17-Nov-2015 5:03 PM

Garuda Indonesia secures London Heathrow slots but slows widebody and international expansion

Analysis

Garuda Indonesia has again shelved plans to launch new destinations in continental Europe but has secured slots at London Heathrow to replace London Gatwick. Frankfurt and Paris have been put on the backburner and capacity to Garuda's two main medium haul markets, Australia and Japan, will remain at relatively modest levels after large cuts were implemented in early 2015.

The airline has taken a sensible decision to decelerate growth of its medium/long haul network and as a result has adjusted its business plan to include fewer A330s and fewer new generation widebody aircraft. Scheduled international capacity also has been adjusted by allocating a larger portion of its widebody fleet to Saudi Arabia charters.

Garuda still plans to add long haul capacity in 2016 as it decouples its two European destinations, London and Amsterdam, but overall international capacity will grow at a significantly slower pace than initially planned. Garuda launched London Gatwick in Sep-2014 as a tag to Amsterdam and now plans to drop Gatwick in Mar-2016 while launching London Heathrow to Jakarta non-stops. Initially the Heathrow flight is slated to stop in Singapore on the outbound leg but Garuda expects eventually to operate non-stops to London once runway issues at Jakarta are resolved.

Summary

Garuda Indonesia has postponed plans to launch new destinations in continental Europe, including Frankfurt and Paris.
The airline has adjusted its business plan to include fewer A330s and fewer new generation widebody aircraft.
Garuda has secured slots at London Heathrow to replace London Gatwick, and plans to launch non-stop flights to Jakarta from Heathrow in March 2016.
The carrier has adjusted its short to medium term widebody fleet plan by reducing A330s and is seeking to defer or cancel its last six A330 orders.
Garuda plans to increase its charter operation to Saudi Arabia in 2016, using 15 aircraft to operate Hajj and Umrah religious pilgrimage flights.
The airline's international operations remain unprofitable, but it has returned to profit overall in 2015.

Garuda adjusts widebody acquisition plan

Garuda currently operates a widebody fleet consisting of 34 aircraft, including 13 A330-300s, 10 A330-200s, nine 777-300ERs and two 747-400s. It does not have any more widebody deliveries in the remainder of 2015 but is planning to return one A330-200, giving it a year-end widebody fleet of 33 aircraft. It began 2015 with 30 widebody aircraft, including 11 A330-300s, 11 A330-200s, six 777-300ERs and two 747-400s.

Garuda has one more 777-300ER on order which is slated to be delivered in 2016. It also has commitments for 11 additional A330-300s which are currently earmarked for delivery in 2016 and 2017.

Garuda Indonesia fleet summary: as of 16-Nov-2015

Aircraft	In Service	On Order
Total:	141	122
Airbus A330-200	10	0
Airbus A330-300	6	0
Airbus A330-300E	7	11
ATR 72-600	11	17
Boeing 737-8	0	80
Boeing 737-800	80	1
Boeing 747-400	2	0
Boeing 777-300ER	9	1
Bombardier CRJ1000NG	16	2

Garuda signed letters of intent in Jun-2015 for 30 A350s and 30 787s. Garuda initially was looking to acquire 60 new generation widebody aircraft by 2024 as part of a long term business plan which envisioned significant expansion of its medium/long haul network.

But Garuda is now preparing a new 10 year business plan that significantly reduces the number of widebodies required. As a result Garuda now plans to convert only one of the two letters of intents signed at the 2015 Paris Air Show into orders.

A deal for 30 A350s or 30 787s is expected to be finalised by the end of 2015. Garuda obviously is now trying to play off Airbus and Boeing - along with potential engine suppliers General Electric and Rolls-Royce - to secure the best prices.

Garuda reduces its A330 fleet

Garuda also has adjusted its short to medium term widebody fleet plan by reducing A330s. Garuda CEO Arif Wibowo told CAPA at the 12-Nov-2015 Association of Asia Pacific Airlines Assembly of Presidents in Bali that Garuda has arranged early returns for four A330s and is now seeking to defer or cancel its last six A330 orders.

