02-Aug-2013 9:00 AM

Garuda Indonesia’s international ambitions set back by London postponement

Analysis

Garuda Indonesia has postponed by at least six months the launch of services to London, the first of several new non-stop routes in the carrier's ambitious European expansion plan. The postponement is a big blow to the carrier's hopes to boost its position in the global market by using its new flagship aircraft, the 777-300ER, to serve new high profile long-haul routes and start competing in the UK-Australia market.

The postponement also highlights a major potential roadblock in the international expansion of Garuda and further expansion of the overall Indonesian market - infrastructure. Garuda cited runway pavement issues at Jakarta in forcing its decision to push back the planned Nov-2013 launch of Jakarta-London services until May-2014. Indonesia's major airports including Jakarta are operating well above capacity and the government has repeatedly been behind the curve in upgrading infrastructure, including terminals and runways.

Although Garuda has been preparing for its new 777-300ER fleet since ordering 10 of the type in early 2008, Jakarta airport operator Angkasa Pura II has not yet upgraded the airport's runways to support a fully loaded 777-300ER. Garuda now expects the runway to be upgraded by May-2014, allowing the carrier to finally launch non-stop services to Europe.

Summary

Garuda Indonesia has postponed the launch of services to London by at least six months due to runway pavement issues at Jakarta airport.
The postponement highlights the infrastructure challenges faced by Garuda and the overall Indonesian market, with major airports operating above capacity and a lack of upgrades.
Jakarta airport is not yet ready to support Garuda's new flagship aircraft, the 777-300ER, which has a higher maximum takeoff weight than the airport's runway can handle.
Garuda needs non-stop flights to London to make the route work, as a one-stop product would be uncompetitive in the Indonesia-Europe market.
The delay in launching London services could benefit Garuda's partner, Etihad, which could potentially carry most or all of Garuda's London passengers.
Garuda's delay in launching long-haul services also means underutilizing its new 777-300ER fleet, which was acquired for long-haul routes.

Jakarta not being ready for the 777-300ER is inexcusable

For one of the world's 10 largest airports to not be able to support a fully loaded 777-300ER is almost unimaginably short sighted. All of the world's other top airports are able to accommodate the A380, which has a maximum takeoff weight that is over 60% greater than the 777-300ER.

Jakarta Soekarno-Hatta, which is currently operating at about three times its designed capacity, has the runway length to accommodate ultra long-haul flights. But the runway surface is currently only certified to handle weights of up to 120 tonnes. An upgrade to 132 tonnes is needed for Garuda to be able to operate the 777-300ER at full capacity to London.

With the current runway, Garuda says it could only operate non-stop flights to London at a significantly lower takeoff weight, which would require the carrier to not sell 39 seats and not carry any cargo. The carrier says flights under such conditions would have too big of a financial impact to merit operating.

London would be by far the longest flight from Jakarta, which currently has a large number of flights to the Middle East but is not linked with any other region outside Asia-Pacific. Soekarno-Hatta has seen its traffic nearly double over the past four years and needs non-stop flights to Europe as much as Garuda to raise its profile globally.

Jakarta Soekarno-Hatta annual passenger numbers: 2008 to 2012

Jakarta-Soekarno-Hatta international capacity (seats) by region: 29-Jul-2013 to 4-Aug-2013

Garuda needs non-stop product to make the route work

Garuda could have opted to initially operate the Jakarta-London route as a one-stop, as it does with Jakarta-Amsterdam, the carrier's only current European route which has a stopover in Abu Dhabi. But the carrier believes offering a one-stop product to London would be uncompetitive.

As no carrier currently operates non-stop flights from Jakarta to Europe, a one-stop product in the Indonesia-Europe market is competitive. Garuda has had some success with its one-stop product in the Jakarta-Amsterdam market, which is also served by KLM via Kuala Lumpur. But Garuda was relying heavily on offering one-stop Australia-London connections to make its Jakarta-London route viable. As CAPA recently reported, Garuda CEO Emirsyah Satar was expecting about one-third of its Jakarta-London passengers to originate in Australia, including about 25% in Sydney.

A two-stop product on the Kangaroo route between Australia and Europe is not really a viable option. Without the connecting traffic to and from Australia, an already risky route becomes entirely unviable. Garuda has no choice but to wait until Jakarta-London can be operated as a non-stop with full payload.

Delay buys time for Garuda to hunt for Heathrow slots

There could be a silver lining in the postponement if in the meantime slots at London Heathrow become available. Garuda's initial preference was to serve Heathrow rather than Gatwick. It was prepared to buy slots on the open market. But there have been no slots for sale with the timings it required and Garuda is not flexible in this regards as it needs slots at London that allow it to make connections to and from Australia on the Jakarta end.

