MISSION POSSIBLE

As Garuda Indonesia prepares to host the 59th Assembly of Presidents of the Association of Asia Pacific Airlines (AAPA) this month, its president director, Arif Wibowo, can look back on his first year at the carrier with some satisfaction. Losses have turned to profits and expansion is on the drawing board.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

November 1st 2015

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Arif Wibowo, Garuda Indonesia’s president director, had big shoes to fill when he took over from Emirsyah Satar last December, and in more ways than one. Read More »

Arif Wibowo, president director Garuda Indonesia: predicts economic growth of 5%-6% for the year

Wibowo’s predecessor had rebuilt the airline from ground up during his tenure, but the recovery trajectory hiccupped last year when a perfect storm of a falling currency, effective budget carrier competition and a faltering domestic economy put the airline into loss, its first red ink result since 2006.

Wibowo has been straight out of the blocks in dealing with the problem. He and his team decided on a “Quick Win” strategy to return the carrier, and its subsidiaries, to profit in the short term. That’s done and now it is a full on focus on Wibowo’s Sky Beyond strategy.

Successful implementation of Sky Beyond, planned to produce sustained airline profits for the group, is hard enough in the best operating environments, so it is even more of a challenge for Wibowo in the flip flop economic world of Asia’s emerging economies in 2015. But so far, Wibowo, at 49, is showing every sign of coping with the pressure.

Wibowo has delivered good news to the airline’s government owners throughout 2015, after three quarters of losses in 2014. In the first six months of the year, it reported a $27.7 million profit, a turnaround from the $203 million net loss it recorded in the same period a year earlier. Garuda achieved an 11.6% decrease in operating expenses, down from $1.9 billion in the first half of 2014, to $1.7 billion this year.

At press time, it announced a net profit of US$51.4 million for the nine months to September 30. In the same period last year, the airline reported a $220.1 million loss.

By June, more than 13 million passengers had boarded Garuda flights, up 19.15% on a year earlier. By year end, the airline has forecast it will carry 25 million passengers, up from 21.5 million in 2014.

Domestically, along with wholly-owned budget subsidiary Citilink, the group holds 44% of the market, up from 38% in 2014. Citilink will become more important to the group as it launches international services to compete with local low-cost carrier rival, the Lion Air Group.

“Garuda is in profit and Citilink is in profit. Our other subsidiaries are contributing positively to the bottom line. So I am confident the rest of 2015 will be a profitable year,” Wibowo said.

Wibowo is well aware of the legacy of Emirsyah. His predecessor, took over an airline that had a three star rating with the global airline survey company, SkyTrax in 2005 and was navigating its way through the post Global Financial Crisis environment.

Emirsyah launched the five year recovery program, Quantum Leap, in 2009, which will draw to a close next month. He was still at the helm of Garuda in early December last year when the airline achieved a five star Skytrax rating. The former banker had to depart Garuda Indonesia as individuals can only serve as the leader of a state-owned enterprise for a mandated period of years.

'Terminal 3 is a milestone development because it will be used by Garuda for all its international and domestic flights and by its SkyTeam alliance partners. We are aiming to build it as the main hub so the network can be entirely interconnected. Domestic to international as well as a transit point for transcontinental flights from Australia to Asia or from Asia to Europe. Garuda really can strengthen and compete on international routes'

Arif Wibowo President director Garuda Indonesia

Sky Beyond follows on from Qantum Leap, with a five year strategy for growth and profits. It is not finalized yet, but it will include domestic and international fleet and network expansion, a strengthening of Garuda’s financial base and, most importantly, a commitment to achieving enduring profitability.

Sky Beyond, said Wibowo, has three main elements. Firstly, it is to improve service standards beyond its Skytrax five star status. “We have to be one of the most caring airlines,” he said.

The second leg of the strategy is building cost leadership and the third is creating synergies within the entire Garuda group.

Wibowo told Orient Aviation: “The bottom line of the company always has to be positive. This is very important to sustain our business in the future.”