Garuda now plans to end 2015 with an A330 fleet of 22 aircraft compared to an original plan for 24 aircraft and end 2016 with an A330 fleet of 25 aircraft compared to an original plan of 29 aircraft. Of the four A330s being returned early, two are exiting the fleet in 2015 (one of which has already exited) and two in 2016.

Garuda still plans to take five A330s in 2016, resulting in a net gain of three aircraft next year, but is aiming to defer or cancel all six of the A330s slated for 2017. A cancellation of the last six A330s could be included as part of an A350 deal if Garuda opts for the A350 over the 787.

Garuda focuses widebody growth on charters with new higher density configurations

Garuda also tried in early 2015 to reduce its 777-300ERs commitments by finding new homes for at least some of the final four aircraft from its 10-aircraft commitment as it was too late to pursue deferrals or cancellations. But Garuda decided to take the four aircraft, three of which have been delivered in recent months, as selling the aircraft would have resulted in a prohibitively large tax bill.

As CAPA outlined in a Jun-2015 report, Garuda opted in early 2015 for a higher density 393-seat configuration for its last four 777-300ERs, three of which have now been delivered. The new 777-300ERs feature 26 business and 367 economy seats compared to the eight first, 38 business and 268 economy seats on its initial six 777-300ERs.

At about the same time Garuda decided to retrofit six of its A330-300s from 257-seat two class configuration (215 economy and 42 business) to 360-seat single class configuration. These six aircraft have already been reconfigured and are being used for charters to Saudi Arabia along with the three newly delivered two-class 777-300ERs.

Garuda is planning to further increase its charter operation to Saudi Arabia in 2016. Mr Arif told CAPA that 15 aircraft will be used in 2016 to operate Hajj and Umrah religious pilgrimage flights to Medina and Jeddah from several points in Indonesia. In 2015 Garuda has been using 11 aircraft for Hajj and Umrah charters.

Garuda will also expand in 2015 charters from Bali to multiple points in China which were introduced in 2014. (Some of the China charters operate during the short period of the year between the Hajj and Umrah seasons.)

As a result Garuda will only have an average of only about 20 widebody aircraft in scheduled operation in 2015. This is several aircraft fewer than initially planned as Garuda has significantly expanded its charter operation and negotiated early returns for four of its A330s.

Garuda scheduled operation to see limited widebody growth over the next few years

Garuda's scheduled widebody operation will likely remain at about the 20 aircraft level through at least 2017 as the carrier is now aiming to cancel or defer all six of its widebody deliveries slated for 2017.

Even as the 30 A350s or 787s are delivered these aircraft are now expected to be used almost entirely as replacements compared to the original business plan that envisioned a large and steady stream of widebody growth aircraft over the next several years.

There could still be some opportunities for capacity expansion by improving utilisation rates, particularly with the six three-class 777-300ERs. Garuda currently operates only 36 weekly scheduled frequencies - the equivalent of less than three daily return flights - with its 777-300ER fleet. It currently operates slightly over 280 weekly scheduled frequencies - the equivalent of more than 20 daily return flights - with its A330 fleet, according to OAG schedule data for the week commencing 16-Nov-2015.

Garuda Indonesia system-wide weekly frequencies (to/from) by aircraft type: 16-Nov-2015 to 22-Nov-2015

But a large share of the A330 capacity is allocated to short haul flights which Garuda plans to maintain as it represents a more efficient use of slots on trunk routes from congested Jakarta. It currently has 149 weekly domestic A330 flights and also uses the A330 on some of its Jakarta-Singapore flights.

The A330 fleet is otherwise used on medium haul flights to Australia and North Asia. The 777-300ER fleet is used on scheduled flights to Jeddah (which are operated separately from the charters), Amsterdam and London along with some flights to Hong Kong and Tokyo (varies depending on the time of year).

Garuda again shelves plans to launch new destinations in continental Europe

With the adjustments to its widebody fleet plan Garuda has revised its network plan and no longer plans to launch services to Frankfurt and Paris. As CAPA outlined in the Jun-2015 report, Garuda had been planning a major long haul push in 2016 including the launch of Frankfurt and Paris and the launch of non-stops to London. But Garuda has wisely again shelved Frankfurt and Paris although at least for now it has kept intact plans to decouple London and Amsterdam.

