5 PORTER FORCES ANALYSIS

1. Industry Competitors or Segment Rivalry Air transportation industry is a business that has tight competition. This tight competition is one of the implications of the deregulation of the domestic airline industry by the Government of Indonesia since 2000, It certainly opened up competition and great access to get into the airline industry in Indonesia. Tight competition marked by the increasing number of domestic airlines and international airlines who operate and develop routes or air service in all airports in Indonesia. Domestic airlines in Indonesia, such as, Merpati Nusantara Airlines, Indonesia AirAsia, Lion Air, Kartika Airlines, Batavia Air, Riau Airlines, Wings Air, Trigana Air Service, Travel Express, Sriwijaya Air, Linus Airways, Republic Express Airlines, Cardig Air, Manunggal Air Service, Indonesia Air Transport, Kal Star Aviation, Megantara Air, Pelita Air Service, and Tri-MG Intra Asia Airlines. While some international airlines including Singapore Airlines, Malaysia Airlines, Air Asia Malaysia, China Airlines, Korean Airlines, and Thai Airways.

Garuda Indonesia is facing competition from both different airlines; Full service carrier/FSC and airlines low cost carrier/LCC. Based on the law on aviation and Ministerial Decision No. 26 in 2010, full service carrier was declared as a business entity scheduled commercial air transport in the running of its activities with the maximum standard,such as provision of food and drink, snacks, and the executive lounge facilities for business class and first class .While low cost carrier is described as a business entity which scheduled commercial air transport in conducting its activities with the minimum standards, such as there is only one (1) class of service, without the provision of food and drink, snacks, executive lounge facilities, and charged for baggage.

The main competitor for Low Cost Carrier is Lion air, To address competition among with LCC industry,especially with Lion air, each airline has its own resources differ from each other. Garuda Indonesia is the established airline

company that acts as a flag carrier, has the profesional experience that much more from lion air. With this condition, the strategic business of Garuda Indonesia focused on service, comfort, security, punctuality and prestige (Prestige) on board. It is a big mistake if the Garuda Indonesia participated in competition with the concept of cheap flights. Furthermore, to anticipate this competition, Garuda Indonesia is develop Low Cost Carrier airlines with Citilink.

The main competitor of Garuda Indonesia for Full Service Carrier in International Market is Malaysian Airlines, and Thai Airlines. Garuda

Indonesia faced competition with other airlines based on several factors such as price, schedule, route network, quality of service, the type ,age of the aircraft and revenue. The Competitor FSC Based on : Revenue. No 1 2 3 Name of airline Garuda Indonesia Malaysian Airlines Thai Airways Revenue in 2012 $ 2,293,80 $ 4,296.88 $6,027.871

Source: Hoover The Competitor FSC Based on : Route network and Number of Fleet 2012 No Name airline of Route of Desrination Number of Type Fleet Age 1 Garuda Indonesia 48 Route (Domestic and 87 Aircraft, International) 6.5 years Boeing and and Aircraft of

Airbus, AND Next Generation

Malaysian Airlines

80 Route (Domestic and 127Aircraft, Boeing International) 12.2 years Airbus Boeing Airbus Jet

and

Thai Airways

60 Route (Domestic and 90 Aircraft, International) 10 years

and

The Competitor FSC Based On: Number of Passenger 2011 No Name of Airlines 1 2 3 Garuda Indonesia Malaysian Airlines Thai Airways Passenger 17.10 17.04 18.04 Load Factor 75.2% 74.5% 76.6% ASK 32.5 Billion 55.8 Billion 55.6 Billion

In the face of increasingly competitive in the airlines industry, Garuda Indonesia continues to innovate for business growth. One of them by launching an aggressive expansion plan called Quantum Leap. Quantum Leap include achieving other competitive factors faced by the aviation industry. Quantum Leap plans to doubling the aircraft fleet and increase passenger numbers by adding routes to the destination domestically and internationally. In addition, Garuda Indonesia is also developing new services based on the concept of hospitality and uniqueness typical of Indonesia's called Garuda Indonesia Experience. This service covers a variety of aspects of the culture, cuisine and hospitality Indonesia.

