05-Mar-2014 6:36 PM

Garuda gives SkyTeam leading presence in Southeast Asia as Garuda’s international profile is raised

Analysis

Garuda Indonesia formally enters SkyTeam on 5-Mar-2014, becoming the fifth flag carrier in the fast-growing Southeast Asian region to join a global alliance. With Garuda, SkyTeam surpasses Star as the largest alliance in Southeast Asia by seat capacity with about a 16% share compared to 14% for Star and 10% for oneworld.

For Garuda, entering SkyTeam is an important component of the carrier's new business plan, which also includes fleet renewal and expansion, product enhancements and ambitious growth of its international network. SkyTeam will particularly help Garuda in Europe, a market the carrier is focusing on in 2014 with new non-stop services to Amsterdam and London.

For SkyTeam, Garuda significantly improves the alliance's access to Southeast Asia, in particular the region's largest market - Indonesia. SkyTeam now has members in two key fast-growing emerging ASEAN markets - Indonesia and Vietnam.

Summary

Garuda Indonesia joins SkyTeam, becoming the fifth flag carrier in Southeast Asia to join a global alliance.
SkyTeam surpasses Star as the largest alliance in Southeast Asia by seat capacity.
Garuda's entrance into SkyTeam significantly improves the alliance's access to Southeast Asia, particularly Indonesia.
Garuda's membership in SkyTeam will help the carrier expand its international network, particularly in Europe.
Garuda's domestic network and product is attractive to foreign full-service airlines, providing important high-yielding revenue for the carrier.
SkyTeam's share of total seat capacity in Indonesia will increase from about 2% to 23% as a result of Garuda's entrance.

SkyTeam becomes the largest alliance in Southeast Asia by seat capacity

Prior to Garuda's entrance on 5-Mar-2014, SkyTeam only accounted for slightly over 9% of capacity in Southeast Asia. The addition of Garuda grows SkyTeam's share by 6.4pts to almost 16%, according to CAPA and OAG data.

About 40% of the region's capacity is now aligned with Star accounting for about 14% and oneworld about 10%. Low-cost carriers account for a 43% share of capacity in Southeast Asia, including nearly 60% on flights within the region. As LCCs in Southeast Asia continue to expand and hybridise, they could start to become candidates for global alliances, particularly as all of the region's main flag carriers are now aligned except Philippine Airlines (PAL).

Southeast Asia capacity share (% of seats) by alliance: 4-Mar-2014 (prior to Garuda joining SkyTeam)

Southeast Asia capacity share (% of seats) by alliance: 5-Mar-2014 (after Garuda joining SkyTeam)

Star has traditionally been the leader in Southeast Asia as it has both Singapore Airlines (SIA) and Thai Airways as longstanding members. Malaysia Airlines (MAS) became oneworld's first Southeast Asian member on 1-Feb-2013, allowing the alliance to close some of the gap with SkyTeam and Star.

Vietnam Airlines became the first non-Star carrier from Southeast Asia to join a global alliance in Jun-2010, when it entered SkyTeam. Five months later, in Nov-2010, SkyTeam announced the approval of Garuda as its second Southeast Asian member.

Garuda becomes 20th SkyTeam member and seventh from Asia

Garuda originally was expected to formally join in 2012 - the ascension process typically takes 18 to 24 months. But Garuda repeatedly delayed its formal entry as it worked on an IT upgrade project, which was critical for the carrier meeting membership requirements. Ultimately it took 40 months for Garuda to complete the ascension process.

Garuda becomes the 20th member of SkyTeam and the seventh in Asia. In addition to Vietnam Airlines, SkyTeam has five members in North Asia - Korean Air (KAL), Taiwan's China Airlines (CAL), China Eastern Airlines, China Southern Airlines and Xiamen Airlines. It does not have any members from South Asia.

No global alliance currently has any South Asian members. But SriLankan Airlines is now in the final phase of the process of joining oneworld and Air India has again started the process of joining Star. India or South Asia is the biggest white spot remaining in the SkyTeam network which the alliance will need to fill in order to maintain its lead in Asia.