Garuda continues to be interested in Heathrow slots and is prepared to switch London airports even after Gatwick is launched if it can succeed at securing slots at the required times. The carrier is confident that it ultimately will end up at Heathrow.

Heathrow slots are important over the long-term for Garuda to be competitive with other airlines in the Australia-London and Southeast Asia-London markets. This is particularly important for business traffic. Garuda has configured its 777-300ERs with 38 business class and eight first class seats. Filling only the 268 economy seats will not suffice given the low yields of the Kangaroo route. Garuda needs Heathrow in order to succeed in its attempt to become a leading premium carrier.

Etihad could benefit from postponement

Garuda's London postponement meanwhile could be a boom for its partner Etihad. The two carriers implemented a codeshare partnership in late 2012 that covers the Jakarta-Abu Dhabi route and gives Garuda access to European destinations beyond Abu Dhabi. Etihad and Garuda see their relationship continuing to have an important role even once Garuda launches non-stop services to London and other major European destinations as Etihad will always have a much bigger European network.

Garuda will continue to use Etihad over the medium to long term to access European destinations that it does not serve on its own as well as destinations in the Middle East and Africa. In the short term Garuda will need to rely on Etihad to carry its passengers to London, including the passengers it has already sold tickets to for flights between Nov-2013 and May-2014.

Etihad has the capacity in London to potentially carry most of these passengers. London Heathrow is currently Etihad's second biggest destination by capacity, with about 14,000 weekly seats. Garuda was only going to have 3,140 weekly return seats in the London market. It is conceivable for Etihad to take on most or all of Garuda's London passengers.

Etihad also operates non-stop flights to Melbourne and Sydney - the two main connecting destinations Garuda was selling for its new London flights. Brisbane and Perth were not being emphasised as much by Garuda, particularly Brisbane as Garuda currently only serves Brisbane from Bali and not Jakarta. Etihad also does not have a one-stop product from London to either of these Australian destinations as it only serves Brisbane via Singapore and uses Garuda to serve the Perth market via Abu Dhabi.

Garuda could potentially add capacity to Abu Dhabi as an interim measure. The carrier already recently upgraded its Jakarta-Abu Dhabi service, which it launched in Dec-2012 after forging its partnership with Etihad and dropping Dubai, from four to six weekly flights. Garuda currently serves the Jakarta-Abu Dhabi-Amsterdam route with A330s-200s and previously told CAPA that Amsterdam would continue to be served via Abu Dhabi with A330s as Garuda launches non-stop routes to other European destinations using 777-300ERs.

Garuda forced to underuse its new 777-300ER fleet

Garuda is about to place into service its second 777-300ER and expects to have four 777-300ERs by the end of 2013. It is now planning to only use these aircraft until May-2013 on services within Asia with the exception of a brief stint to Sydney in Nov/Dec-2013.

Garuda is seeing growing demand for medium-haul international services within Asia, which are now operated with its expanding A330-200/300 fleet. It could even use 777-300ERs domestically if necessary given the large and growing demand on Indonesian domestic trunk routes. But such operations are not ideal as the 777-300ER was acquired for long-haul services and Garuda has invested heavily in outfitting the aircraft with state of the art long-haul cabin products. Garuda's inability to use its first four 777-300ERs on long-haul routes could result in reduced profitability as these aircraft are optimised when flying longer missions.

Garuda fleet: as of 1-Aug-2013

Garuda Indonesia projected delivery dates for aircraft on order*

Any delay in completing the runway upgrade project at Jakarta could be devastating as Garuda plans to take three more 777-300ERs in 2014. If the runway is not completed in time, Garuda faces the prospect of having to operate up to seven 777-300ERs regionally. (The final three 777-300ERs from its current 10-aircraft commitment are slated to be delivered in 2015.)

Jakarta-Paris launch may also be impacted

Garuda had been planning to launch at least one more European non-stop route, most likely Jakarta-Paris, in 2014. Even if the runway project is completed by May-2014, the carrier may have to re-look at these plans.

A Nov-2013 launch of London would have given Garuda time to assess the performance of the Jakarta-London route before proceeding with other non-stop European routes. The Jakarta-London route is a risky venture and Garuda may be forced to adjust its European expansion plans should the market not perform well.

