10-Oct-2013 5:44 PM

Garuda Indonesia & Aeromexico poised to become first Southeast Asia-Latin America codeshare partner

Analysis

A new air services agreement recently forged between Mexico and Indonesia opens up an opportunity for a codeshare between Aeromexico and Garuda, which in early 2014 will be joining the Mexican flag carrier in the SkyTeam alliance. The expected partnership should result in the first of many codeshares between carriers from Southeast Asia and Latin America.

Southeast Asian and Latin American carriers are starting to seek out opportunities to partner with each other as ties and trade between their regions increase. The current lack of partnerships between Southeast Asian and Latin American carriers give Gulf and European carriers an advantage in carrying passengers between two of the world's fastest growing aviation markets.

Aeromexico is the only Latin American carrier serving Asia, where it sees opportunities for expansion using its new Boeing 787 fleet. But Aeromexico only serves North Asia and will need to rely on partnerships to serve Southeast Asia.

Summary

A new air services agreement between Mexico and Indonesia opens up opportunities for a codeshare between Aeromexico and Garuda, potentially leading to the first of many codeshares between Southeast Asian and Latin American carriers.
Southeast Asian and Latin American carriers are seeking partnerships as ties and trade between the regions increase, giving Gulf and European carriers an advantage in carrying passengers between the two markets.
The new air services agreement allows Indonesian and Mexican carriers to codeshare, with Garuda and Aeromexico planning to serve the Indonesia-Mexico market via Tokyo.
Aeromexico plans to expand its Tokyo Narita service using its new Boeing 787 fleet, with the aim of eventually serving Narita non-stop from Mexico City.
Aeromexico's average seat load factor on services to and from Tokyo has improved but is still relatively low, and partnerships with Asian carriers could help improve performance on the Japan route.
Garuda and Aeromexico have complementary operations at Narita, allowing for relatively reasonable connection times and the potential for transfer passengers.

Mexico seeks to boost ties with Indonesia

The new air services agreement between Indonesia and Mexico was signed during a 6-Oct-2013 visit to Indonesia by Mexican President Enrique Peña Nieto, who became the first Mexican president to visit Indonesia in 41 years. Mexico is keen to bolster ties with Southeast Asia, including trade and tourism. During President Nieto's visit, Mexico and Indonesia signed MOUs on tourism to promote air connectivity and remove travel barriers.

Indonesian carriers are unlikely to serve Mexico or any other Latin American destination while Mexican carriers are unlikely to serve Southeast Asia. But the new air services agreement opens up the opportunity for Indonesian and Mexican carriers to codeshare. This is particularly timely as Garuda is planning to enter SkyTeam on 5-Mar-2014.

Indonesian government officials stated after the signing of the new air services agreement with Mexico that Garuda and Aeromexico will serve the Indonesia-Mexico market via Tokyo. Garuda CEO Emirsyah Satar reportedly confirmed that the two airlines have been in codeshare talks and aim to begin the codeshare as soon as possible although a start date has not yet been decided.

Aeromexico and Garuda have two destinations in common - Tokyo Narita and Shanghai Pudong. The two carriers could potentially transfer passengers at both airports. But Narita is more appealing as Aeromexico has more flights from Narita and operates non-stop from Narita with non-stops from Mexico City likely to start in 2014. Shanghai has fewer flights and is served via Tijuana in both directions. Narita also is generally better equipped to handle transit passengers.

Aeromexico improves and expands Tokyo Narita service with 787s

Aeromexico currently serves Narita with three weekly 767-200 flights which stop in Tijuana on the outbound sector and return to Mexico City non-stop. The carrier is planning to add more frequencies and eventually eliminate the Tijuana stop as it transitions its Narita service to 787-8s.

Aeromexico's five 767s and four 777s are unable to operate from Mexico City to Asia non-stop due to Mexico City's high altitude. The carrier's initial batch of three 787-8s, which will be delivered by the end of 2013, are also expected to be unable to make the flight non-stop as these aircraft have some performance limitations. But Aeromexico previously stated that it expects its six additional 787-8s, which will be delivered in 2014 and 2015, to have the capability to serve Narita non-stop and possibly other Asian destinations.

Aeromexico took its first of nine 787-8s in Aug-2013 and also has six 787-9s on order. It now is now using the 787-8 on domestic flights and plans to begin 787-8 operations to Tokyo Narita from 14-Oct-2013. A fourth weekly frequency to Tokyo is slated to be added in Apr-2014, at which point Garuda should in SkyTeam and codesharing with Aeromexico. (For now Aeromexico continues to include in its schedules a stop in Tijuana on the outbound leg from Mexico City.)

