National flag carrier Garuda Indonesia’s share price surged 19 percent on Thursday after the airline said it had taken over operational control of low-cost rival Sriwijaya Air. The move is seen as an effort to help Sriwijaya improve its financial performance, while potentially expanding Garuda’s market share to challenge Indonesia’s largest airline company, the Lion Air Group.
Garuda announced the joint operation through its subsidiary, Citilink Indonesia, on Wednesday after signing an agreement with Sriwijaya Air and NAM Air – both under the Sriwijaya Air Group – on Nov. 9. The partnership could also be escalated to share ownership in the Sriwijaya Group, Garuda said in the statement.
The joint operation will give the flag carrier a combined 46 percent share of the country’s domestic aviation market, while the country’s largest budget carrier, Lion Air, controls 51 percent, according to the Sydney-based CAPA Centre for Aviation.
The remainder of the market is shared by the local unit of Malaysia-based AirAsia, charter service Susi Air and Jakarta-based Trigana Air Service.
“The joint operation is intended to help the Sriwijaya Air Group improve its operational and financial performance to help Sriwijaya fulfill its commitments to third parties, including those within the Garuda Indonesia Group,” Garuda managing director Askhara “Ari” Dhanadiputra said in a statement.
Sriwijaya Air planned to undertake an initial public offering last year, but its weak financial performance put a stop to that.
The carrier suffered a loss last year due to rising fuel costs and the weaker rupiah after three profitable years. Most of Sriwjaya’s revenue is in rupiah, while the carrier’s expenses are mainly in US dollar, including fuel, aircraft maintenance and debt.
According to Garuda’s financial report, Sriwijaya owed the flag carrier around $9.33 million as of Sept. 30 this year for the overhaul of 10 CFM56 turbofan aircraft engines.
“We hope the partnership will help restore the financial performance of the Sriwijaya Air Group amid increasing competition in the domestic aviation industry. We believe the Garuda Indonesia Group has an excellent ability to manage the airline business,” Sriwijaya Air managing director Chandra Lie said.
Price War
Domestic air traffic in Indonesia more than tripled over the past decade as rising prosperity and lower fares made flying affordable for more people.With 129 million passengers in 2017, Indonesia is the world’s 10th-largest aviation market and it is projected to continue growing.
Transportation Minister Budi Karya Sumadi expressed hope that the consolidation between Citilink, Sriwjaya Air and NAM Air would also help end a ticket price war among local airlines.
“We hope this would end the price war and establish a new price equilibrium that covers the costs and margins to allow every airline to grow,” Budi said on Thursday.
His ministry has long held the view that airlines’ race to the bottom in their price offerings would put pressure on their finances, which could make them more likely to neglect safety precautions.
Budi said the joint operations between Citilink and Sriwijaya could also help to reduce redundancy on some of the country’s busiest routes and divert resources to other destinations.
“There are many airports in eastern Indonesia that want to be served,” he said.