Garuda Indonesia Postpones Plans to Serve Manila

The ongoing financial losses at Garuda Indonesia has led the carrier to cancel the launch of new routes to Manila and Mumbai. The state-owned enterprise had previously released a statement earlier this year that they planned to serve the two cities by the end of this year in order to meet travel demand. But given the steep losses incurred in the first half of this year, the carrier is overhauling its planned and existing international routes.

Copyright Photo: Australian Business Traveller

Garuda Indonesia posted a loss of US$211 million in the first half of 2014, which was twenty times greater than the loss of US$10.92 million posted in the same period the previous year. An increase in operational costs was attributed to the rising cost of fuel and the weakening Indonesian Rupiah currency. Although the Indonesian flag carrier initially reported profits of $1.4 million in the first half of 2013, Garuda Indonesia incurred $12.86 million in losses resulting from currency exchange. At a recent press briefing, the Vice President of Communications for Garuda Indonesia stated, “With the current conditions, we have to cancel our plan to open a new route to Mumbai, India this year, as well as the plan to open a new route to the Philippines.”

In addition to the planned route cancellations, Garuda Indonesia has outlined a plan to cut costs. One measure is the cancellation of routes that are currently being served by fuel-intensive aircraft. Moreover, the carrier plans to delay deliveries of new aircraft. The measures are expected to reduce expenditures by approximately $54 million. Most recently, the unprofitable Jakarta-Taipei route was closed on August 10.

JOINING THE SKYTEAM

Although plans for further international expansion have been shelved, Garuda Indonesia remains optimistic that it can grow by 15-20% by year end. The carrier's recent membership in the SkyTeam Alliance creates a new opportunity for the airline to expand its global footprint by relying more on the SkyTeam network that stretches to 1,064 destinations worldwide. The move to join SkyTeam has ultimately cemented the airline's presence in Southeast Asia, creating opportunities to cut thin routes, while strengthening its network through the alliance. According to an airline executive, "By joining SkyTeam earlier this year, Garuda has improved its connectivity. Therefore, even though we have a plan to close the Taipei route, we will sign a code share agreement with China Airlines, so we can still fly out passengers from Jakarta to Taipei." The Taipei route was reportedly only achieving 50-60% load factors when operated by Garuda.

Meanwhile, Garuda’s plan to launch a direct service to London has been changed. Since joining the alliance, the carrier has decided to route its London flight through Amsterdam before continuing to Gatwick Airport. Although the London route was originally aimed at the local Indonesian market and fly-through traffic from Australia,  the route is now less attractive with an intermediary stop in Amsterdam placing Garuda at a competitive disadvantage.

LESSONS FOR PHILIPPINE AIRLINES

Copyright Photo: Lester Tangco/PPSG

Both Garuda Indonesia and Philippine Airlines find themselves in similar predicaments in terms of international expansion. Each carrier planned direct service to London at roughly the same time though Philippine Airlines ended up beating Garuda to the launch. However, it has been no secret that PAL's London route has struggled with challenges filling the Boeing 777-300ER aircraft. Although PAL plans to downgrade the route to a smaller A340-300, the on-board product is inferior to its predecessor and it is unclear how passengers will respond.  Garuda's lacklustre performance on international routes in the first quarter of 2014 has triggered the carrier to slow its international growth. However, Philippine Airlines has shown little sign of slowing down.

Competition in the international and Southeast Asian market has intensified creating a difficult operating climate for both Garuda and Philippine Airlines. Garuda introduced the Boeing 777 as its new flagship aircraft in an effort to drive international expansion. However, the carrier has learned that filling these large aircraft is proving to be more difficult than originally expected leading to overcapacity. Ramon Ang had a similar vision when he took the helm of Philippine Airlines adding new destinations such as London and Toronto. But luckily for Ang, Category 2 status was lifted allowing Philippine Airlines to deploy the Boeing 777 fleet on the busy US routes.

Whereas Philippine Airlines originally acquired its Boeing 777 fleet for the US market, Garuda acquired its 777 fleet with European expansion in mind. The carrier had planned to use the aircraft on multiple non-stop European routes. But Garuda has only managed to launch just one European route to Amsterdam, with London repeatedly delayed. Since launching its direct Amsterdam service, Garuda has shelved plans for any additional European destinations and no longer intends to serve London non-stop.

Garuda previously aimed to serve Paris, London, Amsterdam, a city in Germany, and a city in Italy. The story sounds all too familiar with Philippine Airlines' European ambitions that were revealed last year. To date, PAL has only managed to launch a direct flight to London in spite of several warnings by industry experts to focus expansion elsewhere. Ang earlier said that he planned to serve a number of other European cities direct. However, the opening of US skies and the mediocre performance on the London route is likely causing Ang to rethink that plan, just as Garuda has put the brakes on international expansion. It remains unclear whether PAL will even continue to operate the London route on a long-term basis given its performance. 

With the intense competition in the Southeast Asia-Europe market, slowing any expansion to Europe is a sensible decision. It would be far more practical for carriers such as Garuda and Philippine Airlines to rely on partner carriers to stretch the global footprint on a code share basis. In the case of Garuda, they can easily leverage their membership in the SkyTeam network. But as Philippine Airlines does not currently belong to any alliance, the most likely option would be for them to tap their newest partner, Etihad Airways.

Garuda's route to Amsterdam does hold some promise in the long term given the connections that the carrier is offering throughout Europe through KLM. However, Philippine Airlines has yet to introduce any onward European connections or even a partner airline based in Europe that can operate on their behalf. If PAL could implement this model, the London route might stand a chance of survival in the long run. The scheduling of the current flights are not presently favourable to any sort of connections in either direction.

Given the changes in Garuda's international expansion plans, the carrier now faces a similar dilemma that PAL once faced when they first accepted deliveries of their Boeing 777 aircraft as the US market was closed. Now that European expansion is off the table for Garuda, the carrier must find a new home for its 777 fleet, which is expected to reach 10 aircraft. However, the hard reality is that Garuda likely no longer needs these aircraft. Although the carrier can defer some of its remaining 777 deliveries, they may wish to consider even selling a portion of their 777 fleet. Ironically, Philippine Airlines is in a position where it needs to add to its 777 fleet in order to support its further expansion to the United States and support existing routes to Canada, Australia, and London.

Overall, both Garuda and Philippine Airlines are presently in a relatively weak position in a highly competitive international market. While there are certainly promising opportunities for Philippine Airlines in the United States, if it intends to push with European expansion, it would be a far more sensible strategy to leverage the partnership with Etihad to stretch its global footprint, rather than risk flying its own metal on what may be an unprofitable venture as Garuda has learned the hard way. But Garuda now has an opportunity to redeem itself by leveraging its membership in the SkyTeam Alliance, which might just give it an edge over Philippine Airlines.