ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintSite TitleTitle ChevronIcon Twitter
Interview

Garuda flies tricky path through China and Saudi travel bans

COVID-19 threatens routes that contribute 20% of revenue, new CEO says

Garuda Indonesia CEO Irfan Setiaputra is working on ways to refinance the carrier's nearly $800 million of debt. (Photo by Dimas Ardian)

JAKARTA -- While Indonesia has suffered less direct impact from the coronavirus than neighbors, flag carrier Garuda Indonesia is not safe yet, with the airline's new CEO revealing that a combined 20% of revenue comes from flights to China and Saudi Arabia.

Garuda is feeling the squeeze of international travel restrictions. Particularly harsh is Indonesia's ban on travel to China, which makes up 5% of the carrier's revenues, and Saudi Arabia suspending pilgrimages to Mecca, which account for 15%, Chief Executive Irfan Setiaputra said in a recent interview with the Nikkei Asian Review.

When the travel restrictions will be lifted remains unclear, but Setiaputra said that while revenue may decline, the effect of the coronavirus outbreak on Garuda's overall earnings "will not be significant because our domestic traffic is still quite strong."

State-owned Garuda holds just over a third of the domestic airline market, putting it behind Lion Air Group, a local private company, which holds about 50%, according to aviation research company CAPA.

Even so, cost-cutting reforms need to come quickly for the company, which has a combined $798 million worth of long and short-term debt due by the end of this year, according to data from Factset.

Garuda had announced last year that it would issue sukuk bonds that adhere to Islamic law to refinance the debt, but the sale was canceled as it could not complete the necessary procedures on time. As of September, the airline had $345 million in cash and cash equivalents.

"We are discussing with many parties to be able to refinance this debt. This means how we can get new debt assistance in lieu of this debt," Setiaputra said.

The carrier will also cut unprofitable international routes including the one connecting Jakarta to London, and Jakarta to Chubu Centrair International Airport in Japan while opening new routes. Those include connecting New Delhi with Denpasar in Bali, a popular holiday destination.

Judging by Jakarta-listed Garuda's stock performance, investors appear skeptical of whether Garuda can weather headwinds under its new leader, especially with the COVID-19 outbreak. Shares have fallen nearly 50% since the start of the year, the biggest drop among regional rivals. Even the recent plunge in oil prices, a potential benefit for airlines, has failed to shore up shares so far.

"Our usage of oil is now low because of this coronavirus," Setiaputra said. Under normal usage patterns "we can see the benefit, but because it's going down, we might have some benefits, but not as much as what we should enjoy."

The effect from the coronavirus is "not merely about reducing revenue," the CEO said, explaining that aircraft idled by the travel declines create a dead weight on profits. To cope, Garuda "will relocate large-bodied aircraft used for these international flights to domestic routes which are crowded, like routes to Bali, Surabaya, Medan, Yogyakarta." 

He added: "I think the market wants to see what Garuda can do in this crisis because we were hit by all the bad news at the beginning when I joined this company. We are hit by the coronavirus issues, the umrah issues, the debt issues, and maybe the market doesn't see us doing anything, maybe." Umrah refers to pilgrimages to Mecca.

But, Setiaputra said, "when I meet with several investors, we are sending them notes about what we are planning to do" and the company has received positive feedback. "Everybody felt very confident at the beginning of the year on the Indonesian economy. And now it's turned out to become very challenging, I'm not saying bad, just very challenging."

Setiaputra is the fifth chief since 2014 at the majority state-owned airline. The former CEO of the Indonesian subsidiary of French technology company Sigfox took the helm after his predecessor Ari Ashkara was fired for trying to smuggle a disassembled Harley-Davidson motorcycle into the country on a newly delivered plane.

Garuda is in better financial shape than when Ashkara took charge in September 2018. The previous CEO managed to pull the company out of the red, posting a net profit of $122 million in the nine months ended September 2019, up from a $114 million loss a year earlier.

Brendan Sobie, founder of aviation analysis company Sobie Aviation, said Setiaputra "will need to pursue further restructuring and reassess the group's long term strategy."

The carrier "continues to be unprofitable" in the international market amid stiff competition, Sobie said. While the current upturn in Garuda's financials was a result of reduced capacity in the domestic market, "one cannot assume that capacity will continue to be maintained" at the reduced level.

With Indonesia's confirmed cases of COVID-19 jumping to 27 on Tuesday, and further cases likely to be uncovered, Southeast Asia's biggest economy may see reduced travel, dealing a further blow to Garuda and Setiaputra's strategy to maximize domestic routes. Lee Young Jun, research and development manager at Mirae Asset Sekuritas Indonesia, said he is considering changing his "buy" recommendation on Garuda due to the virus.

Other challenges Setiaputra inherited from his predecessor include revamping Garuda's fleet. The company was awaiting delivery of 49 Boeing 737 Max 8 jets before the aircraft was grounded after two fatal crashes. Under Ashkara, the company canceled the orders and was angling to switch to other Boeing aircraft, including the wide-bodied Boeing 787. However there had been little progress in negotiations with Boeing, especially as Ashkara was ousted in December and interim board took charge until Setiaputra was named CEO.

Now, Setiaputra may divert from his predecessor's decision after he admitted to negotiations with Boeing's rival Airbus. "We need short-range, narrow-body, because we have many cities that we need to connect to with a type of plane like that," he said. "I don't know whether Boeing or Airbus has solutions... Deciding which one is related to availability. Today, we don't have an urgent need, especially in these [reduced travel from coronavirus] conditions to decide on a new one.

"We still have time to decide this. We are discussing also with Airbus regarding [narrow-bodied] 320. [This is] also a possibility."

Additional reporting by Bobby Nugroho in Jakarta.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends July 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media