Garuda Indonesia heads back to Europe after six-year break, but condemned to price leadership

Garuda Indonesia made its much-anticipated return to European skies yesterday for the first time in six years, operating daily Jakarta-Amsterdam service via Dubai. B777-300ER equipment will replace A330s on the route next year and Garuda plans to serve other points in Europe, namely Frankfurt, London, Paris and Rome, now that an EU ban on the carrier has been lifted.

The main issue with Garuda and the Indonesian market was that the safety oversight regime was not effective, rather more than there being anything institutionally wrong at Garuda itself. But that nicety will be lost on European travellers.

The timing of its return is of course good, coming as it does at the beginning of the northern summer, so there should be good load factors. The carrier last week stated 60% of capacity on the route had been booked for Jun-2010, with 89% of capacity already booked for Jul-2010.

But the combination of operating into Amsterdam - traditionally a very price competitive airport - with the need to re-establish credibility will mean that Garuda will have to be a price leader. Garuda was never in the same league as regional rivals, Singapore Airlines or Cathay Pacific and faces significantly heightened competition from Gulf rivals than six years ago.

Degree of protectionism inversely proportional to quality of product

It will take a long time for Garuda to bridge the competitive gap, in terms of product, even with its investments ahead of its planned SkyTeam accession. Meanwhile, so long as the government continues to protect the flag carrier from competition, it will not be able to achieve the necessary edge to improve dramatically.

These days there is a law of inverse proportion in Asia:  the degree of protectionism an airline receives is inversely proportional to the quality of its product. So, until Garuda is freed, it will be condemned to be a price leader.

Meanwhile, the airline’s USD400 million IPO (scheduled for Sep-2010) meanwhile could be rescheduled to 2011, according to media reports last month quoting State Enterprises Deputy Minister, Mahmuddin Yasin. The airline, which is forecasting a 20% lift in profit this year, is in the final stages of restructuring USD241.2 million in debt with the European Credit Agency (ECA).

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