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Garuda revival threatened as partner airline heads for exit

End to Sriwijaya tie-up would slow Indonesian carrier's plan to catch Lion Air

JAKARTA -- Indonesia's third-largest domestic carrier Sriwijaya is seeking an end to its partnership with government-owned Garuda Indonesia, less than a year since the two airlines joined forces to take on upstart rival Lion Air.

Industry insiders have told Nikkei Asian Review that Sriwijaya is unhappy with the terms of the partnership with Garuda, and has been exploring ways to break the agreement since Sriwijaya returned to profitability earlier this year.

Earlier this week, Garuda resumed maintenance work for Sriwijaya after it had stopped providing aircraft maintenance services and spare parts, citing an unpaid debt.

Indonesia's Ministry of Transportation had also issued Sriwijaya with an ultimatum, demanding that Sriwijaya halt operations altogether if it fails to find a maintenance provider.

"[We have] already resumed [the maintenance for Sriwijaya]," Garuda president Ari Ashkara told reporters Thursday. "It's not immediately [back to normal], it will be gradual and within 2 months is expected to be back to normal."

An end to the alliance with Sriwijaya would force Garuda to reconsider its strategy of catching up to market leader Lion Air, which held a 51% share of Indonesia's domestic air travel market as of 2017, according to CAPA Centre for Aviation. Garuda and Sriwijaya have a combined market share of 46%.

The partnership agreement, which was signed last November and did not involve any equity transfer, had an immediate effect on the performance of both airlines.

Garuda turn a loss of $179.2 million for 2018 into a profit of $20.4 million in the three months to March this year, while Sriwijaya's first-quarter sales soared 43.7% to 2.6 trillion rupiah ($184 million) compared to the same period last year.

Sriwijaya recorded a net profit of 41.1 billion rupiah for the three months to March, compared to a loss of 484.3 billion rupiah for same period last year.

The alliance has also enabled Garuda to explore more profitable international routes such as a new service linking Bali, Medan and Amsterdam, while Sriwijaya's rebound has helped it to start paying down debt, including what it owes Garuda.

A halt to Sriwijaya's operations would also affect its ability to repay the $118.7 million it is believed to owe to Garuda's aircraft maintenance subsidiary GMF AeroAsia. A default on that debt would be enough to wipe out the national carrier's entire first quarter profit.

Sriwijaya is also believed to owe state-owned oil company Pertamina 942 billion rupiah, as well as 585 billion rupiah to Bank Negara Indonesia, and 80 billion rupiah and 50 billion rupiah respectively to airport operators Angkasa Pura II and Angkasa Pura I, as of November last year.

Sriwijaya's balance sheet woes were compounded last year by a sudden fall in the value of the rupiah, and were a major incentive for the group to seek an alliance with Garuda.

Another sign of discord between the alliance partners also emerged late last month when the words "Member of Garuda Indonesia" were erased form the fuselages of planes belonging to the Sriwijaya group. Also in September, Sriwijaya shareholders meeting resulted in the ouster of directors sent from Garuda.

Garuda subsidiary Citilink also filed a lawsuit in Jakarta on Sept. 25, demanding that Sriwijaya honor the joint venture contract the two sides signed last year.

Citilink has since agreed to drop its lawsuit "for the [sake of] passengers," Garuda president Ari Ashkara said Thursday.

Earlier this week, Garuda subsidiary Citilink reaffirmed Garuda's commitment to the partnership with Sriwijaya

"With this agreement, we, the Garuda Group and Sriwijaya, hope that this commitment can be the point of what we call it or our turning point," Citilink managing director Juliandra Nurtjahjo told reporters. "Our commitment is always, first, prioritizing the safety of the airworthiness of Sriwijaya aircraft is a priority."

Sriwijaya had not responded to questions sent by Nikkei at the time of publication.

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