By Siva Govindasamy and Balazs Koranyi
BATAM, Indonesia/OSLO, Jan 27 (Reuters) - Indonesian budget airline Lion Air said on Monday it planned to cancel an order for five Boeing Co 787 Dreamliner aircraft and replace them with smaller 737 models.
Lion Air first announced the order, worth $1 billion at list prices, in mid-2012 for its premium subsidiary Batik Air.
Lion Air is one of the world's fastest growing airlines and has placed major orders with both Boeing and Airbus for smaller narrowbody planes as it projects fast growth in air travel demand in Indonesia's populous archipelago.
But many analysts have raised questions about the sustainability of massive aircraft orders in the region, which has also seen aggressive buying from Lion Air's arch-rival AirAsia of Malaysia.
Industry sources said the five 787 Dreamliners ordered by Lion Air were early production models which had been sold at discounts well above 50 percent due to their extra weight and modifications carried out after leaving the production line.
Despite ongoing reliability problems on some Boeing 787 aircraft, such aircraft could be attractive to other budget carriers due to their low prices, market sources said.
One such potential customer is Norwegian Air Shuttle which has said it is looking for more 787s despite complaining about teething problems in 787s it already owns.
"It's no secret that we are looking for more Dreamliners and it has not changed," said Norwegian Air spokesman Lasse Sandaker Nilsen.
"But we will not say anything specific about which companies' Dreamliners we are looking at, what Boeing has said to us, or when we may have the opportunity to obtain more."
Norwegian Chief Executive Bjoern Kjes said last month the airline was in "concrete negotiations" about more 787s and was interested in getting early availability, in 2016 or 2017.
"I think there is a good chance that Norwegian will make an effort to obtain these planes," said analyst Tian Tollefsen at brokerage SEB Enskilda.
"It will of course depend on the price etc, but they have clearly said they want to grow long-haul from where they are today. Delivery in 2015 is also quite attractive."
Lion Air, which had been in negotiations to buy Airbus A330 aircraft before opting for the 787, said it would need bigger aircraft than the 250-seat 787-8 and would place a new order in 2015 to serve domestic, high-frequency routes.
The airline meanwhile said it had chosen CFM International engines worth $1.2 billion to power 60 new Airbus A320s which it has already ordered. The A320 competes with the Boeing 737 on short and medium routes, holding around 150 passengers.
CFM is a joint venture between General Electric and France's Safran.