As CAPA reported previously, Garuda for now intends to use the 777-300ER to open three more non-stop routes to Europe. After Paris, Garuda has been tentatively planning to launch one destination in Germany and one destination in Italy. Frankfurt, Berlin and Munich are the candidates in Germany while Milan and Rome are the prospective destinations in Italy.

The European expansion has been an important component for some time in Garuda's medium to long-term strategy. Membership in SkyTeam, which the carrier now plans to formally join on 5-Mar-2014 after multiple delays, is another important component as Garuda looks to raise its global profile. The launch of non-stop services to Europe will now come after Garuda enters SkyTeam - which could actually benefit the carrier as it leverages SkyTeam to increase its presence in the European market. SkyTeam connections are particularly important for the planned Jakarta-Paris route given that Air France is a founding member of the alliance.

Delay in London is also a setback for Garuda's Australia expansion

Garuda's plans for the European market were cemented in Feb-2013, when Garuda initially announced plans to launch five weekly 777-300ER non-stop flights from Jakarta to London Gatwick. The 2-Nov-2013 launch date was announced two months later, in Apr-2013.

Garuda has been selling London for nearly four months and was preparing for the introduction of long-haul services until suddenly Garuda stopped selling its London flights on 26-Jul-2013. The carrier formally announced the postponement of Jakarta-London on 1-Aug-2013.

It seemed everything was advancing as planned and long-haul preparations took one big step forward in early Jul-2013, when Garuda took delivery of its first 777-300ER. Garuda in recent months also has been adjusting and increasing its Australia flights in preparation for the expected 2-Nov-2013 London launch.

Garuda's Jakarta-Sydney service was in line to be upgraded from the 228-seat A330-200 to the 314-seat 777-300ER on 27-Oct-2013, allowing Garuda to offer a one-stop same-plane service from Sydney to London. Garuda also has been planning to upgrade Jakarta-Sydney from five weekly flights to daily and re-time from late-Oct-2013 its daily Jakarta-Melbourne service to facilitate connections with London in both directions.

A daily Jakarta-Perth service was also added on 28-Jun-2013 that is designed to connect with the new London flights. All the changes to its Australia operation were to give Garuda approximately 60% more capacity in the Indonesia-Australia market.

Indonesia to Australia capacity by carrier (one-way seats per week): 19-Sep-2011 to 19-Jan-2014

The 60% spike in capacity is not absorbable without the London flights as the carrier was anticipating selling about 1,000 weekly London seats to the Australia market. As a result Garuda has had to adjust capacity to Sydney, a market it expected would generate about one-third of its London passengers.

Jakarta-Sydney reportedly will still get the 777-300ER but only briefly, from 8-Nov-2013 to 18-Dec-2013. Garuda is now planning to switch back to the A330 in mid-December and instead only use its 777-300ER fleet regionally until May-2014, when Garuda now intends to finally launch same-plane 777-300ER service from Sydney to London.

London delay is only one of many challenges for Garuda

The delay means Garuda will not be able to enter the Kangaroo route at the start of the peak season for the Australian market. When it does finally launch long-haul services, Garuda will still have to overcome intense competition in the Australia-UK market and try to persuade passengers to fly through an inferior hub. As CAPA reported in Jun-2013:

Competing in the Sydney-London market with a Gatwick product and a stop in Jakarta will not be as appealing to most passengers as a Heathrow product that includes a stop in more transit friendly airports such as Dubai, Singapore, Kuala Lumpur or Hong Kong. Garuda may need to undercut its competitors to overcome this disadvantage, particularly in the premium cabins (it will offer both business and first class in the Sydney-London market). As fares in the Sydney-London market are already low due to the intense competition and a softening Australian market, this will force Garuda to leverage pricing as a lead tactic, with potentially very low fares.

A major challenge for Garuda however is in providing an attractive customer proposition for transfers at its hub. Jakarta is now a larger airport than Kuala Lumpur, Singapore or Hong Kong, based on the most recent passenger figures. But the Jakarta Airport does not have the same level of services for transit passengers, no fault of Garuda's, who will be the poorer for it.

As an airport, Jakarta should be focusing on local passengers until it is able to complete upgrades and catch up with the growth curve. An influx of transit passengers has the potential to exacerbate a challenging infrastructure situation that will take some years to resolve. Indonesian authorities have been moving slowly with plans to expand the Jakarta airport and build a new airport for the Indonesian capital.

The disadvantage Garuda faces due to its weak hub airport has become exacerbated with the latest setback. Garuda already has to contend with one of the world's most congested airports and infrastructure which is lacking across its home market. Dealing with a runway which cannot yet accommodate its new flagship fleet adds yet another unfortunate challenge.