27-Nov-2015 11:13 AM

Citilink plans more domestic expansion for 2016 with new secondary bases due to Jakarta constraints

Analysis

Citilink is planning more rapid domestic expansion in 2016 as the Garuda Indonesia low cost subsidiary adds eight A320s for a total of 44 aircraft. Capacity is expected to grow by approximately 30% for the third consecutive year as Citilink continues its push to grab more domestic market share despite relatively sluggish demand.

Nearly all of the additional capacity in 2016 will have to be allocated to secondary bases, including possible new bases at Medan and Makassar, due to slot constraints at Jakarta, Bali and Surabaya. Profitability, which Citilink has achieved for the first time over the last year, could come under pressure as routes connecting Indonesian secondary cities are typically lower yielding.

Citilink is now evaluating converting some of its A320neo orders into A321neos, a sensible move as it would enable the LCC to resume capacity expansion in Jakarta from 2017 even if it is unable to mount new flights from the Indonesian capital. Citilink now has 35 A320neos on order for delivery from 2017 to 2021 and is also considering the A321neoLR, which would enable it to reach eastern Australia and northern China. Citilink is purely a domestic carrier but aims to launch in late 2016 or 2017 international services within Southeast Asia and to Perth in Western Australia using existing A320ceos.

Summary

Citilink, the low-cost subsidiary of Garuda Indonesia, plans to expand its domestic capacity by approximately 30% in 2016, despite sluggish demand.
The airline is considering opening new bases in Medan and Makassar due to slot constraints at Jakarta, Bali, and Surabaya.
Citilink is evaluating converting some of its A320neo orders into A321neos, which would allow the airline to expand its capacity in Jakarta from 2017.
The carrier aims to launch international services within Southeast Asia and to Perth, Australia, in late 2016 or 2017.
Citilink's profitability may be impacted as it allocates more capacity to lower-yielding secondary markets.
The airline is considering the A321neoLR for potential longer international routes from 2019, including Melbourne and Sydney in Australia and cities in northern or eastern China.

Citilink plans 25% to 30% capacity growth for 2016

Citilink currently operates a fleet of 36 A320s in single class 180 seat configuration to about 30 domestic destinations. Citilink CEO Albert Burhan told CAPA on the sidelines of the 23-Nov-2015 CAPA Asia Aviation Summit in Singapore that the LCC expects to add eight A320s in 2016 for a total of 44 aircraft as it is seeking to extend the only lease which is slated to expire next year. Citilink is currently projecting ASK growth of 25% to 30% for 2016.

Citilink CEO Albert Burhan discusses the carrier's expansion plan for 2016 and beyond

Citilink is now on pace to generate similar ASK growth of 25% to 30% for 2015. Through the first 10 months of 2015 its ASKs were up 26% while RPKs were up 28% and passenger numbers were up 26% to 7.6 million. Citilink had an average load factor of 80.6% through the first 10 months of 2015 compared to 79.2% the same period the prior year.

Citilink has added only four A320s in 2015, representing the slowest fleet growth in four years. But capacity and traffic has again grown rapidly as Citilink added five A320s in the last four months of 2014.

In 2014 ASK growth was 33% as passenger numbers increased by 41% to 7.6 million. Capacity and traffic growth was even faster in 2012 and 2013 but on a much lower base. Citilink began 2013 with a fleet of only 14 A320s.

Citilink year over year capacity and traffic growth: 2011 to 10M2015

	Passenger growth	ASK growth	RPK growth
2011	42.2%	28.3%	38.3%
2012	75.9%	75.5%	65.4%
2013	86.8%	74.8%	87.5%
2014	41.3%	32.9%	37.4%
10M2015	25.8%	25.6%	27.9%

Citilink domestic market share expands from 3% to 13% in only four years

Citilink expects to carry about 10 million passengers in 2015, which gives it about a 13% share of the total Indonesian domestic market. It has nearly doubled its annual passenger traffic since 2013 and has more than tripled its passenger traffic since 2011, when Citilink handled only 1.3 million passengers and accounted for less than 3% of Indonesia's domestic market.

