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Abu Dhabi, UAEThursday 18 April 2019

Indonesia's Lion Air set to scrap $22bn Boeing jet order

The carrier is angry at the aircraft manufacturer's response to October air crash

The closely held, fast-growing carrier has 368 undelivered aircraft on order from Boeing and Airbus, more than triple the fleet of 117 jetliners that it operates. EPA
The closely held, fast-growing carrier has 368 undelivered aircraft on order from Boeing and Airbus, more than triple the fleet of 117 jetliners that it operates. EPA

Lion Air Mentari’s owner is sketching out plans to become one of the world’s largest budget carriers, while also preparing to scrap $22 billion in Boeing jet orders out of anger at the manufacturer’s response to an October air disaster.

Rusdi Kirana, the co-founder of Lion Air, Indonesia’s biggest airline, mapped out the seemingly contradictory goals in an interview with Bloomberg on Tuesday. The crash that killed all 189 people aboard a Boeing 737 Max won’t derail his ambition to expand the budget carrier to an eventual fleet of 1,000 aircraft, he said. Lion Air may also list its Indonesian unit in 2019, he added.

But it’s not clear if Boeing, the airline’s long-time trade partner, would play a role in that growth given tensions following the crash of a two-month-old aircraft. The budget operator is firming up a formal document to press ahead with canceling its remaining 737 orders, Mr Kirana said, claiming the US planemaker unfairly implicated Lion Air in the deadly crash.

He has also sent a letter to the Chicago-based company outlining his objections to the way the aircraft maker handled the fallout from the first fatal crash of a 737 Max jet, Mr Kirana said in Jakarta.

“It was very cunning and very inappropriate, which I think is without any ethics,” Mr Kirana said, explaining his plan to scrap the orders. “They did it to one of their biggest customers. They created an opinion that we did not maintain our aircraft properly.”

A preliminary report last month from Indonesia’s transportation safety commission detailed maintenance issues with the doomed Max, contrasted how pilots handled confusing anti-stall warnings on the final two flights and recommended that Lion Air improve its safety culture.

Boeing responded with a lengthy statement that, like the report, alluded to but didn’t mention by name a new system on the 737 Max that was activated by erroneous data from a sensor. The software repeatedly tilted the plane’s nose downward as pilots battled for control amid a cacophony of alarms.

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“This is a tough situation and understandable that there’s some challenges around that, but this is a highly respected customer. We’re in constant communication with Lion Air,” Boeing Chief Executive Officer Dennis Muilenburg said in a December 6 interview on CNBC. “We’re going to work our way through this. Of course, all of these contracts are long-term arrangements. These are not things that can be exclusively canceled by either side.”

The closely held, fast-growing carrier has 368 undelivered aircraft on order from Boeing and Airbus, more than triple the fleet of 117 jetliners that it operates. Mr Kirana said Tuesday Boeing has yet to deliver about 250 jets to Lion; the manufacturer’s orders and deliveries website shows 190 unfilled orders.

MR Kirana sounded bullish on Lion’s growth prospects, despite the bruising publicity from the October 29 crash.

The group’s subsidiary in Thailand, Thai LionAir, is working on getting permits to fly to Dubai and London next year, using Airbus’s A330neo jet, which they will receive in May. He also said the group plans to fly to more countries and to open another base in Asia, without providing details.

Still, tripling Lion’s order book might be difficult at a time when Airbus and Boeing narrow-body production is effectively sold out into the early 2020s. And some analysts are skeptical Lion needs all the aircraft it currently has on order amid the brutally competitive southeast Asian travel market.

What Lion eventually “does or does not do” with its Max order, isn’t likely to temper other operators’ enthusiasm for the jet, said John Plueger, CEO of Air Lease, a Los Angeles-based lessor and a 737 Max customer.

Order cancellations tend to be “driven by business models and forward outlook, as opposed to aircraft types,” Mr Plueger said in an email. “If an airline orders too many aircraft it will end up canceling or deferring those orders. Overall demand for the Max remains strong and I am sure that there are a number of airlines and lessors that would love to have access to those positions.”

Updated: December 12, 2018 08:02 AM

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