Four weekly frequencies will give Aeromexico 972 weekly one-way seats from Narita, an increase of almost 90% compared to the 513 weekly one-way seats currently. Aeromexico has configured its 787-8s with 32 lie-flat business and 211 economy seats while its 767-200s have 30 angled lie flat seats in business and 141 in economy.

Aeromexico could use more Asian partners to help boost performance of Narita route

Adding Garuda and potentially other Asian carriers as partners should help Aeromexico improve its load factor on the Tokyo route and sell the forthcoming influx of additional seats.

Aeromexico's average seat load factor on services to and from Tokyo through the first eight months of 2013 was 73%, according to Mexican DGAC data. This represents a significant improvement over the 53% average seat load factor from the same period of 2012 but is relatively low considering the upcoming 90% increase in capacity.

Aeromexico passenger traffic and total number of flights to/from Japan: Jan to Aug-2013 vs Jan to Aug-2012

For the full year 2012, Aeromexico's average seat load factor at Narita was also only 52% while in 2011 the average seat load factor was about 55%. More partners and an improved product with the 787 should help Aeromexico further improve its performance on the Japan route.

Aeromexico passenger traffic and total number of flights to/from Japan: 2010 to 2013*

Currently Aeromexico only codeshares with one Asian carrier, SkyTeam member Korean Air. In addition to Garuda, Aeromexico could potentially work at Narita with SkyTeam's other non-Chinese Asian members, Taiwan's China Airlines and Vietnam Airlines.

Working with the alliance's Chinese members - China Southern, China Eastern and Xiamen Airlines - is more suitable at Shanghai Pudong given the domestic connection opportunities at Shanghai. Aeromexico does not yet codeshare with any Chinese carrier despite serving Shanghai, which is China Eastern's largest hub.

Aeromexico currently serves Shanghai with two weekly 777-200ER flights that stop in Tijuana in both directions. The carrier has previously stated that it plans to start operating 787s to Shanghai in 2014.

A switch from the 777 to smaller 787 and partnerships with Chinese carriers should help Aeromexico further improve performance on the Shanghai route. The carrier had an average seat load factor of 66% to and from Shanghai through the first eight months of 2013. For the same period of 2012 the average seat load factor was only 40%, according to Mexican DGAC data.

Aeromexico and Garuda have complementary operations at Narita

Garuda currently serves Narita with daily flights from both Jakarta and Bali, both of which are to be included in the planned codeshare with Aeromexico. Both flights land at Narita at about 09:00 and depart at 11:00 or 12:00 noon. Aeromexico's Narita flight lands at 06:45 and departs at 13:25. As a result the two carriers will be able to transfer passengers with relatively reasonable connection times (four to five hours) in each direction.

Aeromexico will also be able to offer Garuda passengers connections beyond Mexico City to destinations throughout Latin America while Garuda can offer Aeromexico passengers connections beyond Jakarta to destinations throughout Southeast Asia.

Aeromexico currently serves almost 50 domestic destinations and 11 international destinations within Latin America. The carrier announced on 7-Oct-2013 plans to add Quito in Ecuador as its 12th international destination in Latin America from 16-Dec-2013. Garuda serves about 40 domestic destinations in Indonesia but only four international destinations within Southeast Asia.

Aeromexico could also benefit from partnerships with Vietnam Airlines and CAL

Both carriers would be better positioned competitively by pursuing multiple partners in each region.

Vietnam Airlines, for example, would give Aeromexico direct access to Ho Chi Minh and Hanoi via Tokyo as well as multiple stop access to several Southeast Asian destinations not served by Garuda in Cambodia, Laos, Myanmar and the Philippines. Vietnam Airlines and Garuda have highly complementary networks which should benefit all SkyTeam carriers from outside Asia which are keen to improve their access to Southeast Asia.

While based in a North Asian country, China Airlines (CAL) could also provide connections to some Southeast Asian destinations, particularly the Philippines. Both CAL and Vietnam Airlines have flights to and from Narita which would provide relatively quick connections with Aeromexico. CAL serves Narita from Taipei and Kaohsiung while Vietnam Airlines serves Narita from both Ho Chi Minh and Hanoi.

