04-Sep-2018 6:59 PM

SE Asia-London market: Garuda Indonesia learns a difficult lesson

Analysis

Garuda Indonesia is dropping London after four years and several unsuccessful attempts at serving the London market. Garuda's decision to stop providing an online product to London ends a colourful chapter in its history that dates back a decade, when it ordered 777-300ERs as part of an ambitious long haul expansion plan for the then reinvigorated flag carrier.

Pulling out of Heathrow is hardly a surprise, given that Garuda's London service has been highly unprofitable. Garuda has been restructuring in a bid to return to profitability and therefore cannot afford to continue covering losses on the Jakarta-London route.

Garuda's strategy for serving London was flawed from the beginning, resulting in several adjustments. Garuda has only offered nonstop flights in both directions for less than year.

Summary

Garuda Indonesia is dropping services to London in late Oct-2018.
Amsterdam will become Garuda's only long haul route, with connections available on its partner KLM to London and other European destinations.
Garuda will no longer compete in the kangaroo route between Australia and London, which had been a target as part of Garuda's ambitious but flawed London strategy.
Garuda launched services to London Gatwick in 2014, after several postponements, and has been serving Heathrow since 2016.

Garuda's London aspirations date back to 2008

Garuda initially added London to its business plan in early 2008, when it placed orders for 10 777-300ERs. The acquisition of three-class 777-300ERs was an ambitious move aimed at launching nonstop services to Europe along with one-stop services to the US.

At the time, Amsterdam was Garuda's only long haul destination but was served via Dubai using A330s. (Garuda switched the Amsterdam stopover from Dubai to Abu Dhabi in late 2012 as part of a partnership with Etihad that ultimately proved to be unsuccessful.)

Garuda delayed long haul expansion, including the launch of London, for three years as its first 777 delivery was pushed back from 2010 to 2013. Garuda finally began taking 777-300ERs in 2013, enabling it to press forward with its long haul expansion aspirations.

Garuda took delivery of four 777-300ERs in 2013, followed by another two 777-300ERs in 2014 and three aircraft in 2015. The tenth and final aircraft was delivered in early 2016, according to the CAPA Fleet Database.

Garuda's initial eight 777-300ERs were delivered in low density 314-seat three-class configuration (eight first, 38 business and 268 economy). The last two aircraft were delivered in a high density 393-seat two-class configuration (26 business and 367 economy).

Garuda subsequently retrofitted six of the eight 314-seat aircraft to the 393-seat configuration. Jakarta-London and Bali-Tokyo are currently its only routes with a first class product. The suspension of London should lead Garuda to drop its first class product, which has always been more political than commercial, and to retrofit the last two 777s.

Garuda Indonesia widebody fleet: as of 31-Aug-2018

Aircraft	In service	On order
Airbus A330-200	7	0
Airbus A330-300	6	0
Airbus A330-300E	11	0
Airbus A330-900neo	0	14
Boeing 777-300ER	10	0
Total:	34	14

Garuda initially planned to launch London nonstop services in 2013

In early Apr-2013, two months before the first 777 delivery, Garuda set a 2-Nov-2013 launch date for five weekly nonstop return services from Jakarta to London Gatwick and began London sales.

At around the same time Garuda also announced adjustments to its Australia operation in order to facilitate connections from Melbourne, Perth and Sydney to London. The plan was to use the first batch of 777-300ERs to offer a one-stop same-plane service between Sydney and London Gatwick.

However, after nearly four months of selling London (from both Indonesia and Australia) Garuda suddenly stopped selling London in late Jul-2013. Garuda stated at the time that London would be launched in May-2014 instead of Nov-2013, citing runway pavement issues at Jakarta.

"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", CAPA stated in a 2-Aug-2013 analysis report. "Garuda now expects the runway to be upgraded by May-2014, allowing the carrier to finally launch non-stop services to Europe."

CAPA added: "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."

Garuda finally launched London in Sep-2014 - but with a stop in Amsterdam

In early Nov-2013 Garuda reopened sales for Jakarta-London Gatwick, along with one-stop connections from Australia, with a revised launch date of 29-May-2014. But in Mar-2014, after four months of sales, passengers were refunded or rebooked following yet another change in the London launch schedule.

This time, Garuda decided to postpone the launch of London until 8-Sep-2014 and change the routing to include a stop in Amsterdam (in both directions). Garuda launched five weekly nonstop Jakarta-Amsterdam services in late May-2014 and a tag to Gatwick on all five flights was added in Sep-2014. (Garuda stopped serving Jakarta-Abu Dhabi-Amsterdam and pulled out of the UAE market entirely when launching Jakarta-Amsterdam.)

Garuda explained at the time that Jakarta was now able to accommodate 777-300ER departures at full payload but the airport was capping the number of full payload departures at five per week. In an Apr-2014 analysis report CAPA stated that dropping the nonstop London plan "is a bitter pill to swallow as the carrier will now have to work hard to rebuild its profile after twice cancelling the route before it was launched, inconveniencing thousands of passengers. Garuda's position in the Australia market in particular is weakened as the carrier no longer will be offering a one-stop option to London despite heavily promoting and marketing its planned one-stop product for several months."