SkyTeam was already the leader in Asia-Pacific before Garuda's entrance, accounting for about a 20% share of total capacity, putting it just a few fractions of a percentage point above Star. With Garuda joining, SkyTeam widens the gap and grows its share of seat capacity in Asia-Pacific to about 22%, compared to just over 19% for Star and only about 11% for oneworld.

Asia-Pacific capacity share (% of seats) by alliance: 4-Mar-2014 (prior to Garuda joining SkyTeam)

Asia-Pacific capacity share (% of seats) by alliance: 5-Mar-2014 (after Garuda joining SkyTeam)

Fourteen of SkyTeam's 20 members currently serve Asia and 12 serve Southeast Asia. Eight SkyTeam members (exluding Garuda) serve Indonesia - all of the Asian members, KLM and Saudia. Air France will become the 10th SkyTeam member serving Indonesia at the end of Mar-2014, when it launches service to Jakarta.

KLM, CAL and KAL sponsored Garuda's entry into SkyTeam. All three are longstanding codeshare partners for Garuda, with the KLM ties having particular historical significance.

Garuda plans stronger partnerships with SkyTeam Chinese members

Garuda also already codeshares with the three mainland Chinese members of SkyTeam. Garuda CEO Emirsyah Satar says Garuda plans to pursue a stronger partnership with China Eastern, China Southern and Xiamen now that Garuda has entered SkyTeam.

Garuda is hoping to leverage SkyTeam's leading position in the Chinese market. The China-Indonesia market is growing rapidly but is also competitive. China is already an important market for Garuda, accounting for about 15% of its international revenues. Garuda currently only serves Beijing, Guangzhou and Shanghai but has been looking at serving secondary cities in China, including Chengdu and Chongqing, potentially with support from its new SkyTeam partners.

Mr Satar also expects Garuda to complete a codeshare with Saudia by the end of 2014 covering the Indonesia-Saudi Arabia market along with connections beyond the two carriers' hubs. The two carriers already work together on Haj flights.

Garuda has the largest full service fleet in Southeast Asia

Garuda is the largest flag carrier in Southeast Asia based on total seat capacity (domestic and international). Garuda is also Southeast Asia's largest flag carrier based on fleet size, currently operating 111 aircraft, compared with 102 for SIA, 99 for MAS, 97 for Thai Airways and 85 for Vietnam Airlines, according to the CAPA Fleet Database. (These figures exclude regional or budget carrier subsidiaries, which are not part of any global alliance alongside their parents.)

Garuda is poised to maintain the largest fleet in Southeast Asia as it plans to place new orders over the next few years for more than 200 additional aircraft, which will be used for a combination of growth and replacements in the 2015 to 2025 time period. Mr Satar expects a decision on new-generation narrowbody aircraft (A320neo and 737 MAX) and new-generation medium-size widebody aircraft (787 or A350) by the end of 2014. An evaluation of larger widebody aircraft, between the 777X and A350-1000, is expected to take longer.

Garuda currently has 89 additional aircraft on order, including lease commitments, which is second highest among Southeast Asian flag carriers after SIA, according to the CAPA Fleet Database. But 24 of these aircraft have been allocated to budget subsidiary Citilink, giving Garuda mainline an order pipeline of only 64 aircraft - hence the need for a major top up in 2014.

Garuda Indonesia fleet: as of 5-Mar-2014

Aircraft	In Service	In Storage	On Order*
Total:	111	2	89
Airbus A320-200	0	0	15
Airbus A320-200NEO	0	0	10
Airbus A330-200	11	0	0
Airbus A330-300	6	0	0
Airbus A330-300E	1	0	17
ATR 72-212A(72-600)	2	0	23
Boeing 737-300	3	0	0
Boeing 737-500	3	2	0
Boeing 737-800	66	0	12
Boeing 737-800(ETOPS)	1	0	0
Boeing 747-400	2	0	0
Boeing 777-300ER	4	0	6
Bombardier CL-600-2E25(CRJ1000NG)	12	0	6

Garuda says it plans to take delivery of 27 additional aircraft in 2014, including three 777-300ERs, four A330s, 10 737-800s, six ATR 72s and four CRJ1000s. (Excludes Citilink, which currently operates 24 A320s and plans to take delivery of eight A320s in 2014.)