Frankfurt and Paris were initially in the network plan for 2014. Services to Italy - either Milan or Rome - were also envisioned as part of a plan to serve five European cities by the time the carrier received its 10th and final 777-300ER.

The initial long haul expansion plan was overambitious given that Garuda is not a well known brand in Europe, the relatively small size of the Indonesia-Europe market and the extremely competitive nature of the broader Southeast Asia-Europe market, which has suffered from aggressive capacity expansion from Gulf carriers. Emirates, Etihad and Qatar have all expanded significantly in the Indonesian market in recent years - particularly Qatar, which has added two daily non-stop flights to Bali since mid-2014 and is now seeking to add Surabaya as its third Indonesian destination.

Emirates, Etihad and Qatar now have almost 50,000 weekly seats in the Indonesian market, more than double the capacity from Nov-2012. Singapore Airlines is also a large and tough competitor in the Indonesia-Europe market with over 10 destinations in both Indonesia and Europe (including secondary Indonesian cities served by SilkAir).

Garuda initially shelved plans for France, Germany and Italy in mid-2014 as its international operation struggled and became highly unprofitable, leading to overall losses at the Garuda Group. At about the same time Garuda also suspended services to Taipei and plans to launch Manila and Mumbai. A few months later Garuda also decided to cut capacity to Australia and Japan, suspending Brisbane and dropping plans to launch Nagoya while reducing flights to existing destinations in both markets.

See related reports:

Garuda's international operations remains unprofitable

Garuda has returned to the black in 2015, reporting a USD51 million net profit for the first nine months of this year compared to a loss of USD220 million in the first nine months of 2014. But the international operation remains unprofitable - albeit with significantly reduced losses.

Garuda was overly confident in initially thinking in 1H2015 that market conditions had improved enough to justify reinstating plans for Frankfurt and Paris. Low fuel prices alone are not enough to give Garuda a profitable medium and long haul operation.

The new strategy to maintain scheduled widebody capacity at roughly current levels is sensible given current market conditions. Garuda is performing much better in the domestic market, with both its main brand and LCC subsidiary Citilink generating profits.

Over the last year Garuda has been able to improve its international load factor by cutting ASKs. Through the first nine months of 2015 Garuda reported a 10.5ppt improvement in international load factor to 75.9% compared to a dismal 65.4% load factor in 9M2015 as RPKs increased 8% despite a 7% reduction in ASKs.

But international passenger yields were down 14% in the first nine months of 2015, an indication that market conditions remain challenging. Restoring international ASKs to 2014 levels could lead to further yield erosion and again impact load factors.

Garuda Indonesia monthly international ASKs: Jan-2010 to Jul-2015

Garuda to launch London Heathrow

Garuda may need to reconsider its plans for growing capacity to Europe in 2015 by decoupling Amsterdam and London. The additional capacity generated from the new London flights will likely be difficult to absorb and will pressure yields, particularly as Garuda will not be able to operate non-stops to Heathrow in both directions due to runway limitations at Jakarta.

Garuda plans to launch four weekly flights to Heathrow in Mar-2016 on a Jakarta-Singapore-London Heathrow-Jakarta routing. With this routing Garuda is still unable to offer a faster total travel time on the outbound leg than some of its main competitors in the Indonesia-London market. Meanwhile Garuda is unable to offer a competitive return product in the Singapore-London market as passengers originating in Singapore will need to connect in congested Jakarta on the return sector.

The evening pair of slots acquired at Heathrow is also far from ideal as it requires a morning departure from Jakarta, preventing same day connections from Australia. Even if Garuda were able to launch non-stops to London in 2017 after a planned runway surface upgrade project is completed at Jakarta Airport, the inability to offer international connections could make the new route difficult to sustain. Even domestic connections with the current slots are limited.

Connections beyond Jakarta, particularly to Australia, were always a large component of Garuda's strategy for entering the London market. Garuda initially planned to launch Gatwick in Nov-2013 with non-stops in both directions and in the initial marketing campaign for the new flights heavily promoted connections to Melbourne, Perth and Sydney.

