Lion Air bulk buy exposes weak Australian airline laws

Lion Air’s huge Airbus order, placed 18 months after its huge Boeing order, exposes a weakness in the foreign ownership rules for  Australian domestic airlines.

Australia allows 100% foreign shareholder equity in such carriers, such as Tiger Airways Australia (currently 100% Singapore owned) and Virgin Blue when it was set up late in 1999 (and began service in 2000), which was almost 100% owned by UK venture capitalist Richard Branson.

But no-one thought to provide for the quid pro quo  so that while a giant enterprise like Indonesia’s Lion Air can own 100% of an Australian domestic carrier, investors in this country cannot own 100% of a carrier in our northern neighbour, which is rapidly emerging as a highly attractive and very large aviation market.

Lion Air has been making references about a possible Australian venture for around seven years, dating back to a time when few in this country took it or for that matter the Indonesia aviation market seriously.

However its co-founder and chief executive Rusdi Kirana did mention Australia once more, in passing, at the ceremonial signing of the order for 234 assorted A320 family single aisle jets at the Elysée Palace in Paris, an event that might make even the very thick take Lion Air seriously.

The order worth a notional $24 billion if Lion Air paid the list price, (which it didn’t)  is said to have been larger than the October 2011 order for 230 assorted Boeing single aisle 737s after discounts.

It is more likely than not that we will see Lions v Tigers played out in Australia in due course, not necessarily Tiger Australia of course, which may not last long enough to be devoured.

Both the Qantas and Virgin Australia groups would be acutely aware of Lion’s ambitions, and acutely attuned to any sign that either is even exchanging raised eyebrows with Lion, since the biggest problems both Australian aviation groups face in Asia are scale, connections and capital.

Lion Air doesn’t need to cooperate with either group, it has the mass and it seems, the money, to do what it likes, if it is allowed to.

With the Boeing and now Airbus orders Lion Air appears to be playing a more patient and thoughtful game than the headline figures suggest. Its orders stretch out to 2026, and are understood to provide for orderly growth paced by retiring and replacing existing jets before they enter the more costly maintenance and overhaul cycles that affect aging high pressurisation cycle airframes.

At present Lion Air on the Boeing side has future deliveries booked for 201 new technology engined 737 MAX series airlines, 113 current technology 737-900s, 11 737-800s and five Dreamliner 787-8s. On the Airbus side it has orders for 60 current engine technology A320s, 109 new engine option A320NEOs, and 65 A321NEOs.

The Lion Air order is also a reminder that airlines that see a need for greatly increased capacity in the current and next decade simply cannot source sufficient jets on a timely basis from one manufacturer.

The Lion situation has been cited as evidence that China for example has no option but to pursue its own design and build jet projects, such as the COMAC c919, which is a 160-ish passenger single aisle jet if it is to modernise and expand its own domestic capacity, and compete against the established giants Airbus and Boeing.