But Garuda is Southeast Asia's sixth largest flag carrier based on international capacity

While Garuda will remain the largest flag carrier in Southeast Asia by total seat capacity and fleet size, it is a relatively small international player. Garuda has big international ambitions - with SkyTeam playing a significant role - but it is not about to overtake SIA, Thai or MAS as larger international carriers.

SIA currently has almost four times the international seat capacity as Garuda while Thai has about three times as much and MAS has two and a half times, according to CAPA and OAG data. Even Vietnam Airlines and PAL currently have more international seat capacity than Garuda, making Garuda the sixth smallest of the main Southeast Asian flag carriers in this important category.

Garuda currently allocates 79% of its seat capacity to the domestic market, according to CAPA and OAG data. The domestic market also accounts for about 50% of Garuda's revenues. In 2013 Garuda carried only 3.8 international passengers and 15.8 million domestic passengers. (Citilink, which will not be part of SkyTeam, transported 5.3 million domestic passengers.)

Garuda currently serves 20 international destinations, including only three outside Asia-Pacific, according to OAG data. It currently has only one destination in Europe, Amsterdam, which is currently served via Abu Dhabi but will be upgraded to non-stop in late May-2014. In addition to Abu Dhabi it has one other destinations in the Middle East - Jeddah in Saudi Arabia.

Mr Satar says the international network will grow by three destinations in 2014 including a fourth outside Asia-Pacific with London Gatwick. Garuda also plans to begin serving Mumbai in India and Manila in the Philippines, growing its regional international network within Asia-Pacific to 19 destinations (includes four in Australia).

Garuda Indonesia Network Summary (at 9-Mar-2014)

Total non-stop passenger destinations	65
Domestic	45
Africa	0
Asia Pacific	17
Schengen Europe	1
Other Europe	0
Latin America	0
Middle East	2
North America	0

Garuda plans further domestic expansion

Garuda's domestic network currently consists of 45 destinations, according to OAG data. The carrier is planning to add several domestic destinations in 2014, mainly smaller islands which will be served using the carrier's new ATR 72 turboprop fleet. Garuda took delivery of its first two ATR 72s in late 2013, which it has based at Bali and are used on short island-hopping flights. The carrier will open additional ATR 72 bases in 2014 as it adds six more turboprops to its fleet.

The regional expansion is important as Garuda looks to add secondary destinations that cannot be accessed by jets but have growing demand, including for international connections. Rapid expansion under the new Explore sub-brand, which also includes the carrier's CRJ1000 fleet, will enable Garuda to continue to pursue rapid double-digit domestic growth as infrastructure constraints start to limit expansion on trunk routes.

Garuda grew domestic passenger traffic by 14% in 2013 (excludes Citlink, which grew at a much faster rate but from a small base) and aims to continue growing its domestic operation at similar clips over the medium to long term.

Only Lion Air has a larger Indonesian domestic network than Garuda. Garuda accounted for only about 21% of Indonesia's domestic passenger market in 2013 but it is by far the largest full-service player. LCCs accounted for nearly 60% of the Indonesian domestic market in 2013, including about 45% for Lion and its regional subsidiary Wings, about 7% for Citlink, about 5% for Indonesia AirAsia and less than 2% for Tigerair Mandala.

Garuda's domestic network and product is attractive to foreign full-service airlines

Garuda competes against several smaller and generally weaker carriers in the full-service sector, including regional operators. Sriwijaya Air is the only other large full-service player but has less than 10% of Indonesia's domestic market and does not work with any foreign carriers. Lion's new full-service subsidiary Batik is expanding ambitiously and providing a new threat to Garuda's dominance at the top of the market. But Batik, which launched in May-2013 and accounted for a 1% share of Indonesia's domestic market in 2013, also does not work with any carriers outside the Lion Group.

