AirAsia cancels US$80 million deal for Indonesia's Batavia Air

AirAsia announced its first ever acquisition in July to accelerate expansion in Southeast Asia's biggest economy. But in an about face, AirAsia Chief Executive Tony Fernandes said a thorough evaluation found the deal would have “induced too many risks” and hurt earnings.

“We always knew it was not going to be an easy transaction. It has been a very good experience and we come out of it feeling more confident of what we need to do to grow the market in Indonesia,” Fernandes said. “Our aggressive focus in Indonesia remains and we will push our Indonesian IPO plans while still maintaining close co-operation with Batavia Air.”

Batavia Air's commercial director Sukirno Sukarna told The Associated Press in Jakarta that the deal was called off as the two parties failed to reach an agreement.

“This is not the end of the world for Batavia because we will still continue our business without the acquisition,” he said, declining to elaborate.

AirAsia said in a statement that the two airlines will cooperate in areas including ground handling and inventory systems. They will also jointly set up an aviation training center to address an expected pilot shortage in Indonesia.

AirAsia's Indonesian Chief Executive Dharmadi, who goes by one name, said the airline will accelerate its fleet expansion from 2013 with plans to more than triple the number of planes in the next five years, adding more routes and flights.

Analysts said AirAsia was eyeing Batavia for its massive ticketing agent network.

However, the deal would have weighed on AirAsia as Batavia has US$40 million in debt and an aging fleet, said Ahmad Maghfur Usman, analyst with OSK Research.

Without the acquisition, Ahmad said it will be challenging for AirAsia, which currently commands only two percent of Indonesia's lucrative air travel market, to expand. Batavia has a 12-percent share while rival Lion Air has 38 percent of Indonesia's 260 million-person market.

Ahmad said AirAsia has to establish a strong physical presence with more ticketing offices to tap Indonesia's rural population.

Overall, he is optimistic about AirAsia's prospects, citing strong demand and the proposed listings of its Indonesian unit and long-haul arm AirAsia X expected next year.

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