Furthermore concluded that Garuda Indonesia can survive the competition in the airlines industry in Indonesia, since the company has done a variety of ways to deal with the major competitive factors in the airline industry like Improving service quality with brand FSC in Garuda Indonesia, the company that developed the LCC Citilink service, continue to innovate for business growth by adding and rejuvenating the fleet, adding routes, and increasing the quality of service for customers, is expected to further strengthen the position of Garuda Indonesia as a leader in the airline market in Indonesia, and also we can concluded that Garuda Indonesia is the growing company airline for the next year ahead. 2. Potential Entrants As a result of the competitive rivalry in the airline industry, Garuda Indonesia faces the entry of new competitors from both domestic and international

markets. These new competitors are mostly low-cost airlines (low cost carrier / LCC). The entry of new competitors, especially LCC cause some changes in the airline industry. Experienced changes such as entry of new competitors has increased the seating capacity of passengers and increasing price competition on routes that have been available. New competitors low-cost carrier (LCC) has expanded and increased flight frequencies to be able to make lose market share of Garuda Indonesia in 2009.

PT Citilink Indonesia is a subsidiary of PT Garuda Indonesia (Persero) engaged in the transportation scheduled commercial low-cost carrier (LCC). Development of LCC service via Citilink is a way for the company to compete with new competitors and gain market share of the economy that has been dominated by competitors. So with developing Full Services Carrier industry namely Garuda Indonesi Low Cost Carrier services industry with Citilink, the company is expected to be able to compete with new competitors and market share in the Indonesian airline industry. And for now, Full Service Carrier airline industry in Indonesia just held by Garuda Indonesia, so, if viewed from the FSC industry in Indonesia, the threat of new entrants from local FSC is very weak.

High capital requirements and large amount of investment is a barrier for number of new entrants to enter the airline industry. Even if new entrants have the capital, Government of Indonesia has said it will ensure the maximum protection to the national carrier. The protection given by the government is only allowed international airlines fly regional routes to and from the airport from abroad the same direction (point-to-point) to the airport of origin, such as Soekarno-Hatta in Jakarta, Polonia airport in Medan, Ngurah Rai Airport in Denpasar, Juanda Airport in Surabaya, and Hasanudin Airport in

Makassar. Foreign airlines will not be given permission to fly domestic routes.

3. Substitutes Threat Product substitution of air transport is sea and land transportation services. The use of replacement transportation services may be an option for the customer if a short distance and lower cost than using air

transportation. Ground transportation

services that can be a replacement

product is rail, bus or car. Customers who prefer to use train mostly people who wants to travel in Java island, because there is a rail service. Meanwhile, people who choose to travel by train, bus or car it is because they travel in short distance. However, the current high level of mobility that has resulted into people to choose air transportation for their activities. Because air transportation more faster than ground transportation. In addition, many airline, such as Garuda Indonesia provide a promo ticket to travel so affordable to low and medium passenger to buy.

4. Bargaining Power of Supplier Suppliers are partnership with the airlines are those that supply the raw materials necessary for the company to carry out the operational activities of the company. PT Garuda Indonesia Tbk has some suppliers that support operations such as PT Angkasa Pura, fuel suppliers, and manufacturers of aircraft and aircraft engines. PT Angkasa Pura is the state-owned enterprises that provide airport operations in Indonesia. PT Angkasa Pura provides a range of services for Garuda Indonesia to support its operations. Services supplied by PT Angkasa Pura (Limited), which includes the use of airport facilities such as ticket sales and rent office space services, air traffic control, ground control services and other aviation services. With a variety of services and service received, Garuda Indonesia received a bill each month for the use of facilities and services at any airport in Indonesia where the company operates. The fuel is needed in the implementation of airline operations. Fuel suppliers Garuda Indonesia consists of Pertamina and several international

suppliers. Aircraft fuel used by Garuda Indonesia amounting about 70% and it is derived from one source, namely Pertamina.Fuel supply agreement with Pertamina lasted for five years where fuel pricing refers to the price of domestically produced post Pertamina including discounts, which are determined based on their own policies. While the agreements with several international suppliers are valid for one to two years where the international fuel pricing refers to the average base price of oil, published by Platts

Singapore through based on the Mean of Platts Singapore (MOPS), Mean of Platts Arabian Gulf (MOPAG), the Arabian Gulf, Saudi Arabia and the Netherlands, which was published by ARAMCO or Rotterdam.

