Oct 18, 2012

Indonesia - AirAsia aborts plan to buy Batavia Air

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JAKARTA - AirAsia has dropped its plans to acquire Batavia Air, two months after it made the offer as part of a long-term expansion plan in one of the world's most lucrative markets, from which it planned to become a dominant player in Asean.

AirAsia's chief executive Tony Fernandes cited "too many risks" as the reason for the about-turn, but maintained it was not a setback.

Instead, both carriers will revise their agreement to collaborate on operational areas like ground handling, distribution and inventory, as well as pilot training.

Indonesia's sprawling archipelago of 17,000 islands, large domestic market and rising affluence has fuelled an aviation growth that is among the fastest in the world, spurring foreign players to aim for mergers to get a slice of the pie.

The US$80 million (S$98 million) acquisition plan announced in late July was billed as a "perfect marriage" - a way for AirAsia to increase its market share in Asean and for Batavia Air to claw out of its debt load, estimated at US$40 million.

The Malaysian low-cost carrier was to own 49 per cent of Batavia Air, while its Indonesian partner, Fersindo Nusaperkasa, was to control 51 per cent, in order to comply with Indonesian ownership rules.

But the plans were scuttled, partly due to AirAsia's request to lower its offered price, which Batavia Air refused, according to local business daily InvestorDaily, citing a source.

Batavia Air's commercial director Sukirno Sukarna said the company had held a meeting with AirAsia and Fersindo late last week. The discussion touched on measures to lower costs, such as cutting the number of flights.

He said the failed deal was not "the end of the world" for the carrier, as it would continue its business.

Yesterday, Mr Fernandes said: "The company's decision was based on a thorough evaluation by many parties into Batavia Air. In our minds, the timing was perhaps not appropriate as it would have induced too many risks and would ultimately be earnings dilutive to our shareholders.

"Our aggressive focus in Indonesia remains, and we will push our Indonesian IPO (initial public offering) plans while still maintaining close cooperation with Batavia Air," he added. Its launch target is early next year.

Despite this turbulence, the former music industry executive tweeted: "We have learnt a tremendous amount, and feel very confident that we will be a market leader in Indonesia."

Mr Shukor Yusof, an aviation analyst at Standard and Poor's equity research, said AirAsia would find it tough to realise its goal in Indonesia.

Local airlines in the low-cost sector like Lion Air command over half the domestic market, and foreign players have partnered with local carriers to tap and grow the local market, for example, Tiger Airways has tied up with Mandala Airlines.

AirAsia's share of the domestic market is around 8 per cent, but it is Indonesia's biggest player on international routes, with a market share of 42 per cent.

Batavia Air has an 11 per cent market share, and nearly 4 per cent share of international routes out of the country.

"Batavia Air might stand to lose more as it has lost a strong partner that could help increase dominance and resolve its debt issues," said Mr Yusof.

AirAsia's fleet has grown from two planes in 2001 to 115, flying over 100 routes across Asia and Australia.

Mr Dharmadi, who heads AirAsia Indonesia, said the carrier will now focus on fleet expansion next year. "We are looking to more than triple our fleet size in the next five years to accommodate an average annual passenger growth rate of 24 per cent and 28 per cent in the international and domestic markets respectively."

The Straits Times

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