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ASEAN open skies pact to have little impact on Garuda's ratings: Fitch
Fitch Ratings says that the implementation of the ASEAN Open Skies agreement in 2015 will have minimal impact on the ratings of PT Garuda Indonesia, which is rated at âA(idn)â with stable outlook
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itch Ratings says that the implementation of the ASEAN Open Skies agreement in 2015 will have minimal impact on the ratings of PT Garuda Indonesia, which is rated at 'A(idn)' with stable outlook.
The agreement among members of the Association of Southeast Asian Nations (ASEAN) means that international flights beginning and ending in an ASEAN airline's home state are fully open to competition from carriers whose states are signatories of the open skies pact.
The agreement, however, is not equivalent to free access between ASEAN member countries, while the extent of liberalization varies greatly among members. For instance, the Philippines will restrict access in its main airport in Manila while opening access at its secondary airports in other cities. Indonesia plans to initially open five international airports in Jakarta, Medan, Bali, Surabaya and Makassar by 2015.
The pact will increase competition in Southeast Asia and in Indonesia, the region's largest passenger air travel market.
'However, Fitch believes that Garuda will maintain its competitive position in domestic routes, where it has market leadership in full-service carrier (FSC) flights. Domestic routes contributed to almost 80 percent of Garuda's revenue in 2012 and the company has an established presence in flights between Indonesia's major cities,' Fitch said in an official release on Thursday.
'Fitch also views as positive Garuda's track record of maintaining a healthy market share in the domestic market. At end-2012, Garuda had around 28 percent of the domestic air travel market, where competition among domestic airlines has already been intense.'
Garuda currently has two major hubs in Jakarta and Denpasar, where the airports handle nearly 50 percent of Indonesia's air traffic. The company recently made Medan one of its regional hubs and plans to step up hub operations in Makassar and Balikpapan, as these airports will play increasingly important roles as demand for air travel expands on islands such as Sumatra, Kalimantan, and Sulawesi.
'Fitch views this strategy as positive to improve the company's connectivity and operating efficiencies,' Fitch said.
To meet growing demand in the domestic market, Garuda also plans to expand its fleet to between 350 and 400 by 2025.
The company had 131 planes at the end of September 2013 and is in the process of writing its fleet expansion plan. If this plan is implemented, Fitch believes it will improve Garuda's competitive position prior to the opening of the domestic market to foreign competition.
The agency also believes that this plan is likely to put pressure on the company's leverage, although the extent it does so will greatly depend on the method of funding.
Garuda is not yet a member of any global alliance and plans to enter the Skyteam alliance by the first quarter of 2014. Fitch views this strategy as positive to improve its market presence globally beyond the current regional flights - partially mitigating the expected increase in competition within Southeast Asia.
The company derived around 20 percent of 2012 revenue from international flights and around five percent of the revenue from haj pilgrimage flights, for which the company is the sole provider from Indonesia.