Garuda could benefit from partnerships with Aerolineas and Delta

Garuda could link up with SkyTeam's other Latin American member, Aerolineas Argentinas, in Sydney. Aerolineas currently serves Sydney non-stop from Buenos Aires with three weekly flights which will be upgraded to four weekly frequencies in Nov-2013. Garuda serves Sydney daily from Bali and five times per week from Jakarta with plans to go daily in 2014. But the two carriers would only be able to offer same day connections in one direction unless one was willing to re-schedule their flights or if Garuda added a second frequency.

Aerolineas and Aeromexico have complementary networks, with Aerolineas providing potentially better access to destinations within South America's Southern Cone, including Argentina, Brazil, Chile, Paraguay and Uruguay. Aerolineas has already been working on implementing a codeshare with China Southern via Sydney. China Southern has two daily flights from its Guangzhou hub to Sydney, making it easier for connections with Aerolineas.

Garuda is also keen to work with Delta Air Lines, which links Narita with eight destinations in mainland US. Access to additional points in the US as well as destinations in the Caribbean and Latin America would be available via Delta's US hubs. But the codeshare could initially only be one-way because currently Delta is unable to place its code on Garuda-operated flights due to Indonesia's category 2 safety rating from the US FAA. Until Indonesian authorities comply with category 1 standards, Delta, which does not serve Indonesia, will have to rely on a strong interline agreement with Garuda.

Garuda's Narita flights currently do not connect well with Delta's US flights to and from Narita. But as Garuda adds partnerships with SkyTeam members it could potentially support a second daily flight from Jakarta to Narita, particularly if it uses A330-200s. Garuda recently introduced 777-300ER service to Narita but this is seen as a temporary measure until it begins non-stop flights to Europe in 2014.

While SkyTeam does not have a Japanese member, it has a strong presence in Narita, accounting for 24% of total international capacity. As it prepares to enter SkyTeam Garuda should be able to leverage the SkyTeam network at Narita and use the airport as its main transit point for destinations throughout the Americas.

Tokyo Narita international capacity share (% of seats) by alliance: 7-Oct-2013 to 13-Oct-2013

Mexico also seeks to boost ties with Singapore

In addition to his visit to Indonesia along with Mexican president Nieto, Mexico tourism secretary Ruiz Massieu stopped in Singapore, where he signed agreements with Singapore tourism authorities and visited with Singapore Airlines (SIA) CEO Goh Choon Phong. As it is with Indonesia, Mexico is keen to promote better connectivity with Singapore.

SIA is currently the only Southeast Asian carrier serving Latin America, operating a one-stop service three times per week to Sao Paulo via Barcelona. SIA has had this distinction since Malaysia Airlines dropped Buenos Aires, which was served from Kuala Lumpur via Cape Town in South Africa, in early 2012.

SIA does not currently codeshare with any Latin American carrier. A relationship with Aeromexico would be slightly unusual but feasible as SIA has several partners outside Star while Aeromexico has partners outside SkyTeam. SIA could also potentially partner with Star members Avianca via Barcelona and Copa via Los Angeles and New York.

Southeast Asian and Latin American airlines need to work more closely to counter competitors from the Gulf

Connectivity to Latin America is becoming increasingly important for Asian carriers given the rapid growth in the Asia-Latin America market. Some Latin American carriers are also starting to look into alternatives for tapping the Asian market although generally not yet to the same extent as their Asian counterparts.

Without partnering with each other, Latin American and Asian carriers will lose out in the Asia-Latin American market to the Gulf and European carriers. Emirates, Etihad and Qatar Airways are all expanding their presence in Latin America and are able to offer convenient connections from points throughout Asia, particularly Southeast Asia as Northeast Asia-Latin American connections are generally faster via North America. Currently the Gulf carriers only serve three Latin American destinations (Sao Paulo for all three, Buenos Aires for Emirates and Qatar, and Rio de Janeiro for Emirates) but as they expand into other parts of Latin America, including Mexico City, they will be able to further grow their slice of the Southeast Asia-Latin American market.

Turkish Airlines is also pursuing rapid expansion in Latin America and targeting connections from destinations in its Southeast Asian network. Turkish currently only serves Buenos Aires and Sao Paulo but plans to add Bogota, Caracas, Havana and Mexico City in 2014.

Turkish and the Gulf carriers are able to generally offer quicker Southeast Asia-Latin America connections than Western European carriers, which have traditionally carried the majority of traffic between the two regions. Asian and Latin American carriers can also offer competitive connections but will need to pursue close partnerships and coordinate their flights to maximise opportunities in the fast-growing Southeast Asia-Latin America market. The anticipated Garuda-Aeromexico codeshare represents the first of many potential new partnerships between Southeast Asian and Latin American carriers.