Exclusive: AirAsia plans to boost Airbus deal

KUALA LUMPUR Wed Jul 6, 2011 7:41am EDT

An AirAsia X Airbus A340 passenger jet arrives on its inaugural flight from Kuala Lumpur to Paris Orly Airport in this February 14, 2011 file photo. REUTERS/Charles Platiau/Files

An AirAsia X Airbus A340 passenger jet arrives on its inaugural flight from Kuala Lumpur to Paris Orly Airport in this February 14, 2011 file photo.

Credit: Reuters/Charles Platiau/Files

KUALA LUMPUR (Reuters) - AirAsia has drawn up plans to buy an extra 100 Airbus A320neo jets, potentially taking its record-breaking order to 300, a source with direct knowledge of ongoing discussions said.

Such a deal would make the Malaysia-based low-cost airline one of the world's largest carriers and could increase pressure on Boeing to clarify its strategy for countering its European rival's plans to upgrade its A320 medium-haul jet.

AirAsia announced a deal worth $18.2 billion at list prices for 200 A320neo planes at the Paris Air Show in June, setting a record for the largest number of jets in one deal.

While the additional order, if confirmed, would take the list price of the deal to $27 billion, most analysts have assumed the airline won a discount of as much as 50 percent because of the size of the original order.

The bumper order highlighted Airbus's growing lead over Boeing in medium-haul jets and throws the spotlight on AirAsia's aggressive growth plans at a time when high oil prices and an uncertain economy are clouding the outlook for travel.

AirAsia's regional head for corporate finance and treasury Aireen Omar said, "We ordered 200 and so far there are no changes."

An Airbus spokesman said the manufacturer would not comment on commercial discussions with customers that were confidential.

An extended order would drive AirAsia's expansion as it competes with short-haul carriers such as Singaporean group Tiger Airways and Australian carrier Jetstar in the Asia-Pacific region, the fastest growing in the world.

"AirAsia's last replacement order was in 2007/08. These new orders are long overdue so it is not an aggressive order," said Kunal Sinha, an aerospace and defense expert with the Frost & Sullivan consultancy.

"AirAsia's new fleet is to be used mostly to link Southeast Asia to India and China. By 2015, Southeast Asia will have open skies so you have to have a growth plan."

AirAsia plans to list its operations in Indonesia and Thailand this year as it expands in those markets and is in talks to open a hub in Singapore.

Like the previous order, the additional 100 single-aisle planes would also carry CFM International engines, the source with knowledge of the deal said, declining to be identified.

AirAsia denied when announcing the order that it had placed options for 100 extra aircraft. But sources familiar with the deal said it had built in the flexibility to bump up the order by that amount without imposing an obligation on its finances.

AirAsia shares fell 0.3 percent, while those of Airbus parent EADS were flat. AirAsia shares have more than tripled over the past year as investors supported its rapid expansion.

To anticipate demand, airlines can acquire options giving them the right to coveted production slots with a cut-off date or negotiate 'purchase rights', a looser commitment which avoids tying up production in advance. Manufacturers tend to be somewhat conservative about granting options in a strong market.

GROWTH PLANS

AirAsia, which flies to 63 destinations in more than 20 countries, has 90 planes currently, almost all A320s. The firm order so far for 200 A320neo aircraft would bring the current and future fleet to 375 before adjusting for retirements as new jets arrive.

Chief executive Tony Fernandes has set his sights on hitting the 500 mark.

According to International Air Transport Association (IATA) data, United Continental had the largest passenger fleet of 737 planes at the end of 2010, followed by Delta Airlines with 722, American Airlines with 618 and Lufthansa with 427.

Non-IATA member Southwest Airlines, the only low-cost carrier in the top five, has around 550 planes.

"AirAsia had the first-mover advantage and it continues to stay ahead of the game by ordering fuel-efficient planes and keeping the size growing," said an analyst with a Malaysian bank who declined to be identified due to company policy.

"But the key risk is if expansion plans do not succeed. The Malaysian base is fairly saturated. So, if the other markets do not grow or cannot take off because of protectionism or other factors, then they will find themselves having to manage a lot of aircraft," the analyst said.

Fernandes said the A320neo purchases would be funded by debt and cash flow as staggered deliveries begin in 2016.

The A320neo is a new version of Airbus's best-selling 150-seat passenger jet offering fuel savings with new engines from 2015. Huge orders at the Paris Air Show have piled pressure on Boeing to come up with a newer version of its 737 workhorse.

"Later this year we will come up with an answer. But clearly with the orders that have appeared for neo at the Paris air show, we have to act fast," said Dinesh Keskar, vice president of Boeing International and head of the company's Indian office.

Asian budget airlines placed a record $42 billion in plane orders at Paris, signaling their high expectations for travel in the world's fastest-growing market and also triggering worries some may not survive.

Many of the no-frills carriers such as AirAsia and Indian player Indigo aim to more than double their fleets to power rapid growth, partly at the expense of full-service airlines such as Cathay Pacific and Singapore Airlines.

Worldwide passenger demand was expected to rise 4.4 percent over the next year with the Asia-Pacific region growing faster at 6.4 percent, according to IATA, which represents the majority of airlines operating in the $598 billion industry.

(Additional reporting by Harry Suhartono, Tim Hepher; Editing by Vinu Pilakkot and Dan Lalor)

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