Garuda initially decided to postpone the launch of Gatwick in Jul-2013, about three months after sales had begun for flights commencing Nov-2013. In Nov-2013 ticket sales recommenced for Jakarta-Gatwick non-stops with a revised launch date of May-2014 but in Mar-2014 Garuda again decided to postpone the launch and refunded or re-booked affected passengers.

Garuda did finally launch Gatwick in Sep-2014 but only as a tag with Amsterdam. Garuda initially served London with five weekly flights via Amsterdam. In Jul-2015 Garuda reduced its Jakarta-Amsterdam-London Gatwick-Amsterdam-Jakarta route to three weekly flights while launching three weekly flights on a Jakarta-Singapore-Amsterdam-Jakarta routing.

Currently Garuda has three weekly flights on Jakarta-Amsterdam-London Gatwick-Jakarta and two weekly flight on Jakarta-Singapore-Amsterdam-Jakarta, according to OAG data.

See related reports:

Garuda needs to rethink its London route strategy

Once it introduces Jakarta-Singapore-London Heathrow-Jakarta service, Garuda plans to continue serving the Amsterdam market with five of six weekly flights, including three non-stops and two to three flights via Singapore. Garuda aims eventually to operate all of its Amsterdam flights as non-stops but as is the case with Jakarta-London non-stops, this needs to wait for Jakarta Airport to complete a runway surface improvement project. For now airport authorities are limiting Garuda to only three non-stop flights to Europe.

The continued delays in securing airport approval to operate more non-stops to Europe is frustrating as Garuda initially decided to acquire the 777-300ERs to launch non-stop flights to Europe. But Garuda is probably best advised to add long haul flights until this issue is finally resolved.

The multiple delays and route changes for the Gatwick service have already made it difficult for Garuda to gain traction in the highly competitive UK market. Garuda should consider maintaining the current schedule of three weekly flights to London via Amsterdam until it is able to launch non-stops in both directions.

Garuda should also continue searching for better Heathrow slots, which would enable convenient connections to Australia and other destinations - both domestic and international.

Garuda's capacity to Australia is currently about 35% below Nov-2014 levels. Garuda will likely need one-stop connections to London - as well as more regular one-stops to Amsterdam - if it is to restore capacity to Australia in future.

Garuda seat capacity to Australia (one-way seats per week): Sep-2011 to May-2016

Garuda considers resumption of Jakarta-Narita

Garuda will also need to be careful about adding back capacity to Japan. Currently Garuda's capacity to Japan is down by about 40% compared to Nov-2014 levels. The Indonesia-Japan market remains highly competitive, making any capacity increases difficult to pursue at this time without impacting yields and load factor.

Japan is currently Garuda's second largest international market after Singapore, with slightly more capacity than Australia. (However, Australia is a bigger market than Japan for Garuda during certain periods of the year as there is considerable seasonal fluctuation in Garuda's Australian capacity.)

Garuda seat capacity to Japan (one-way seats per week): Sep-2011 to May-2016

Garuda is now reconsidering resuming Jakarta-Tokyo Narita services in order to improve connections to the US with SkyTeam partner Delta Air Lines. But Garuda is also looking at improving US connections through an expanded partnership with Korean Air, which is a more sensible option as Korean has more trans-Pacific routes from Seoul than Delta has from Narita.

Garuda also does not have enough US offline passengers to support adding back a Jakarta-Narita flight while it can use its existing Jakarta-Seoul flight to carry passengers to North America. (Garuda also links Bali with Seoul and with Narita as it does not currently have a Bali-Haneda service.)

Garuda's conservative approach to international expansion is needed. Domestic is the place to focus

Garuda will have opportunities over the long term to pursue expansion of its long haul network. But over the short to medium term it should focus on improving its international reach by bolstering partnerships.

There are still some opportunities to launch smaller niche routes using its narrowbody fleet. For example Garuda is launching on 22-Nov-2015 thrice weekly 737-800 flights from Bali to Guangzhou.

But new widebody routes are a much riskier and costly proposition, particularly in the current highly competitive environment. Garuda's biggest strength is its domestic operation, which it is able to continue growing rapidly and profitably.

At least for now reducing the number of widebody aircraft in scheduled services and committing to fewer new generation widebodies is a rational move.