This year, he said, had been one of “quick wins” of maximizing revenue generators, aggressively restructuring cost drivers and re-profiling most of the airline’s short term loans.

It’s a long way from the dismal late 1990s when Garuda was one of the region’s financial basket cases. It was deep in debt and near bankrupt. Its operations were being strangled by corruption, cronyism and nepotism, not to mention a poor safety reputation.

An added blow was the European Union’s (EU) ban on all Indonesian carriers, imposed in 2007, which prevented Garuda from serving Europe. Garuda was exempted from the ban in 2009 and resumed EU operations with flights to Amsterdam in May 2010 and London last year.

Wibowo conceded there were challenges with profitability last year. It was its first year of losses since 2006, but then the oil price collapsed and the operating costs of the airline industry took a favourable downward turn.

In the first quarter of this year, Garuda’s fuel bill dropped almost 30%, to $264.25 million, compared with $376.49 million a year earlier. While the fuel price has eased, Wibowo said there has been a “strong headwind” with the depreciation of Indonesia’s rupiah. The currencies of Japan, Korea, China and Australia, markets Garuda services, also have declined.

But whatever the pressures, the plan is to reduce operating costs by 10% ($200 million) without impacting of the airline’s service delivery.

A critical element of the Sky Beyond strategy will be fleet planning. At this year’s Paris Air Show, in June, Wibowo foreshadowed a major fleet expansion, when he negotiated a Memorandum of Collaboration with Boeing for 30 B787-9 Dreamliners and 30 B737-8s, worth up to $10.9 billion.

If the deal goes ahead, the 787s will be delivered between 2020 and 2024 and the 737s from 2022 to 2025. At the same time, Garuda and Airbus signed a Letter of Intent for 30 wide-body A350-900s, valued at $9.1 billion.

At the Airbus signing, Arif said the aircraft would be used to fly non-stop to Europe from Jakarta and Bali. “Following our success in revitalizing our regional operation in Asia and the Pacific, the development of our long-haul network will be a priority in coming years.” he said.

The Airbus Letter of Intent provoked controversy in August when Indonesia’s maritime affairs minister, Rizal Ramli, called on the airline to cancel negotiations to buy the A350s. He said their purchase would bankrupt the airline. The newly installed minister wanted Garuda to buy more single aisle aircraft and concentrate on domestic and regional markets.

“We can rule the regional market in five to seven years,” he said. “When we are strong enough then we can go to the next step.”

Wibowo emphasised to Orient Aviation that both the Airbus and Boeing arrangements were not firm orders. “The Memorandum of Collaboration with Boeing and the Letter of Intent with Airbus need to be analysed,” he said.

“We still need to have an order or purchase confirmed by the majority shareholder, the State Owned Enterprise ministry. We are finalizing the fleet strategy for the next decade and onwards.

“It is now under assessment by a consultant to make sure it is a very good strategy.There will, ultimately, be a fleet plan and a choice will be made between the B787 and the A350,” he said.

Garuda has a fleet of 136 aircraft, of which 32 are wide-bodies. They are two B747-400s (used for Haj flights to the Middle East), eight B777-300ERs (2 more on order), 10 A330-200s and 12 A330-300s (12 more on order), 79 B737-800s (3 on order), 15 Bombardier CRJ1000 NextGens (3 on order) and 10 ATR 72-600s (15 on order). Also on firm order are the 50 B737 MAX8s.

Citilink operates 36 A320s and four B737s. Said Wibowo: “We need to replace at least 20 of our long-haul fleet and 70 of our narrow-bodies over ten years and beyond. Today, the average age of Garuda aircraft is 4.6 years.

“If we don’t replace these planes we will become the old airline in terms of fleet. Over and above that we need to grow. The plan outlines a reduction of aircraft types to ensure better cost efficiency.”

Garuda intends to have 53 wide-body aircraft by 2025, although earlier this year it was disclosed that State-Owned Enterprises (SOE) Minister, Rini Soemarno, had asked Arif to speed up the expansion.

