24-6-2023 (SINGAPORE) A palpable sense of optimism radiated from Irfan Setiaputra as the Garuda Indonesia CEO addressed parliament in June. As Setiaputra outlined the flag carrier’s recovery after years of struggle, politicians lavished praise on the airline – a far cry from the mood at a similar meeting last year.
Talk of shuttering Garuda had been floated then, as the COVID-19 crisis gutted passenger numbers by 90% and triggered $4 billion in losses plus $10 billion in debt. But Garuda and regional peers are thriving now, buoyed by eased curbs and travel’s rebound. Garuda posted a record $3.9 billion profit in 2022, its biggest in 74 years, while Malaysia Airlines (MAB) turned a profit after losses and tripled revenue on strong international demand.
Singapore Airlines marked a $1.6 billion profit, its largest in 76 years, for the year ended March. Its shares hit a three-year high and staff got eight-month bonuses.
Still, choppier conditions may buffet Garuda and MAB. A post-pandemic fare war looms as airlines vie for surging demand, and costs to lease, fly and fix idled planes will likely balloon. Experts say Garuda should stay cautious but MAB should attack.
Pre-pandemic, neither was in top shape. MAB grappled with costs and excess staff; it struggled after flights MH370 and MH17 vanished or were shot down in 2014. Malaysia’s Khazanah rescued its parent Malaysia Aviation Group (MAG) that year. MAG ranked 10th among Southeast Asian aviation groups for passenger traffic in 2019, a study found.
MAB’s main rivals were AirAsia and Malindo Air, now Batik Air Malaysia. “Competitors were expanding aggressively by pricing crazy low. It led to losses for all airlines in 2019,” said analyst Brendan Sobie, a study co-author.
As the pandemic hit, MAB restructured $3.4 billion in debt by renegotiating with lessors, creditors and government entities. Completing this in March 2021, Khazanah gave $769 million to fund MAB through 2025.
Robust demand and cost control then helped MAG flip a $164 million loss in 2021 to a $118 million profit. Restructuring fast cut costs as MAB kept all staff, said MAG chief Izham Ismail. “We avoided grounding planes or cutting jobs. So we relaunched fast in April 2022,” he said.
MAB has recouped 90% of pre-pandemic capacity; it expects full recovery once Chinese demand rebounds in late 2023. It will boost capacity to hotspots like Australia and South Asia. “Among Southeast Asian carriers, Malaysia Airlines has exploited the post-COVID market, unlike laggards Garuda and Thai Airways,” said analyst Shukor Yusof.
Garuda entered the crisis hobbled by excess and scandal. Former CEO Ari Askhara, ousted in 2019 for smuggling Harley parts in a new plane, also faced price-fixing and fraud claims.
When Setiaputra took over, he said: “The pandemic unveiled problems in Garuda – inflexible costs, high rent, mismanagement.” To generate cash flow, Garuda downsized fast, including by spinning off and closing units. Staff fell from 7,878 in 2019 to 4,459 now; its fleet shrank from 142 to 66 planes. Facing rival Lion Group, Garuda dropped over 100 domestic and international routes to focus on profitable ones.
Garuda restructured debt in 2021, converting some to shares and bonds. But it still has negative equity of $563 million, said expert Gerry Soejatman. On June 13, Setiaputra told lawmakers this was its “biggest homework”. But he was confident of continued progress. “If we tightly control costs, we can fix past problems,” he said.
“Garuda hasn’t fully recovered,” Soejatman said. “With cost discipline, it will survive. But can it expand after fixing its finances? We’ll see.”
This year, bright spots emerged for Garuda, like being named the world’s most punctual airline by OAG Aviation in January and having the best crew in Skytrax’s 2023 awards. But MAG admits “much room for improvement” in service and punctuality.
Analysts traced MAB’s service issues to vendors, saying it needs an ” overhaul”. In-flight entertainment on domestic flights disappoints, said oil exec Fashran Fauzi, who flies MAB’s Kuala Lumpur-Kuala Terengganu route thrice monthly for work. “It’s like budget airlines. Economy food isn’t better,” said the 38-year-old.
MAG’s Izham said MAB prioritised improving 10 service aspects from check-in to food. MAB also cut underperforming staff, Sobie said. But Shukor said MAB “remains bloated” despite a shrunken fleet. “Its staff-to-plane ratio rose, hitting profits.” Trimming “dead wood” is “politically sensitive” as governments dislike job cuts at state-linked firms like MAB before elections over vote impacts, he added.
More challenges loom, like MAB facing higher costs as it resumes lease payments deferred in restructuring, Sobie said. “Issues like inflation and a strong dollar raise costs.”
MAB also confronts intensifying competition, including from new entrants SKS Airways and MYAirline, and their ambitious expansion plans. Malaysia’s plan to reopen Subang Airport for narrow-body jets will also spark competition and force MAB to split operations from its KL hub, Sobie said.
“Airfares will come down again. Low fares will return,” he said. But Izham and Setiaputra insist they do not fear budget carriers, focusing on premium flyers instead.
Dominant full-service neighbour Singapore Airlines is not quite a rival, Sobie said. SIA is “all international” while Garuda and MAB are “smaller regional players” that dropped long-haul flights. Their domestic markets differ too.
In 2019, SIA proposed partnering MAB to share revenue and expand codeshares. Garuda and SIA recently agreed to coordinate fares and schedules, subject to approvals. The tie-ups benefit all, Sobie said: MAB and Garuda tap SIA’s network, while SIA sees Malaysia and Indonesia as “extended home markets”.
If anything, Garuda should avoid reopening routes fast, Soejatman said, urging cost caution. “Focus on positive cash flow – that shows the business is sound. I hope Garuda stays nimble, anticipates changes better than early in the pandemic.” Setiaputra wants 40% more flights annually, focusing on profitable routes. “We need 60-70% of profits to repay creditors,” he said.
Advisor Chappy Hakim said Garuda has room to grow, citing Indonesia’s strategic location, large size and thousands of islands. But elections next year may spark “political interventions” affecting Garuda, as regional leaders see flag carriers servicing their areas as a “source of pride”, he warned. “Garuda must choose battles wisely, as requests or even orders from those with short-term agendas will come.”
So a cautious Garuda contrasts with analysts urging offensive MAB strategies ahead.
Sobie said MAB has yet to use most government funding received during restructuring as it turned profitable fast. So it can invest to improve service and renew and expand its fleet. MAB expects four Boeing 737 MAX 8s in the third quarter of 2023 to renew its narrow-body fleet.
“If unprofitable in 2024 and beyond due to outside factors, MAB can withstand it,” Sobie said. “Its finances are strong enough to weather storms.” But prolonged losses may upset sole owner Khazanah and revive existential MAB questions, he warned. “The government must support MAB. But it always chooses to have a flag carrier – and provides capital when needed.”
While acknowledging “stiff competition and challenges” ahead, Izham said MAG’s position lets it make key investments impossible before. Continued cost discipline and meeting changing demand by boosting customer experience are strategies going forward, he said.
Shukor said MAB needs an aggressive approach, especially against domestic rivals. In Sabah and Sarawak, “more can be done”, like expanding beyond subsidiary MASwings. “Exploit opportunities in that frontier.” For Shukor, exceptional discipline, shrewdness and “smarts in business dealings” can transform MAB, though “easier said than done”.
