices. The smart collaboration such as the one formalized today would provide the new airline of various savings and efficiencies in terms of fleet maintenance. The airlines need to be creative and innovative in order to continue to be profitable and sustainable in the business without compromising on reliability, maintainability of the aircraft as well as service levels.

Market Shares

Entry of Malindo Air would enhance competition with other low-cost carrier that operates in Malaysia especially Air Asia. Before the entry of Malindo Air, Malaysia’s aviation sector is driven by Malaysia Airlines System and Air Asia. Now the market needs to be share by the three airlines thus will increase in excess capacity which could lead the airlines having loss.

With more entry of low-cost carrier will result in the demand instability because the operator will lower their fare to seduce the people to use their service. If this occur for a long period, it would probably the operator will suffer in the long term because of the increasing in operation costs.

By using the slogan “Not Just Low Cost”, Malindo sure needs a pack of punch to break the AirAsia monopoly on the Malaysia market. It is believed that Malindo Airways is eyeing primarily AirAsia’s on the lucrative domestic market in Malaysia which is primarily on the east coast of the Malaysia that is Sabah and Sarawak. Theoretically Malindo Airways for being a new entrant in Malaysia will go all out for market share at the expense of profits by undercutting prices. AirAsia also on the other hand, may also want nip the competition in the bud by dropping fares. This will result in a full-scale price war.

Fuel Price Volatility

Fuel price are the key driver in aviation economy. Its price keeps changing and increasing from time to time that make it crucial part to manage in airline business. Fuel price is expected to reach average $115 per barrel for this year, 2012. Fuel price was hit the highest price a $145 per barrel in 2008, the most critical period for airlines. What causes the fuel price hiking at higher price drastically? It is believed causes by depletion of natural fuel supply and also because of speculation.

The effect of this fuel volatility effect not only airline in Malaysia but almost all airlines in the world. With the fuel price keep increasing from time to time, it will make it harder for a new establish airline such as Malindo Airways to gain profit. If it not being manages carefully, it can lead to the bankruptcy. Either increase in fuel price because of natural supply surging or speculative agenda, fuel efficiency is become focus in airlines business.

IATA realizes the impacts of fuel price fluctuation have on airlines financial stability because more airline customers value low prices above all other carrier selection factors.

Malindo Air has taken measures to deal with the fuel price fluctuation by minimizes the fuel consumption of the aircraft by purchasing aircraft that burns less fuel which is Boeing 737-900ER.

How does the Malindo Air cope with the issues of fuel price fluctuation?

  • Using computerized flight planning.
  • Reducing aircraft speed during cruising periods.
  • Using slower rates of climb or descent and higher cruise altitudes.

Excess Capacity

The entry of new carrier also will result more excess capacity will be produced thus could lead to the product perishability in the end.

Aggressive fleet growth plane by Malindo Air which the plan to deploy 12 aircraft per year. But the current domestic air traffic growth rate will not be able to support the fleet deployment plan. It is not only Malindo Air has fleet growth plan, MAS and Air Asia also have their own fleet growth plans.

The market shares in Malaysia are NOT big enough for MAS, Air Asia and also Malindo Air.

Domestic passengers growth

International passengers growth

From the above two graph, the domestic sector carried 16.5 million passengers has been growing at a 10-year Compound Annual Growth Rate (CAGR) of 5.5% in 2011. For the international sector which carried 16.0 million passengers has been growing at a 10-year CAGR of 9.2%.

Assuming these growth rates continue, under normal circumstances, a net addition of 5-6 aircraft per annum for whole Malaysian market is a fair number to meet the growth for the domestic and international demand according to Maybank IB research. But the new aircraft deliveries total count of 10 just from Malindo Air now look like to exceed which in the end could result high excess capacity.

Bad Safety Record

As we all know, in this joint venture between NADI and Lion Air to form the Malindo Air, Lion Air will act as the operator of the airline meanwhile NADI will be responsible in doing the maintenance for the fleet. However, it is maybe takes time for the Malindo Air to attract the passenger to fly with them due to the bad safety record that surrounding the Lion Air which will be its operator.