Garuda Indonesia also require suppliers of aircraft and engines that support the provision of spare parts related to flight operations of the company. Garuda Indonesia using a fleet of two aircraft manufactured by Boeing and Airbus suppliers. While the machines used by aircraft manufactured by CFM International SA (Joint venture between Snecma (SAFRAN Group) of France and General Electric in the United States), and Rolls-Royce Plc. The purchase of a fleet of aircraft and spare parts takes Garuda Indonesia carried out in accordance with the purchase agreement. So that Garuda Indonesia may get approval at a reasonable price with best quality spare parts with the suppliers i.e. Boeing, Aibus, CFM International S. A, and Rolls-Royce Plc.

Therefore it is important for Garuda Indonesia to choose the right supplier that can support corporate flight operations. Suppliers are expected to work together in developing the operational quality and service Garuda Indonesia for provide the supply of raw materials and spare parts required with the best quality, on time, and in accordance with the agreements.

5. Bargaining power of Consumer Customers Garuda Indonesia can be categorized into two groups: customers who use domestic and international routes. As premium airlines, consumer who used Garuda Indonesia as a FSC in domestic flight routes that a

customers who are on the middle to top category. Thus, not all people can use the services of Garuda Indonesia, company provided options with LCC Citilink service aimed at consumers who use domestic routes that are on economy class. Moreover, to serve the customers domestic routes, the company has developed the FSC and LCC services that can reach the entire market share in the domestic avirline industry.

Customers who using international routes

such as Hajj passenger,

government, and other consumers who use the service airline Garuda

Indonesia. Hajj passenger are fix consumers of international air service Garuda Indonesia every year. Flight service for Hajj passenger make a great contribution in non-flight schedule in Garuda Indonesia.

5 Forces Porter Model in Garuda Indonesia

Potential Entrants: Low Cost Carrier industry (local and international)

Competitive pressures coming from potential new entrants to seize the market (consumen)

Bargaining Power of Supplier : -PT Angkasa Pura - PT Pertamina -Boeing and Airbus -CFM International S.A and Rolls Royce Plc

Industry Competitors or Segment Rivalry -LCC : Lion Air -FSC : Malaysian airlines, Substitutes Threat: Thai Airline
Land transportation : Rail, Car, Bus,Motorcycle Sea transportation: Cruise

Bargaining Power of Consumer : - Domestic route customer - International route customer i.e Hajj Passenger

Competitive pressures coming from businesses market (competitors) to seize the market (consumers)

No
1

Porter Analysis
Potential entrants

Type of risk
Low risk

Description
Full Service Carrier airline industry in Indonesia just held only by Garuda Indonesia, so, if viewed from the FSC industry in Indonesia, the threat of new entrants from local FSC is very weak. Garuda Indonesia is Facing competition with both local and international airline as a low cost carrier and full service carrier. Nowdays, mobility of people is higher than few years ago, travelling with air transportation is the best option to save time than if using land or sea transportation. Customer facing a trade off : Price or Time. Garuda Indonesia made a long-term contract with their

Industry Competitors or Segment rivalry

High risk

Substitutes threat

Low risk

Bargaining power of Supplier

Medium risk

suppliers to reduce the risk regarding unstable future condition. 5 Bargaining power of consumer Medium to High risk For fix scheduled flights consumers they have power to make a choice whether to use the services of Garuda Indonesia or not . They can easily switch to other airlines wit low to none cost. But for non fix scheduled flight, like Hajj passenger, the demand for passenger seat Hajj is always increase every year.

Competitive rivalry in Garuda Indonesia affected by the Porter's five forces. It can be seen that the threat of new entrants come is low risk, bargaining power of suppliers is medium risk, bargaining power of buyers is medium until high it depends on the type of passenger,intensity of segment rivalry is high and the threat of substitute products is low. Thus, it is concluded that Garuda Indonesia industrial environment is quite attractive. Garuda Indonesia strategic success depends on the mission and competitive advantage. Therefore, the main purpose of Garuda Indonesia is to strength their markey in Indonesia and expand their market globaly.