After a closed door meeting at the Ministry in June, the Garuda president said the airline “had been urged to expand aggressively with both organic and non-organic growth so that it can conquer domestic, regional and international markets”.

The minister wanted Garuda to have 450 aircraft in five years. The carrier estimated it could reach that target in 10 years. A compromise is being discussed.

In the meantime, there has been no slowing of deliveries. Garuda has accepted 18 new aircraft this year. In 2016, it will add five A330-300s, one B777-300ER and nine ATR-72-600 turboprops to its fleet. The following year, another six A330s and six more ATRs will arrive at the airline’s Jakarta headquarters.

Subsidiary Citilink will add five A320neo and one A320ceo to its fleet next year and 20 new narrow-bodies in 2017.

Network-wise, Garuda will strengthen its presence domestically, regionally and globally with a particular goal of dominating Indonesia’s domestic market, using both Citilink and Garuda services, to combat the accelerated growth of rival, Lion Air.

Lion Air is a formidable rival and is Southeast Asia’s largest airline by fleet numbers. In January this year, it was operating 103 aircraft and had 549 aircraft on order. Citilink had 32 airliners flying in January and had ordered 47 aircraft by that date. Lion Air Group co-founder, Rusdi Kirana, told Forbes magazine early this year his airline group flew 43 million passengers in 2014.

“We have a 250 million population, 17,000 islands with 5,000 miles in a straight line from east to west, but fewer available seats per kilometer compared with other Asian countries in this region. We have huge room to grow,” Rusdi said.

Wibowo agrees. “With the evolution of open skies within Asean (Association of Southeast Asian Nations) we want to use the joint strength of Garuda and Citilink to encompass market sectors,” he said.

“We are planning to add more capacity to Singapore. We did 10 frequencies a day to Singapore using narrow-bodies, but are starting to add two or three or four frequencies with A330s. Citilink is preparing to fly to Singapore and other Asean countries.”

Not surprisingly, China is a focus for the carrier, which it services with flights to the Beijing, Shanghai, Guangzhou triangle of hubs. It added Beijing-Denpasar earlier this year and will launch Shanghai-Denpasar either late this year or in early 2016.

The introduction of visa-free entry to Indonesia for Chinese tourists this year is boosting business. “The potential market for Indonesia is still quite far from the total outbound market of China. China has more than 100 million outbound travelers, but to Indonesia it is only around 800,000 annually,” said Wibowo.

“We need to add more flights between our two countries because there is potential for two million travelers from China into Indonesia.”

From this year, Garuda has offered regular charter flights that connect Denpasar (Bali) and Manado (North Sulawesi) with cities including Chengdu, Chongqing, Ningbo, Kunming, Jinan, Harbin, Xian, Shenyang and Chengzhou. Apart from China, it has been expanding charters to the Middle East, encouraged by the country’s large umrah (minor haj pilgrimage) market. The carrier’s charter revenue has soared by more than 13 times year-on-year, to $39.2 million, from only $2.86 million.

More European destinations are being considered, potentially Frankfurt and Paris. Garuda flies to Amsterdam and London Gatwick. Wibowo told Orient Aviation the airline is close to finalizing access to Heathrow that will strengthen its position in the U.K. Adding to Garuda’s long-distance international presence “will be a priority in the coming years”, he said.

The development of the hub at Jakarta’s Soekarno-Hatta International Airport, where the new Terminal 3 is scheduled to open in July next year, is critical to Garuda’s strategy.

Terminal 3 is a milestone development, said Wibowo, because it will be used by Garuda for all its international and domestic flights and by its SkyTeam alliance partners. “We are aiming to build it as the main hub so the network can be entirely interconnected. From domestic to international as well as a transit point for transcontinental flights from Australia to Asia or from Asia to Europe. Garuda really can strengthen and compete on international routes,” he said.

