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Tuesday, February 15, 2011

Indonesian Airlines Set For Consolidation

Financially troubled Indonesian carrier Mandala Airlines’ move to suspend all operations indefinitely may be a precursor of similar actions by other airlines.
Indonesia has more than 20 commercial airlines, but market consolidation appears inevitable due to a new rule that is coming into effect in January 2012, which mandates that all commercial airlines have a minimum of 10 aircraft, five of which must be owned.
Other Indonesian carriers to watch in the coming months include Kartika and Riau. Kartika Airlines only has two aircraft, Boeing 737-200s leased from Aero Nusantara Indonesia (ANI). Industry executives say Kartika’s owners have been speaking to potential buyers. If the carrier is sold, it could have implications for the manufacturer of the Sukhoi SuperJet 100 as Kartika is the aircraft’s Asian launch customer, with a firm order for 30. Deliveries to Kartika are due to start mid-2012. Chairman Kim Mulia declined to comment.
Riau Airlines is presently only flying one aircraft, a Boeing 737-500 leased from ANI. Some of the regional governments that are shareholders in the loss-making carrier have been trying to withdraw, although the Riau provincial government is attempting to bring in new investors. But it is unclear whether it, or any new investors, will be willing to commit enough funds to bring about a 10-aircraft fleet by next January.
Mandala’s owners shut down the airline’s operations—at least for the time being—on Jan. 13, because they realized that if the carrier was to survive it needed to be recapitalized and to frame a new business plan.
“Over the past few months Mandala has been performing at a commercial loss and the situation now is such that we need to restructure the company to pave the way for entry of new investors,” says CEO Diono Nurjadin. “We are confident of attracting new investors to inject additional funds into the airline because once it is restructured, Mandala will be an attractive investment. There is huge demand for air travel in Indonesia and the market has lots of space for a well-defined and positioned low-cost carrier,” he adds. The South Jakarta Commercial Court granted Mandala a 45-day temporary reprieve on Jan. 17 so it can formulate and unveil a restructuring plan.
Prior to the shutdown, the airline had two Airbus A319s and three A320s on operating leases and an order for 25 A320s that were to be powered by International Aero Engines, say analysts from Ascend. The leased A319s were from International Lease Finance Corp. (ILFC), two A320s were let from Amentum Capital and the other A320 is from AerCap. Other leasing companies such as CIT and GE Capital Aviation Services had aircraft at Mandala but withdrew those earlier. The airline’s owners are U.S. investment firm Indigo Partners with 49%, and Indonesia’s Cardig International, which holds other aviation-related businesses such as local ground-handling company JAS Airport Services.
If Mandala opts for relatively cheap aircraft, such as Boeing 737-300/-400s, the purchase of five such aircraft will cost at least $20 million, according to an aircraft leasing business executive. If the other five aircraft in the fleet are retained on an operating lease, this will require a approximately $10 million more to cover security deposits and the first month’s lease rental. That is in addition to the money the carrier will need for working capital, the executive adds.
One of the difficulties Mandala faced was that its two shareholders did not always agree. Some industry executives say Indigo was sometimes reluctant to inject new capital into the business.
Another concern was that the owners brought in European executives to manage the airline, in an effort to make it a truly world-class carrier, but Mandala never achieved ‘economies of scale’ to cover the higher overhead that this required. Mandala also struggled in the face of intense price competition from other Indonesian airlines, which made it hard to achieve high yields, and it sometimes resorted to price discounting to maintain its market share. “But by doing this they undervalued their whole value proposition,” says one industry executive.
Mandala and any other commercial airline that plans to compete beyond 2012 faces a huge uphill battle going up against Lion Air and Garuda Indonesia. Lion has 56 jet aircraft, of which 43 are new Boeing 737-900ERs, with another 139 of that type on order, according to Ascend. Garuda now has a fleet of new Boeing 737-800s that has been well-capitalized, thanks to a February initial public offering.
There is more room in the turboprop market, but even in that sector, Lion Air’s subsidiary, Wings Air, boasts a fleet of nine ATR 72-500s with another six on order. And state-owned Merpati Nusantara Airlines, which has government funding, is adding new Xian Aircraft MA60s, already on order.

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