While it is being approached by several foreign carriers Batik has no short-term plans to put in the infrastructure required to support codesharing. Garuda is also the only Indonesian member of IATA.

Garuda is therefore in an envious position as the only Indonesian carrier providing domestic connections to foreign full-service carriers. Feeding foreign carriers provides important high-yielding revenue for Garuda's domestic operation, particularly given the rapid depreciation of the Indonesian rupiah over the past year.

As Indonesia emerges as one of the world's largest economies (Indonesia could potentially join the BRIC grouping), there is growing demand for domestic connections from international carriers. Indonesia is an enormous archipelago with dozens of fast-growing regional cities.

Garuda will give SkyTeam members important access to these destinations but will also continue to work with foreign carriers that are members of the other global alliances or are unaligned carriers. Garuda for example recently forged a codeshare deal with Star member All Nippon Airways (ANA) which is aimed at giving the Japanese carrier domestic connections in Indonesia and Garuda domestic connections in Japan.

SkyTeam will capture about a 23% share of the Indonesian market

SkyTeam carriers (excluding Garuda) only serve three Indonesian destinations - Jakarta, Bali and Surabaya. Garuda has hubs at all three airports and will grow SkyTeam's overall network by over 40 destinations solely as a result of the domestic connections it will be able to provide to SkyTeam members. SkyTeam currently has over 1,000 global destinations.

As Garuda will not significantly add to SkyTeam's network outside Indonesia, the main benefit for SkyTeam will come in the Indonesian market. SkyTeam's share of total seat capacity in Indonesia will grow from about 2% to 23% as a result of Garuda's entrance, according to CAPA and OAG data.

Oneworld and Star only have about 3% shares of total seat capacity in Indonesia. Without any other alliance candidates in Indonesia (at least for now), oneworld and Star will be at a competitive disadvantage in accessing one of the world's largest and fastest-growing emerging markets.

In terms of international capacity in Indonesia, SkyTeam will see its share of the market increase from about 8% to 23%. Star currently has about an 11% share of international seat capacity in Indonesia while oneworld has about a 10% share. While this may give Star and oneworld sufficient access to Indonesia's two main gateways, Jakarta and Bali, the lack of domestic connections is a weakness.

Indonesia capacity share (% of seats) by alliance: 4-Mar-2014 (before Garuda joining SkyTeam)

Asia-Pacific capacity share (% of seats) by alliance: 5-Mar-2014 (after Garuda joining SkyTeam)

Garuda currently has a modest 15% share of international capacity in its home market. Indonesia AirAsia is the market leader with a 17% share, according to CAPA and OAG data. Foreign carriers account for almost 60% of Indonesia's international market, including an 8% share for SIA and a 7% share for Malaysia AirAsia.

As Garuda has a relatively weak international network, the carrier should benefit significantly from membership in SkyTeam as it expands overseas - both organically and virtually. SkyTeam could particularly leverage SkyTeam's strength in Europe, where it is the second largest global alliance after Star and currently accounts for about a 16% share of seat capacity.

Garuda will rely on SkyTeam in Amsterdam more than London

There will not be significant opportunities in London as Garuda will be serving Gatwick, which is mainly an LCC hub. London is also not an ideal connection point for the Asia-Europe market as it requires significant backtracking.

Garuda is mainly pursuing London as a local market for Indonesia and for connections to Australia. Garuda plans to offer connections from Sydney, Melbourne and Perth to London and has said it is working on trying to adjust its slots at Gatwick to minimise connection times. Garuda initially planned to offer 777-300ER same plane service from Sydney to London but is now likely to continue operating A330s on Sydney-Jakarta while opening London with 777-300ERs.

(Currently Garuda is selling a non-stop to London from May-2014 but the carrier could end up initially serving London via Amsterdam. This would result in a one-stop product from Jakarta to London and a two-stop product from Australia to London, which would put Garuda at a competitive disadvantage.)

