Garuda Indonesia: Transport

The Company

Established over 60 years ago, Garuda Indonesia (GIAA) is the country’s first carrier and the only premium airline serving the local market, with an extensive network including 22% of domestic market share and 38% market share in cargo.

On the international front, GIAA is also a market leader with a market share of 15.5% for departing flights. GIAA was in charge of operations for 131 aircrafts as of the end of September 2013. GIAA has an integrated business with four subsidiaries: Aero Wisata (travel, transportation and catering), GMF Aero Asia (maintenance), Gapura Angkasa (ground handling), Abacus Distribution systems (computer reservation provider), and Aero Systems Indonesia (IT provider and solutions). These companies have paved the way for GIAA to build a strong brand and cater to its customers. In 2005, the management team undertook a comprehensive debt restructuring programme, paving the way for GIAA to go public in early 2011.

Development Strategy

To maintain their market share from Lion Air as well as other airlines, and at the same time cater to Indonesia’s expanding middle-class income earners, GIAA established Citilink, its low-cost carrier (LCC) subsidiary, in 2001. Although currently still losing money, Citilink is expected to be profitable in 2014, helped by the government’s plan to increase the ticket ceiling price for LCCs and a positive spillover effect from GIAA’s passengers as load factor increases. Additionally, Citilink’s plan to expand within the region as a whole by flying to Singapore, Malaysia and Thailand, an expected stronger IDR and subdued fuel prices should all assist future performance. Going into 2014, GIAA will expand its routes to the eastern part of Indonesia with the help of Bombardier CRJ 1000 and ATR turbo prop aircraft. Therefore, as part of their rejuvenation plan, GIAA will also add Boeing 777-300 ER, which have first-class seatings, and also Airbus 330-200 and 330-300. On the LCC front, Citilink will add Airbus 320-200 to their fleet. This will result in GIAA’s fleet average age to decline to five years in 2015, from 12 years in 2008, allowing for a greater competitive edge.

GIAA is also likely to benefit from increased domestic flights on the back of political campaigning in 2014 across the archipelago. This should help offset high costs due to their rapid fleet expansions. On the international front, GIAA is expanding routes with code sharing agreements with other international airlines to increase penetration into Europe and the Middle East, while joining the Skyteam Alliance will help in providing travel access to routes currently unserved. In an effort to further penetrate the overseas markets, GIAA will also fly the Jakarta-London route in the second quarter of 2014 and increase route frequencies to Australia and the Middle East. The GIAA has also signed an agreement with Aeromexico to tap the Latin American routes.

In line with the company’s rejuvenation plan, GIAA has cooperated with two major flight schools in Indonesia (BIFA and Curug Flight School) to provide them future pilot requirements. With new fleets and route expansions, GIAA is estimated to require 200-250 pilots per annum. With the help of their own internal training facility, GIAA will have no problem securing the required cabin crews of 800-1000 per annum.

Forecast

Continued fleet rejuvenation and route expansions helped by code sharing agreements should result in a 2012-15F EPS CAGR of 13% and Indonesian passenger five-year CAGR of 17.5%, higher than the world growth at 4.7% and Singapore’s 7.4%, which will be supported by domestic flights. This is likely to support demand growth going forward, facilitated by expansions of major airports and new terminals in five major cities under Angkasa Pura I and II from 2013 to 2016.

On the capacity front, GIAA is planning to add 32 further aircraft up to 2014, with a total of 163 aircraft and creating a higher ASK of 49,318 and RPK of 37,728. GIAA is trading on an attractive 2014F adj. EV/EBITDAR of 6.2x, at around 30% discount to its regional peers. Our Rp750 ($0.075) target price, reflecting a 50% upside potential from the current level, is based on a 2014F EV/EBITDAR of 6.9x, a 25% discount to the region.