“We will concentrate on our four revenue generating units. Garuda is the full-service arm, which has a business size of around $4 billion. Then there is Citilink. It is the weapon for Garuda to make sure the middle down market can be served. The size of this business is around $600 million.”

“The third one is building the maintenance capability of GMF AeroAsia, which is worth around $300 million. In October, the MRO company opened the world’s largest maintenance facility at its Soekarno-Jakarta airport base. The fourth is the cargo business, with a value of about $300 million. These four revenue generating units are really significant for the Garuda group in its goal of making sure Garuda will be big.”

Earlier this year, the carrier signed a partnership agreement with Jakarta-based cargo operator, Cardig Air, in which both carriers will benefit from joint marketing and promotion of freight routes they operate.

During the initial stage of co-operation, which began in July, Garuda has the rights to sell freight space aboard Cardig Air flights that serve Surabaya, East Java, Denpasar, Bali, and Dili in Timor Leste, while Cardig has rights to market Garuda’s cargo space on several domestic and international routes.

Wibowo said the carrier is forecast to book $300 million in cargo revenue this year, up 12% on 2014. The partnership is expected to contribute $10 million in cargo revenues and “in the future we will continue to extend the cooperation with Cardig Air to expand our domestic and international cargo route network”, he said.

He won’t disclose the amount of investment he might need for the planned aggressive growth, but he did say Garuda was looking at all possible funding options. “We always explore any available opportunity. We’ve already obtained funding from the Asia market, so we’ll seek opportunities for funding from non-Asian sources, including the U.S.,” he said.

Indeed, attracting funding does not seem to be a problem for Garuda. It has raised $500 million from global Islamic bonds issuance and a credit facility commitment from Bank of China (BOC) Aviation.

The global bonds are being used to refinance the company’s $350 million debt that is maturing this year and will fund part of its capital expenditure. The $130 million credit facility from BOC Aviation will refinance pre-delivery payments for Airbus aircraft destined for Citilink.

Fuel and currency hedging has helped Garuda’s financial performance. In April, it signed a partnership agreement with four private banks - Bank International Indonesia, Bank Mega, ANZ Indonesia and the Standard Chartered Bank - for a $77.01 million hedging facility.

The deal followed a previous hedging facility agreement, worth a similar amount, with state lenders, Bank Negara Indonesia, Bank CIMB Niaga and Standard Chartered. During the second half of this year, Garuda is monitoring the rupiah exchange rate and has moved ahead with its costs restructuring and hedging program.

Wibowo has decided to reduce spending on sponsorships and advertising - although the carrier does invest heavily in sponsorship of English Premier League side, Liverpool - and focus on sales promotions.

None of the efficiency measures appear to be impacting on the airline’s growing reputation for service. Its five-star rating places it in the same class as All Nippon Airways, Asiana Airlines, Cathay Pacific Airways, Hainan Airlines, Qatar Airways and Singapore Airlines.

Wibowo said one of the main challenges he, and the group, face is ensuring Garuda can dominate the immediate market. “I need to expedite the growth of Citilink domestically and regionally. Secondly, we need to strengthen Garuda as the best player in medium and long-range markets. Thirdly, we are still facing strong headwinds on the economic growth front. I think economic growth is still in moderate mode,” he said.

“I see economic growth at around 5%-6% in the next year. Then there is fuel. It may cease to be a tailwind because I think the price of jet fuel will start to increase next year. These are the kind of challenges we face as well as adding so many aircraft to our fleet.”

Overall, Garuda appears well-positioned for growth, but it faces unrelenting low-cost carrier competition, particularly from deep-pocketed Lion Air. It also is constrained by its main hub, Soekarno-Hatta International Airport. The facility is processing more than 60 million passengers annually, some three times its design capacity. Plans are underway for new runways and terminal expansion, but completion is years away.

The Garuda’s group’s expansion plans are grand. They could go awry in the wrong hands. Wibowo, not yet 50, is proving to be a safe pair of hands for the Indonesian flag carrier as it strives to dominate in the region’s third largest economy.