Garuda took delivery of its first 777-300ER in mid-2013 and currently operates four of the type with six more on order, three of which are slated to be delivered in 2014. The 777-300ER is Garuda's new flagship and only three-class aircraft, providing a first class along with lie-flat business product.

While it initially has deployed its 777-300ERs on routes to North Asia the type was acquired mainly to open new routes to Europe. London, which initially was planned for Nov-2013 but was delayed until May-2014, and Amsterdam will be the first of potentially several destinations in Europe served with the 777.

The carrier had been considering Paris, Frankfurt as well as Rome or Milan. But Garuda has ruled out these potential destinations - all of which are SkyTeam hubs - at least for now. Instead Mr Satar says the carrier will upgrade from late May-2014 Amsterdam, which is now served one-stop via Abu Dhabi with A330s, to a non-stop 777-300ER service.

The new non-stop service will allow Garuda to offer one-stop connections throughout Europe instead of the current two-stop product. Garuda already has a codeshare with KLM. The Dutch carrier also serves Jakarta but via Kuala Lumpur. Air France will also initially serve Jakarta with one-stop product - via Singapore - when it launches Jakarta service at the end of Mar-2014.

Garuda should be able to significantly expand its share of the Indonesia-Europe market as a result of the new non-stop routes (or route) and its membership with SkyTeam. Having an exclusive non-stop product and one-stop connections via KLM should allow Garuda to compete better against Middle Eastern carriers, which have a strong position and compete aggressively in the growing Indonesia-Europe market.

Garuda currently has a codeshare partnership with Etihad, covering Jakarta-Abu Dhabi and several destinations in Europe and North America. But this deal could end up being terminated or reduced to only the Indonesia-UAE market as Garuda drops the Abu Dhabi stop on its Jakarta-Amsterdam service.

Garuda is now evaluating the UAE market to decide if it will maintain a service after the non-stop flight to Amsterdam is launched. Garuda could decide to abandon the UAE market entirely given the current service from Etihad and Emirates is more than sufficient to meet the local market.

Garuda will rely on KAL and CAL to serve the US market - plus Delta on a non-codeshare basis

Garuda also plans to use Amsterdam as a connection point to provide offline access to the eastern US. Connections to the west coast of the US will continue to be provided via Seoul on KAL and via Taipei on CAL.

Garuda is unable to codeshare with US SkyTeam member Delta Air Lines as Indonesia has a Category 2 safety rating from the US FAA. But Garuda plans to work closely with Delta on an interline basis and eventually start codesharing with the US carrier if and when Indonesia secures a Category 1 rating.

Garuda and SkyTeam member Aeromexico also have already been talking about codesharing via Tokyo Narita. Garuda currently does not have any offline access to Latin America.

In addition, Garuda plans to start working with SkyTeam member Aeroflot via an intermediary point on providing services between Russia and Indonesia. Garuda currently has no plans to serve Russia with its own aircraft, despite reports of a possible Bali-Moscow route.

Garuda's international profile and outlook is raised as it enters SkyTeam

While Garuda plans to continue pursuing domestic growth SkyTeam enables the carrier to start turning more attention to the international market. In the Indonesian international market Garuda is striving to win back passengers who over the years while generally staying loyal domestically abandoned Garuda for premium carriers such as SIA and Cathay Pacific. Membership in SkyTeam should help the carrier in these efforts.

But there will still be challenges. Competition is fierce from existing carriers while more foreign carriers will be attracted to launching services to Indonesia.

SIA has a strong position, accounting for a 10% share of the Indonesian international market (when also including services operated by regional subsidiary SilkAir). Garuda needs to quickly leverage its membership and investment in SkyTeam and forge more partnership.

Entering SkyTeam is a huge milestone and represented a huge undertaking as the carrier upgraded its IT systems and processes. SkyTeam will help place Garuda, which a couple of decades ago had a big network in Europe and also served North America, back on the international stage. But as competition at home and regionally intensifies the carrier will still have its share of challenges to overcome.