AirAsia squeezed at home by perky new budget carrier

By Yantoultra Ngui and Anshuman Daga

KUALA LUMPUR/SINGAPORE (Reuters) - Malaysia's AirAsia Bhd , which has dominated budget air travel in Asia with explosive growth over the past decade, faces serious competition at home just as it tries to scale up operations in the region.

Malindo Airways, an affiliate of fast-growing Indonesian budget carrier Lion Air, began operating in Malaysia two months ago, offering competitive fares on lucrative routes.

Malindo is also luring travellers with perks such as free snacks, a booked luggage allowance and enlarged seats.

The new player's entry has since sparked a price war.

Median prices for the routes from Kuala Lumpur to the Borneo island hubs of Kota Kinabalu and Kuching fell between March and May by 12.6 percent and 18.6 percent respectively, data from travel website Skyscanner shows.

The intensifying competition in Malaysia is part of a wider battle for low cost carrier (LCC) dominance between AirAsia and privately held Lion Air, which has placed huge aircraft orders and plans to use its dominance in Indonesia to expand in Asia.

Shukor Yusof, a Singapore-based aviation analyst at Standard & Poor's, said that while Malindo was not yet established enough to be a big worry for AirAsia, the Malaysia-based firm would be under pressure in the coming months from the aggressive pricing.

"That could also result in AirAsia's bottom line being affected as they will have to retaliate in some ways, which means erosion in yields."

Malindo's chief executive Chandran Ramamurthy said the airline had clocked load factors - the proportion of seats occupied by paying passengers - of 79 percent on average but did not say if the routes were profitable.

The airline plans to expand to Sibu, Miri and Tawau in East Malaysia this month.

"Sustainable or not, we will come back to you maybe next year and tell you," he told reporters last Thursday, referring to its pricing strategy.

Lion Air has a 49 percent stake in Malindo, a joint venture with Malaysia's National Aerospace & Defense Industries Sdn Bhd.

CRACKS APPEAR

Despite AirAsia's rapid expansion to markets as far-flung as Japan and Indonesia - boosting its fleet to 124 planes - its Malaysian operation still makes up 80 percent of its profits, boasting plump group operating profit margins of 19.5 percent.

The challenge from Malindo comes as higher financing costs erode AirAsia's earnings.

AirAsia reported a 39 percent fall in profit in January-March. Since the start of the year, analysts have trimmed net profit estimates for AirAsia for 2013 by 3 percent.

AirAsia's charismatic boss Tony Fernandes dismissed the challenge from Malindo with a curt "no" when asked about it by Reuters last month.

Subhranshu Sekhar Das, who heads consultancy Frost & Sullivan's aerospace and defence practice for Asia-Pacific, said Malindo was targeting a niche between full-service and budget.

Malindo steps into a void left by Malaysian Airline System Bhd's turboprop arm Firefly, which gave up its service to Borneo destinations in 2011.

Along with the onboard perks, Malindo trumps its bigger rival as it flies from Kuala Lumpur's well-connected main international airport rather than AirAsia's low-cost terminal.

"Malindo gives us more. At almost the same price we can get a free sandwich and bottled drink on board ... and boarding from a better airport," said Mohamad Yazmi Fauzi, 19, who boarded Malindo for the first time from Kuching to Kuala Lumpur in May.

(Additional reporting By Alan Baldwin in LONDON, Patturaja Murugaboopathy in BANGALORE and Siva Govindasamy in SINGAPORE; Editing by Stuart Grudgings and Jeremy Laurence)