In the most recent month, Oct-2015, Citilink carried 745,000 passengers compared to 136,000 in Oct-2011.

Citilink monthly passenger traffic: Jan-2010 to Oct-2015

Citilink was established as a unit of Garuda in 2001 but was a tiny player in its first decade, operating only four aircraft in 2010. Citilink finally started to accelerate expansion in 2011. In mid-2012 it became a Garuda subsidiary and secured its own operators' certificate.

Citilink faces growth constraints at both Jakarta airports

Most of Citilink's expansion over the last four years has been in the Jakarta and Surabaya markets. It currently has less than 20 routes that do not touch Jakarta or Surabaya, according to OAG data. These routes are generally served with one daily flight or less and account for under 20% of Citilink's current seat capacity. But the portion of capacity that does not touch Jakarta or Surabaya will increase significantly in 2016 due to infrastructure constraints at its three largest bases.

Jakarta Soekarno Hatta International Airport is Citilink's largest hub and base with 50 daily departures (according to data from Citilink). It also has a large base at Surabaya and smaller bases at Jakarta Halim Airport, Batam and Bali. Of the three smaller bases Halim is the largest with 22 daily departures.

Citilink is keen to continue growing at both Jakarta airports but faces infrastructure constraints and could potentially even be forced to reduce its Jakarta operation in 2016.

At Halim, a subsidiary of rival Lion Group has begun modernising the passenger terminal and will take over the operation of the terminal in the near future. Citilink has received assurances from the Indonesian government and the air force, which controls Halim but does not own the passenger terminal, it will be able to continue operating from Haim. But there is still a possibility that Citilink will be forced out of Halim by Lion, perhaps indirectly through an increase in charges.

At best Citilink will be able to maintain its current Halim operation. Growth at Halim will almost certainly be infeasible as there is a cap on the number of commercial movements. Once Lion Group takes over management of the terminal Lion will be in better position to expand should there be any movement to increase the cap.

Citilink and Lion Group full service subsidiary Batik Air have the only regular scheduled operations at Halim, which reopened to commercial traffic in early 2014. The airport, which is closer to central Jakarta than Soekarno-Hatta, is also used by charter carriers, small air taxi operators, the Indonesian air force and business aviation.

Citilink expects to add only one A320 to Jakarta base in 2016

There are also uncertainties at Soekarno-Hatta as the government owned airport operator has been seeking to reduce hourly movements, which would require all carriers to cut peak hour flights. Citilink and other Indonesian carriers are trying to block the move and are supporting an initiative to improve air traffic management which would instead enable an increase in the number of hourly movements from 72 to 84.

But even if this initiative is successful it likely will take a couple of years before the technology and procedures are in place to increase slots, which would then be distributed among several Indonesian carriers. For 2016 the best case scenario for Citilink is to add a small number of flights at Soekarno-Hatta with slots freed up by adjustments from other airlines.

Mr Burhan told CAPA that Citilink expects to only be able to base in Jakarta one of the eight A320s being added in 2016. As it has also become difficult to secure additional slots at Surabaya and Bali, Citilink is planning to base most of its additional aircraft for 2016 in Batam, Makassar and Medan.

Citilink to continue domestic push

Makassar and Medan are potential new bases that Citilink is now looking at opening in 2016. Citilink currently serves Makassar with only five daily flights while Medan is served with eight daily flights, according to OAG schedule data.

Makassar is located in central Indonesia and could be used to expand in eastern Indonesia, a remote but growing region where Citilink does not yet have a presence. Medan, where a new airport opened in 2013, is the largest city on the western island of Sumatra.

Citilink sees huge opportunities to continue to expand its domestic network and is keen to continue to narrow the gap with Indonesia's largest LCC, Lion Air. Lion has a much larger network than Citilink and carries approximately four times more passengers.

Expansion in secondary markets could impact newfound profitability

But as Citilink is forced to allocate most of its additional capacity outside the three main markets of Jakarta, Bali and Surabaya its profitability will inevitably be impacted. Citilink's Jakarta routes now generate most - if not all - of the carrier's profits.

