The new carrier, Malindo Airways, will begin flights between Indonesia and Malaysia next May with a fleet of 12 Boeing 727 aircraft which it plans to expand to 100 planes within a decade, Lion Air President Rusdi Kirana told reporters in Kuala Lumpur.

The move is the latest in a burgeoning rivalry between Lion Air and Malaysia-based AirAsia as strong economic growth and rising incomes spur rapid passenger growth among Asian low-cost carriers, helping to shield Western planemakers from the malaise gripping developed economies.

"Malindo is an opportunity to tap a robust market that is right for the entry of a new low-cost carrier," Malaysia's Prime Minister Najib Razak said at the launch event.

AirAsia (AIRA.KL) has made inroads into Lion Air's home market, announcing in July it would make its first major acquisition by buying Indonesia's Batavia Air.

AirAsia chief executive Tony Fernandes said in May his group was looking to list its Indonesian operations by the first quarter of next year as it moves its regional base to Indonesia.

In contrast with other budget carriers, Malindo Airways will have in-flight entertainment, extra legroom and free light meals, as well as low fares, Kirana said. Its hub will be Malaysia's new budget terminal, KLIA 2, which is currently under construction.

"I should be selling at what AirAsia is selling, or I may sell lower," Kirana told reporters, referring to ticket prices. He did not say how much Lion Air was investing in the new carrier.

Lion Air has a 49 percent stake in the airline, a joint venture with Malaysia's privately held National Aerospace & Defense Industries Sdn Bhd, which holds the majority 51 percent

Despite Asia's increasingly crowded budget carrier field, Kirana said there was still a need for "two or three more airlines with specific business models" by 2013.

The two firms' rivalry is also part of a battle between dominant manufacturers Boeing (BA.N) and Europe's Airbus (EAD.PA), which are favoured by Lion and AirAsia respectively.

Lion Air ordered 230 Boeing short-haul jets worth $22 billion last November to take its total orderbook to more than 400 planes. Sources told Reuters last week that AirAsia is close to a deal to buy up to 100 Airbus jets, closely on the heels of its record order for 200 last year. (Writing by Stuart Grudgings; Editing by Daniel Magnowski)

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