Monday 19 November 2018

Financial strengths of Citilink and Sriwijaya Air Group after managerial control over the latter

Report by : Gan Yung Chyan
                  / KUCINTA SETIA
Distributed to All Press & Travel Professionals







On 14 November 2018, Garuda Indonesia officially took over the operational control of its 15-year-old rival Sriwijaya Air Group through its subsidiary Citilink, which enabled the company to occupy a majority share in the fast-growing domestic aviation market.  Under the agreement (KSO), Garuda Indonesia improves the operation and financial management of the Sriwijaya Air Group through its subsidiary Citilink. The deal has not yet involved equity, but Garuda Indonesia Group said it could increase cooperation at a later stage, including ownership of the Sriwijaya Air Group. 



After the cooperation agreement was reached,  the air traffic share of the airlines of the Lion Group in the Indonesian domestic market is approximately 51 per cent while Garuda Indonesia Group controls the air traffic share of approximately 47 per cent. The air traffic share by other Indonesian airlines is only 3 per cent. 

If viewed from the current fleet size, Garuda Indonesia Group controls the fleet of Sriwijaya Air Group slightly larger than the Lion Group. However, in 2017, the passenger traffic of the Lion Group was higher than that of the Sriwijaya Air Group and Garuda Indonesia Group.

The deep cooperation between Sriwijaya Air Group and Garuda Indonesia Group has a harbinger.

On 16 May 2018, Garuda Indonesia Group and Sriwijaya Air Group signed a code-sharing agreement to strengthen cooperation on domestic routes, strengthen synergies, and increase market share and profitability. The code-sharing cooperation agreement is the first cooperation agreement between Garuda Indonesia Group and Sriwijaya Air Group. At the time, the two parties also indicated that this was the first step for the two parent companies to carry out more strategic cooperation in other fields in the future. As an initial stage, the cooperation between the two parties is through a special proportional allocation agreement (SPA) and code sharing agreement. But as of now, the code sharing cooperation between the two parties has not yet been implemented. 



Sriwijaya Air and its full-service subsidiary NAM Air use reservation system differently from Lion Air and Citilink. Sriwijaya Air, NAM Air and Citilink have never code-shared with any airline and therefore need to upgrade their IT investments. For Sriwijaya Air, considering its financial situation is not ideal, the managerial control by Citilink represents a huge investment.

Citilink is a wholly-owned subsidiary of Garuda Indonesia that was established in 2001 then known as Garuda Indonesia Citilink. In May 2011, Garuda Indonesia announced the launch of the Citilink independent operation plan. On 5 July  2012, it obtained the Operation Qualification Certificate (AOC) issued by the Indonesian Transportation Department. On 30 July 2012, it officially operated independently using the independent call sign and logo. Its main competitor is Lion Air. Up to now, the number of aircraft in Citilink's fleet has reached 60, and the average utilization rate of the fleet from January to September 2018 has reached 9:12 hours. Due to the unsatisfactory operation in the past two years, it has slowed down the pace of fleet expansion.

Since the independent operation of Citilink, the passenger traffic has maintained a high growth rate, which has exceeded the average development speed of the Indonesian aviation industry for many years. In 2017, its passenger traffic growth slowed down, only 10.8% although its passenger load factor has been rising year after year. The average passenger load factor from January to September in 2018 reached 83.8%.

After the 2014 Indonesia AirAsia QZ8501 plane clash, in January 2015, the Indonesian transportation department signed the regulations and the minimum price of the ticket should not be less than 40% of the full price, which limits the minimum fare. Compared with the revenue of Citilink passenger kilometers in recent years, it is still possible to see the fierce market competition of the Indonesian aviation industry, and the revenue per unit passenger kilometer continues to decline. On the other hand, due to the impact of oil prices, the cost per unit of seat has increased in recent years. In 2015, Citilink's operating income increased by 123.92 per cent, and the first profit was 3.561 million US dollars. In  2016 and 2017, Garuda Indonesia Group did not separately announce the performance of Citilink, but in the whole year of 2017 and the first three quarters of 2018, Garuda Indonesia Group incurred a severe loss (a loss of 110 million in the first three quarters of 2018). It is believed that during this period, Citilink is highly likely to lose money.

To contribute to the profits of Garuda Indonesia Group, Citilink needs to improve its sales strategies. Currently, it relies on agency sales in Indonesia, and the construction of direct sales channels is backward. Its official website at www.citilink.co.id has almost no updates and limited brand appeal. It needs to improve its marketing strategies. Passengers from countries outside Indonesia know very little about Citilink. It is likely to lose money at the beginning of the opening of international routes. Its parent company, Garuda Indonesia, has been listed and is responsible for the capital market. This is why Citilink has not opened many scheduled international routes. Today, it only has two regular international routes.





Sriwijaya Air is a full-service airline that began operations in November 2003 and has been the third largest airline in Indonesia's domestic market since 2010. It established Sriwijaya Air Group in 2013 and also launched Nam Air, which is positioned as a full service regional airline. In the past year, the Sriwijaya Air Group has also been extremely difficult to operate and has contacted several potential investors.

This time, with the official takeover of the Sriwijaya Air Group management, it is expected that there will be follow-up actions such as equity acquisitions. From the current development of the Southeast Asian aviation market, large aviation groups are mostly developed with full-service sub-brands and low-cost sub-brands. At present, Garuda Indonesia Group manages four brands (operating license AOC), and it is difficult for multiple brands to achieve differentiated positioning and future. It is still possible for these brands including Citilink, Cargo Garuda Indonesia Cargo, Garuda Indonesia Explore-jet and Garuda Indonesia Explore to continue to integrate before any merger with Sriwijaya Air Group can be discussed.

The managerial control of Citilink over Sriwijaya Air Group shows that the Indonesian aviation market is growing faster but competition is fierce. 

According to Indonesian DGAC data, the domestic passenger market in Indonesia grew by 8 per cent in 2017, reaching 96.9 million. In 2016, the domestic market grew at a faster rate of 17 per cent At present, the Indonesian market is second only to the world's fifth largest domestic market in the US, China, India and Japan. Indonesia is very likely to surpass Japan in 2018 and become the fourth largest domestic market in the world. In 2017, the number of domestic tourists in Japan was 101.8 million. According to data from the Brazilian ANAC, Brazil is the sixth largest domestic market in the world with 90.6 million domestic passengers. If viewed from the scale of the entire aviation market, Indonesia has entered the tenth largest market in 2017 and is expected to leap to the fourth largest market in 2030.

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