Overcapacity threatens global airline industry: Garuda CEO

Sunday, 9 Feb 2014 | 9:02 PM ET
Garuda: Drop in purchasing power hit yields
Sunday, 9 Feb 2014 | 7:23 PM ET
Emirsyah Satar, President & CEO, Garuda Indonesia, warns that the airline will have to enforce cost-cutting measures to boost yields, which have been hit by reduced purchasing power.

With emerging market economies slowing and low-cost carriers adding capacity at a rapid pace, the global aviation sector is at risk of overcapacity, warns Emirsyah Satar, president & CEO of Garuda Indonesia.

"I think what's going to happen is there's going to be a consolidation. You see it with airlines in Indonesia, some of them are already closing their routes – they will be consolidated. The market will react," Satar told CNBC on Monday.

(Read more: 'Full-fledged war' awaits India''s airline sector)

The Indonesian flag carrier is continuing with plans to expand its fleet despite posting a net loss of $22 million for the January-September period that was driven by high operating costs as a result of the rupiah's decline.

Emirsyah Satar, chief executive officer of Garuda Indonesia
Bloomberg | Bloomberg | Getty Images
Emirsyah Satar, chief executive officer of Garuda Indonesia

The airline will acquire 27 new aircraft this year to capture booming demand in the domestic market, said Satar.

He noted the airline plans to add more capacity to China, citing deepening investment ties between the two countries.

Coping with FX volatility

The weaker rupiah - which has lost 16 percent against the greenback over the past 12 months – is a challenge for Indonesia's airline sector, said Satar.

"Most of our operating costs, 65 to 70 percent, are in U.S. dollars. For airlines that don't have any international flights, they will be suffering," he said.

While jet fuel prices have softened, the weaker exchange rate is offsetting cheaper prices, he said.

In such an environment, Satar said yields – or the average revenue per passenger for every kilometer flown – are under pressure.

In order to cope with the challenging operating conditions, he said the airline is focusing on cost-cutting and increasing aircraft utilization.

—By CNBC's Ansuya Harjani. Follow her on Twitter: @Ansuya_H

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