It bad safety record start on 19 July 2011when Lion Air has grounded 13 planes due to sanction caused by bad on-time performance (OTP). This grounded plane is until Lion Air can fulfill at least 80 percent of OTP. Lion Air also has been banned in the European Union (EU) for failure to comply with safety requirements

NADI is owner of Airod and have many years of experience in aircraft maintenance both for civilian and military aircrafts. Based on that NADI, as a reputable MRO provider can improve Lion air safety records and NADI get MRO jobs from Lion and probably other Indonesian airlines. Indonesia has a booming aviation industry that its pilots from the training centers are released to airliners with very minimal flying hours and they have a lack of maintenance personnel too and that is where NADI can chip in. It is a very good synergy and Malindo Air can get the best of both worlds, NADI access to Indonesian market and Lion Air getting good Malaysian standard maintenance and safety records.

Survival of the Fittest

Malindo Air as a new establish airline need to compete with the already established airline in the country. As Malindo Air ready to enter the competitive Southeast Asia budget-carrier market, AirAsia wants to boost business by accelerating fleet expansion and setting up innovation labs. AirAsia Group CEO Tony Fernandes said that the Malaysia-based group plans for Indonesia AirAsia (IAA) to take delivery of 10 to 12 new Airbus A320s a year starting in 2013, up from an original five new aircraft a year, intending its local subsidiary to operate up to 60 aircraft by the end of 2015.

According to Tony Fernandes, he said that we feel good about the Indonesian market. By having a larger fleet, we will be able to strengthen both our international and domestic routes here. However, he said the competition between AirAsia and Malindo Air is still on. Tony Fernandes also said that AirAsia has a very strong foothold in the regional aviation industry to face the competition. Without doubt, we will compete against each other. I know what it takes for an airline to win. National Aerospace and Defence Industries Sdn Bhd (NADI) and PT Lion Group will form the new frills-free Malindo Air, which is poised to start operations in May 2013 using the soon-to-be completed KLIA2 in Sepang. It plans to offer flights within Malaysia and Indonesia, as well as to Thailand, China, India, Japan and Australia. With the challenge keeps increasing, Malindo Air needs something to attract the passenger or else it will fall. Competing with an establish airline such as Malaysia Airline and AirAsia which their brand already conquer the region is not the easy task.

In order to ensure its survival, Malindo Air offering a few features on their appearance which is it offers seat pitch of 31 inch that is 7% roomier compared with AirAsia’s and it provides complimentary frills such as light snacks, drinks, foods, in-flight entertainment and uses the aerobridges to attract people using their service. In addition Malindo Air’s Boeing 737-900 aircraft also is a very economical which it has superior cost economics for flights which are above two hours against AirAsia’s fleet which is Airbus A320 aircraft. So, it is really important for Malindo to build its own market to compete with the other airline in order to survive.

CONCLUSION

The entry of Malindo Air has an impact towards economy as well as towards the Malaysian aviation industry. The entry of Malindo air in the Malaysian aviation sector has the positive and also negative implications. The presence of Malindo Air into the low-cost segment is set to create some waves in the local airline industry dominated by Malaysian Airlines (MAS) and Air Asia Bhd. The entry of Malindo Air as well as to break the monopoly of Air Asia in low-cost carrier segment.

This new joint venture company has offer up a lot of jobs opportunities to the local. Malindo Air would complement the local aviation industry ecosystem in addition to winning the rapid growth potential of the Asian market. As Prime Minister, Datuk Seri Najib indicated that the world air traffic was expected to grow at an annual rate of 5.1% within the 20 years, while air travel within the Asia-Pacific region was expected to grow by 6.7%. The Asia-Pacific region accounts the total of 34% of global passenger traffic expected almost to triple fromm 779.6 million in 2010 to over 2.2 billion in 2030 and Malaysian aviation sector expected to account for 200 million passenger.

Datuk Seri Najib said. “ We must ready to tap into the lucrative market and readiness means adapting and making changes today for the market conditions we anticipated tomorrow”.

The entry of Malindo Air is a good signal increasing of the low-cost carrier in accordance with the ASEAN Open Skies Policy which will be addressed in the beginning of 2015.

 

Disclaimer: This article do not representing this blog and its owner do not have any responsibility for any plagiarism if it exists.

** I believe there are other case study on the same topic was done by other student are better than this article. However, this is the best I can share with my blog reader for the time being.

About these ads

3 comments on “Malindo Air : Opportunities and Threats

  1. Thank u for a very helpful and full of information case study!

  2. Thanks for the info.. I’m wondering about the pilots? It is mentioned that Malindo has hired unemployed pilots in Malaysia. Unemployed means they are not hired by any airlines because they are not good enough?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 608 other followers

%d bloggers like this: