REPUBLIKA.CO.ID, JAKARTA - Fitch Ratings has downgraded PT Garuda Indonesia Tbk's (Garuda) National Long-Term Rating to 'A-(idn)' from 'A(idn)'. The Outlook is stable. At the same time, Garuda's outstanding IDR 2 trillion bonds due in 2018 have also been downgraded to 'A-(idn)' from 'A(idn)'.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

The rating downgrade reflects Fitch's view of a sustained weakness in Garuda's financial profile, primarily driven by currency mismatch and high fixed-cost structure. Given the agency's expectation that Garuda will continue to face a difficult operating environment, Fitch does not foresee significant improvement in profit margins or overall business profile in the next two to three years.

About 50 percent of Garuda's revenue is denominated in or linked to the US dollar, whereas about 65 percent of its costs are denominated in USD. In addition, its low cost carrier (LCC), Citilink, has limited flexibility to adjust ticket prices to defend its margin amid tough competition in the Indonesian LCC sector.

This leaves Citilink especially vulnerable to depreciation in the Indonesian rupiah as its revenue is mostly denominated in rupiah while it main cost item, fuel, is in US dollars. Although fuel surcharges in effect since March 2014 will moderate margin pressures, the fact that more than 80 percent of the group's fleet is leased increases Garuda's fixed charges and hence, we think material improvement in its financial profile is limited.

In Fitch's view, Garuda will be able to gradually moderate its currency mismatches as its international routes increase and connectivity improves, especially now that the carrier is part of the Skyteam airline alliance. Nevertheless, given the fact that a majority of cash flows are domestic, substantial improvement in the currency mismatches is not expected within the rating horizon.

Garuda reported continued growth in total passenger traffic of 22.3 percent in 2013. Citilink's passenger growth outpaced Garuda's, with passenger traffic more than doubling to 4.2 million in 2013 from 1.7 million in 2012. 

While Garuda's overall liquidity position remains weak, Fitch acknowledges that it has significantly improved its funding access. Garuda is planning for a rights issue in the first half of 2014, and may divest a 40 percent stake in Citilink to raise additional capital. These initiatives, coupled with improved access to bank borrowings, are an important support to Garuda's weak liquidity profile.

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