Garuda Tumbles as Much as 23% in Jakarta Debut on Rising Fuel Outlook

PT Garuda Indonesia, the nation’s biggest airline, plunged on its trading debut in Jakarta amid concern that rising fuel prices will damp industry profit. 

The stock dropped as much as 23 percent to 580 rupiah on the Indonesia Stock Exchange from its initial public offering price of 750 rupiah. Garuda last month completed a 4.8 trillion rupiah ($538 million) IPO at the bottom of the price range. The shares traded at 640 rupiah at 11:30 a.m., local time. 

Chief Executive Officer Emirsyah Satar plans to use proceeds of the share sale to boost the carrier’s fleet to 153 planes by 2015 and add new routes. The plan for new airplanes comes as higher fuel costs and slowing economic growth this year may slash profit at airlines worldwide 40 percent, according to International Air Transport Association estimates. 

“Investors see an increase in global oil prices impacting Garuda’s profit,” said Norico Gaman, head of research at PT BNI Securities in Jakarta. “Garuda can’t increase ticket prices or it won’t be competitive with other airlines. That’s why investors see the fair price for Garuda shares between 500 and 600 rupiah.” 

Profit at airlines globally may drop to $9.1 billion this year from $15.1 billion in 2010, according to a December IATA forecast. The industry is expected to face “tougher” conditions this year than in 2010, the trade group’s Chief Executive Officer Giovanni Bisignani said. 

Oil prices have climbed 16 percent in the past year based on futures traded on the New York Mercantile Exchange.

Initial Share Sale

Garuda and shareholder PT Bank Mandiri on Jan. 26 sold 6.4 billion new and existing shares at the bottom of a price range that went as high as 1,100 rupiah. PT Bank Mandiri, which owned about 30 percent of the 26 percent stake Jakarta-based Garuda sold, raised about 1.5 trillion rupiah in the sale, with the airline taking the rest.

The carrier, which started flying in 1949, is expanding after signing a final debt agreement with European export credit agencies in December. Garuda resumed flights to Europe in June for the first time in six years after the European Union eased a ban on some Indonesian airlines following a series of fatal crashes. 

“It is normal that the share price is down, as the market is in a bearish trend,” Satar said at the Indonesia Stock Exchange today after trading started. “The more important thing is we’re going to use the proceeds for expansion. This will make Garuda better.”

Five-Star Quest

Garuda aims to achieve a five-star rating from London-based Skytrax in three years, the highest ranking awarded by the research company and one level up from its current status, according to the carrier’s 2009 annual report. Garuda, which flies to 19 international and 31 domestic destinations, was named the world’s most-improved airline last year in a traveler survey by Skytrax. 

The airline also plans to expand its low-fare unit, boosting the fleet to 25 planes from six, Satar said on Jan. 12. Asian budget travel is growing at about 20 percent annually and will probably continue at that pace for at least seven years, according to estimates by Jetstar, the budget arm of Australia’s Qantas Airways Ltd. 

Citigroup Inc., UBS AG, PT Bahana Securities, PT Danareksa Sekuritas and PT Mandiri Sekuritas managed the Garuda share sale. Source: Bloomberg