Citilink has had some success with point to point routes that do not touch the main markets of Jakarta, Surabaya or Bali. But some of these types of routes have not worked out and collectively these routes are not currently profitable on a year round basis. As Citilink allocates more of its capacity to such routes there is a risk it will see its profits decline or potentially even slip back into the red.

Citilink incurred heavy losses the first two years it operated as a separate subsidiary and was also unprofitable when it was a unit under Garuda. But Citilink has been in the black since 2H2014.

In the first three quarters of 2015 Citilink had an operating profit of USD12.6 million and an operating margin of 3.6%. In the same period of 2014 the LCC incurred an operating loss of USD11.2 million and had an operating margin of negative 3.9%. As the fourth quarter is typically strong in Indonesia Citilink is on track to generate its first annual profit in 2015.

Citilink financial highlights: 9M2015 vs 9M2014

Citilink saw passenger yields drop 11% through the first three quarters of 2015 but unit costs decreased 13%, driven by the decline in fuel prices. Domestic market conditions in Indonesia have been challenging as a sluggish economy and depreciation of the Indonesian rupiah has impacted discretionary consumer spending.

Citilink expects the total domestic market to shrink slightly in 2015. Domestic growth in Indonesia, which is the world's fifth largest domestic market, already slowed significantly in 2013 and 2014 to the mid single digits after high double digit growth in 2010 through 2012.

But Citilink has obviously benefitted in 2015 from lower fuel prices, although the fuel price reduction has been offset by the weaker rupiah. It also has achieved better economy of scale as it has expanded its fleet and improved utilisation levels.

Yields will likely continue to be under pressure in 2016 as domestic competition remains intense and as the portion of capacity Citilink allocates to lower yielding secondary markets increases. But Citilink is hoping for further unit cost reductions as it expands its fleet and its decision to further delay the launch of scheduled international services should help it remain profitable in 2016.

Citilink further delays launch of scheduled international services

New international routes come with much higher risk than new domestic routes and take much longer to mature. Citilink briefly operated scheduled international services to Johor in Malaysia in early 2014 but has since been entirely focusing on domestic operations.

In early 2015 Citilink was planning to resume scheduled international operations in late 2015. But this plan has again been shelved for at least another year.

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Mr Burhan told CAPA that Citilink is now looking at launching one or two international destinations in late 2016. Bangkok, Kuala Lumpur, Singapore and Perth are under consideration.

Garuda currently serves all four potential Citilink international destinations from Jakarta. Garuda also links Singapore with Surabaya and Bali and Perth with Bali. Citilink is only looking at existing Garuda routes - a combination of supplementary services and taking over unprofitable Garuda flights - from these four destinations rather than opening new links to secondary Indonesian destinations.

Citilink could end up further pushing back the launch of scheduled international operations until 2017. The LCC is not in a hurry to operate international routes as it realises such routes likely will be unprofitable - at least during the initial phase.

Citilink to again operate international charters in 1H2016

While Citilink is not expecting to operate scheduled international flights until at least late 2016 it is planning to operate an international charter programme in 1H2016. Citilink dedicated two A320s to international charters to Saudi Arabia (with a fuel stop in India) and China in 1H2015. The LCC is keen to operate again charters in these markets in 1H2016 and this time allocate three A320s.

The charters only run during the first half of the year as there is stronger domestic demand in Indonesia in the second half. Therefore the charters, which are guaranteed to be profitable as they are underwritten by agents, give Citilink the ability to reduce its scheduled capacity during the leaner months.

Any scheduled international routes launched in the short or medium term would likely be driven by a potential need by its parent to offload routes such as Bali-Perth, Bali-Singapore or Surabaya-Singapore. If such a transfer occurs Citilink likely will begin codesharing with its full service parent. Citilink has not yet implemented a codeshare or interline with Garuda as it has been focusing almost entirely on routes already served by Garuda with the Citilink product being used to compete against LCCs at the bottom end of the market.

