News Backgrounder
Garuda and Citilink seek investors as losses widen
Confronting voracious capacity expansion across its network, Indonesian flag carrier, Garuda Indonesia, is continuing to re-engineer its domestic and international business to stem widening losses.
June 1st 2014
Garuda Indonesia president, savvy charmer and former banker, Emirsyah Satar, last month announced plans to sell 40% of the flag carrier’s domestic budget arm, Citilink, and also to take over several important domestic routes serviced by debt-ridden Merpati Nusantara. Read More »
At the same time, Citilink, a domestic low-cost carrier majority-owned by Garuda, said it wanted to buy into low-cost carrier, Tigerair Mandala, to deepen its market base in the region’s extremely competitive low-cost airline sector. Indonesia is the fifth largest domestic market in the world.
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| Garuda Indonesia president, Emirsyah Satar, said the airline will increase services to Japan in the second half of 2014 |
Satar said the regional strategy re-alignment of both the flag carrier and its domestic subsidiary was necessary to compete with the low-cost carriers (LCCs) that are beginning to dominate air routes across Southeast Asia, and counter a huge increase in capacity into Indonesia from global rivals.
Middle Eastern and regional rivals, including Etihad Airways, Emirates Airline and Singapore Airlines, have expanded their route networks into Indonesia. Emirates is now the third largest carrier flying into Jakarta after Singapore Airlines and Malaysia Airlines. As well, Australia-Indonesia capacity has risen by 40% in the last year, leaving Garuda with 24% of business between the two countries.
Garuda will take over Merpati’s routes from Jakarta to Sumbawa Besar, West Nusa Tenggara and North Sumatera, using new ATR 72-600 aircraft.
The necessity of a strategic shift for Garuda was highlighted in May when the airline announced a net loss of US$164 million for its first quarter, to March 31, compared with a $33.75 million loss in the same period last year.
Citilink president, Arif Wibowo, told local media last month his airline planned to take over Tigerair Mandala to strengthen its regional budget network. A bid had been made, he said, and discussions are taking place.
“We intend to take over Tigerair Mandala to strengthen Citlilink’s development,” he said, and added Garuda supports plans to “acquire or to partner with” Tigerair Mandala. “The essence of the deal is it is fully supported by the holding company [Garuda] as long as it does not harm Citilink,” he said.
But it is no means a done deal. It is understood other carriers have shown interest in Tigerair Mandala, including AirAsia, which already has conducted due diligence on the no-frills operator.
Established in 1969 as Mandala Airlines, Tigerair Mandala has a troubled history. Facing financial problems early in the decade, Cardig International (5%) and Indigo Partners (49%) bought into the carrier in 2006. After defaulting on aircraft lease payments four years later, the airline ceased operations in January 2011. In April 2012, it resumed flying after Singapore’s Tigerair (then Tiger Airways) and the Saratoga Group bought into it.
Meanwhile, Garuda has secured $100 million in financing from a unit of Malaysia’s Maybank to fund operations and expansion. The three-year Musyarakah-based loan, which will be Indonesia’s largest bilateral Islamic financing, will be issued through Maybank’s Indonesian unit, PT Bank Internasional Indonesia (BII).
“The partnership in financing demonstrates BII’s continuous support for Garuda Indonesia as we are growing our business,” said Satar. “We are honored that this is the first and only Islamic financing done between a bank and an airline in Indonesia.”
The airline has been adjusting its network to focus on profitable services. It recently reduced daily flights to Amsterdam to four times a week because of tough economic conditions, opting instead to fill the gap by co-operating with its new SkyTeam partner, KLM, which can carry Garuda passengers on to other European destinations.
At the same time, its network to Japan is expanding. Daily flights to Tokyo’s Haneda airport from Jakarta will be launched this month. “We will continue to expand operations in Japan as the country’s increasing business interests in Indonesia boosts traffic between the two countries,” said Satar.
Garuda operates 32 services to Japan each week with daily Jakarta-Narita, Denpasar-Narita and Denpasar-Osaka flights as well as four times a week flights from Jakarta to Osaka. Satar said Japanese direct investment in Indonesia almost doubled, to $4.7 billion, in 2013, from $2.5 billion a year earlier. Last year, Japan replaced Singapore as the largest investor in Indonesia.