CAPA added that "Garuda saves some face by still serving London, where it has invested significantly in marketing campaigns and opened an office ahead of its original anticipated Nov-2013 launch. But only serving London via Amsterdam is a completely different product [and] tag flights on long haul services can be notoriously costly. Relying on connections with KLM to serve the London market would make more sense, particularly financially, than operating a tag from Amsterdam with its own aircraft and crews."

Garuda launched Heathrow in Mar-2016

The Amsterdam-Gatwick tag indeed proved to be highly unprofitable and was dropped in Mar-2016. Garuda succeeded at securing Heathrow slots (Gatwick was never its preference) and instead, in Mar-2016, launched a five times weekly Jakarta-Singapore-London Heathrow-Jakarta service.

The Singapore stop on the westbound leg was necessary as Jakarta's main runway had still not yet been upgraded to support more 777-300ER departures at full payload. In fact, in Jul-2015 Garuda was forced to reduce the number of nonstop Jakarta-Amsterdam nonstop services to three, and has since been operating three Jakarta-Amsterdam frequencies via Singapore.

The London service via Singapore also proved to be highly unprofitable. Initial load factors were less than 50%, and Garuda also struggled with yield. Garuda reduced Jakarta-Singapore-London-Jakarta from five to three weekly services in Sep-2016 but the route continued to bleed.

Garuda tried to sell London in the Singapore market but could only attract a relatively small number of low-yielding Singapore passengers. Singapore passengers were dissuaded by a transit stop in Jakarta on the return sector from London. Not offering a daily service also made it difficult to attract business passengers.

Meanwhile, Garuda was still unable to offer a one-stop product from Australia to London. For the local Jakarta-London market traffic volumes remained relatively small, and Garuda continued to cede a large share of Jakarta-London passengers to other airlines. Offering a (non-daily) nonstop product in just one direction did not provide sufficient differentiation; several airlines offer multiple daily one-stop services from Jakarta to London with quick connections.

Garuda finally operates Jakarta-London nonstop services

At the end of Oct-2017 Garuda dropped the Singapore stop and started to offer nonstop Jakarta-London flights in both directions. This also finally enabled Garuda to offer one-stop Australia-London connections.

Garuda has since operated three weekly nonstop return services on the Jakarta-London Heathrow route, as well as three weekly nonstop return services on the Jakarta-Amsterdam route. It has also continued to operate three weekly Jakarta-Singapore-Amsterdam-Jakarta frequencies.

Airport authorities deemed the Jakarta runway capable of supporting six frequencies at full payload but not ready to support all nine frequencies.

Amsterdam is a more attractive market

Garuda will offer six weekly nonstop Jakarta-Amsterdam services from late Oct-2018 as it suspends Jakarta-London and will no longer have any Singapore-Amsterdam services.

London will be offered as an offline product using partner airlines, including a KLM connection from Amsterdam to London. Using SkyTeam partner KLM was always a sensible option for serving London, as CAPA stated in the 2014 report.

Ironically the remaining limitations on the Jakarta runway, which the airport has been gradually upgrading, are expected to be lifted by the end of this year. Garuda therefore would be able to operate three weekly nonstop services to London (or more), as well as the six weekly nonstop services to Amsterdam.

However, Garuda now realises operating nonstop services to both London and Amsterdam is not sustainable commercially. As Amsterdam has been by far the better performing market, dropping London is logical.

Amsterdam is a bigger market from Jakarta and is better positioned than London for offering connections throughout Europe. Garuda is also a more recognised brand in Holland because it has been in the Amsterdam market for decades. Indonesia and Holland have close economic ties and an intertwined history.

Jakarta-London was not sustainable

The reality is the Jakarta-London market is too small and too price sensitive to sustain a nonstop service, particularly given the intense one-stop competition. The broader Southeast Asia-London market, as well as the Australia-London market, is also extremely competitive, making it impossible for Garuda to attract sixth freedom traffic at a sufficient yield to cover costs.

Garuda's London load factor did improve after the Singapore stop was dropped in Oct-2017 and this year has been averaging approximately 65%. However, Garuda has not been generating nearly a high enough yield to even approach break-even. Australia-London passengers have helped the load factor but have resulted in even lower average yields for the London sector.

In addition to dropping London, Garuda has again postponed any consideration for any new European route. The 10 777-300ERs were initially intended to operate four nonstop routes to Europe (Frankfurt and Paris were the other European destinations initially earmarked). Garuda now mainly uses its 777s to Japan and Saudi Arabia, including for religious charters.

Garuda has learned a long and difficult lesson about the challenges of long haul expansion. Other smaller Southeast Asian flag carriers may also learn a similar lesson.

Among the seven Southeast Asian airlines serving London, Garuda had the smallest presence. However, it has not been alone in its struggles.

London weekly seat capacity by Southeast Asian airline: 27-Aug-2018 to 2-Sep-2018

Rank	Airline	Code	Seats
1	Singapore Airlines	SQ	23,374
2	Thai Airways	TG	10,192
3	Malaysia Airlines	MH	9,094
4	Philippine Airlines	PR	5,180
5	Vietnam Airlines	VN	3,976
6	Royal Brunei Airlines*	BI	3,556
7	Garuda Indonesia	GA	1,908

London can be a challenging market that is often launched and maintained by smaller flag carriers for prestige rather than commercial reasons, while also meeting aspirations to compete in sixth freedom markets. During difficult times such routes are often dropped.

In this highly competitive market the Garuda decision was inevitable, sooner or later.