Inevitably the Garuda group will adjust its dual brand strategy when Citilink finally enters the international market. While domestic routes generally are large enough to support both brands there are smaller leisure oriented international routes that are better off being served only with the Citilink brand. Garuda will need a codeshare with Citilink to maintain a presence in these types of markets, particularly for passengers connecting to its long haul network.

Citilink considers A321neoLR

For now the five year business plan envisions several short to medium haul scheduled international routes using the existing A320ceo fleet. But Mr Burhan said Citilink is evaluating potential longer international routes from 2019, when the A321neoLR enters service.

Airbus launched the new long range version of the A321neo in early 2015. Citilink has not yet ordered the aircraft but could potentially convert some of the 25 A320neos it has on order for delivery from 2019 to 2021 to the A321neoLR. Citilink also has an earlier batch of 10 A320neos on order for delivery in 2018 and 2019 (five each year) but these cannot be converted into the A321neoLR as the type will not be available until 2019.

Citilink fleet summary: as of 26-Nov-2015

Aircraft	In Service	On Order*
Total:	36	44
Airbus A320-200	36	9
Airbus A320-200neo	0	35

Citilink is looking to use the A321neoLR to launch Melbourne and Sydney in Australia and potential cities in northern or eastern China, which would not be within range of the A320neo. Garuda currently serves Beijing, Melbourne and Sydney from both Bali and Jakarta using A330s while Shanghai is served only from Jakarta also using A330s.

Citilink plans to maintain an all-narrowbody fleet and is not interested in taking over any of Garuda's A330-300s, some of which are now in single class configuration. But Citilink sees opportunities to use new generation narrowbody technology to operate longer international routes.

As is the case with regional international routes Citilink is looking at operating longer international routes alongside Garuda or potentially take over Garuda routes which have become unprofitable due to intense LCC competition.

Garuda looks at up-gauging Jakarta flights by acquiring A321neos

Citilink is also looking at converting some of its 35 A320neo orders, including the initial batch of 10 aircraft for delivery in 2017 and 2018, to the A321neo. This would be a sensible move for Citilink as it would enable the airline to expand in Jakarta even if the current slot restrictions remain.

Citilink is looking at the high density 220 seat configuration for the A321neo, which would drive a 22% increase in seat capacity on routes now operated with the A320ceo.

Citilink's five year plan is to increase its fleet to between 70 and 80 aircraft by 2021. But Citilink has the flexibility to accelerate or decelerate growth depending on market conditions.

Growth can be slowed by returning some of its older A320ceos as A320neos are delivered and can be accelerated by sourcing additional aircraft from leasing companies or up-gauging some of its current A320ceo orders to A321neos. If Citilink is forced to maintain its Jakarta schedule at about 70 to 80 daily flights the up-gauging of the aircraft based at the Indonesian capital will become a no brainer.

Fleet flexibility gives Citilink brighter outlook

The fleet flexibility gives Citilink a stronger position as it tries to increase market share while remaining profitable. Domestic growth will hinge on the economy and on how quickly Indonesia is able to resolve infrastructure constraints at Jakarta - and to a lesser extent at Bali and Surabaya.

There are opportunities to grow in secondary domestic routes and in the short/medium haul international market, both of which remain relatively underserved. But both sectors can be extremely challenging.

In the international market Citilink needs to build up its brand, which is virtually unknown outside Indonesia. With point to point secondary domestic routes there is often insufficient demand to generate the yields and load factors needed to maintain the routes on a regular basis. Citilink will need to decide over the next couple of years whether it needs to strategically build up a presence in these kind of higher risk markets or pursue a more conservative growth strategy, focusing on growing domestic trunk routes through up-gauging.

Citilink could ultimately end up with a fleet of 35 220-seat A321s and a relatively small number of A320s for use in secondary markets. But if market conditions in Indonesia become more favourable a fleet of 80 aircraft, including a large portion of A321neos for use on trunk routes and a niche fleet of A321neoLRs for longer international routes, is also a feasible scenario.