Asia's largest low-cost carrier, AirAsia, is making its first major airline acquisition by buying Indonesia's Batavia Air for USD$80 million in cash to expand in Southeast Asia's biggest economy, the two groups said on Thursday.
The move will ratchet up competition among low-cost carriers in Indonesia, a field already crowded with players such as Lion Air, the nation's biggest with 47 percent of the market and flag carrier Garuda's Citilink unit with a combined 23 percent share. Batavia had 11 percent and once the sale is complete should give AirAsia about 13 percent of the market.
"It's an interesting move and it surely going to make the competition even tighter in an already competitive market," Edward Sirait, a Lion Air director said. "It also shows the recognition by foreign investors that Indonesia's aviation market has a very huge potential."
The purchase is somewhat of an about-face for AirAsia CEO and founder Tony Fernandes who said previously he was against acquisitions, calling them "value destroying".
On Thursday however, Fernandes changed his view.
"This is the way for us to expand our business in Indonesia. Lion Air is big and if we're not big enough, then Lion Air can eat us," Fernandes told a news conference in Jakarta. "Aviation is a hard business... hopefully this marriage is a good marriage."
The move will help AirAsia to expand its fleet and routes in Indonesia where Batavia Air currently operates 33 aircraft on about 48 routes, including some to several international destinations.
The acquisition will also help Malaysia-based AirAsia compete against regional rivals such as Tiger Airways and Singapore Airlines once the Southeast Asian open-sky policy comes into effect in 2015.
That policy will allow the budget carriers to fly more regional routes and removes various restrictions on passenger, cargo and charter services.
AirAsia will buy 76.95 percent of Batavia Air this year and the rest by 2013. AirAsia will also take up Batavia Air's debt as a part of the deal, said Dharmadi, chief executive of its Indonesian unit, who like many Indonesians goes by one name. The amount of debt was not disclosed.
Malaysia-based AirAsia will own 49 percent of Batavia Air while its Indonesian unit will control 51 percent in order to comply with Indonesian ownership rules.
MOVING TO JAKARTA
Fernandes said in early May his group was looking to list its Indonesian operations by the first quarter of next year as it moves its regional base to Indonesia to focus on further expansion.
Fernandes is also expected to move to Jakarta to oversee the airline's expansion plans in Southeast Asia.
"There will also be a positive impact on its Indonesian unit's listing. The IPO will be helped by this acquisition," said an aviation analyst with MIDF Research in Kuala Lumpur.
AirAsia will benefit from Batavia's strong agent network in Indonesia, said Ahmad Maghfur Usman, a Kuala Lumpur-based equity analyst with OSK Research.
"The Internet penetration in Indonesia AirAsia in terms of ticket bookings is not as great as Malaysia or Thailand. So that's why AirAsia sees value through the purchase of Batavia Air," he added.
The acquisition will add a network of more than 5,000 travel agents as well as 70 sales offices across Indonesia so it can expand its focus to off-line retail customers.
AirAsia's move is also "a battle among the global giants, Boeing versus Airbus, of how they battle for dominance in the Indonesian market," said Harry Su, head of research at Bahana Securities in Jakarta.
Lion Air ordered 230 Boeing short-haul jets worth USD$22 billion in November last year to take it its total order book to more than 400 planes.
AirAsia said in May that it is in talks with Airbus to buy 50 A320 passenger jets worth USD$4 billion, only months after it placed a record order for 200. Batavia itself flies a mix of planes from both manufacturers.