ANALYSIS: Citilink A320 order a strategic move for Garuda

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Citilink's recent order for another 25 Airbus A320neos will help the carrier play a strategic role in Garuda Indonesia's future, while keeping the other low-cost carriers (LCCs) in the country at bay.

This order is on top of an existing backlog for 15 baseline A320s and 10 A320neos, which will complement an existing fleet of 14 A320s and five Boeing 737 Classics.

These, however, pale in comparison to the other Indonesian LCCs.

Lion Air, for example, has a fleet of 84 Boeing 737s and an orderbook for another 329 737s, comprising NGs and the re-engined Max variants. Indonesia AirAsia has 21 A320s in its fleet, another nine in its backlog, and could add more with its Malaysian shareholder AirAsia increasing its orderbook to cater to growth at its various Asian franchises.

Even with its additional aircraft, Citilink is likely to remain a much smaller player in the market compared with its rivals.

"I think the order for 25 aircraft might be a bit small for them, with such big expansion of flying in Indonesia," says Paul Sheridan, head of consultancy in Asia at Flightglobal's Ascend division.

Despite its smaller size, Citilink's presence in the low-cost market is likely to help stabilise yields for its parent.

"We think Citilink was not only designed to tap into the growing LCC market, but it was also designed to introduce price competition to the LCC market so that LCCs cannot deliberately price their tickets just below Garuda fares to earn a wide margin on a lower cost base," says Rigan Wong of Citi Research.

"By using Citilink to keep LCC fares low and provide competition to other LCCs, Garuda will then be able to protect its own domestic premium profitability."

Sheridan says that recent history has shown that the two-brand strategy can work in a competitive market.

He adds that Garuda has made the right choice in separating the budget operation out of the mainline airline, giving it its own brand identity and using different aircraft from the mainline carrier.

"You can make some comparisons between Qantas and Jetstar when they were competing with Virgin Blue. Having two distinct brands is a very effective way of competing," he says.

While backing Citilink's strategy, Wong warns that the airline will need to contain its costs as it moves forward.

During the three months to the end of September 2012, he says that the airline's losses widened even as it started replacing its older Boeing 737s with newer A320s.

"Our calculations show that despite the fleet mix improvement, Citilink's cost structure did not improve meaningfully and it continues to be loss-making," he says.

He adds that Citlink will need to reverse this situation in the longer term, or the strategic gains that Garuda gets may be outweighed by the financial losses from the subsidiary.

But Sheridan remains upbeat about Citilink's role within the Garuda group.

"I think they have made the right choices with the way they have set up Citilink," he says