Pilot pay dispute more turbulence for Garuda

Southeast Asia
http://www.atimes.com/atimes/Southeast_Asia/EB01Ae04.html

Feb 1, 2003

Pilot pay dispute more turbulence for Garuda
By Bill Guerin

Turbulence over pilots' salaries is shaking up Garuda's efforts to soar into clear business skies as Indonesia's national carrier tries to avert a strike that would disrupt flights.

Garuda pilots have agreed to hold off the "labor slowdown" and negotiate with manpower minister Jacob Nuwa Wea about wages.

From the outset, however, Garuda has played hardball, claiming it cannot afford the Rp47.1 million to Rp88.8 million (US$5,300-$10,000) a month demanded by the pilots because of its huge debt obligations. Amid veiled threats of bringing in foreign pilots to break any strike, the airline countered with an offer of between Rp13 million and Rp24.6 million a month ($1,460-$2,770). These figures are all take-home pay, as the company pays the taxes.

Still 100 percent government-owned, Garuda operates 41 aircraft, carries almost 6 million passengers a year and employs about 9,000 people. It flew about 40 percent of last year's lower-than-expected total of 5 million domestic air travelers, taking them to 21 domestic destinations.

The slim-down from 83 aircraft and a workforce of 15,000 people over the past two years is part of the shakeup that followed the onset of the regional financial crisis. In 1998, with negative capital of almost $235 million, $1.8 billion in foreign and domestic debts, and rampant corruption, Garuda was already technically bankrupt.

The carrier incurred massive losses partly from operating unprofitable routes to the United States and Europe. Reducing several of these routes led to over-employment and excess flight capacity. A more traditional way of losing money was from deep-seated corruption within the airline. Malpractice and lack of supervision caused losses of $721 million between 1995 and 1999. As with many other Indonesian state enterprises, opacity, not transparency, ruled.

Garuda is no stranger to elite and government control and was never a commercial enterprise proper. For most of the 32 years of the Suharto regime, the former first family and their cronies treated the airline almost as their own private company, bullying management into commercially unsound practices that benefited only those who rented the Garuda cash cow.

One case exposed by Indonesian Corruption Watch (ICW) was when Garuda, led by then company president Soeparno, leased nine aircraft without proper feasibility studies beforehand. Garuda officials colluded with the two lessors involved to mark up the contract so that the carrier had to pay more, inflicting losses of about $1 billion in the process.

Suharto's son Tommy, along with Chinese timber tycoon Bob Hasan, who are now in adjoining cells in prison, also succeeded in bringing grief to the national flag carrier. In 1989 the pair bought a majority share of a poorly run charter airline from a holding company controlled by the armed forces, Sempati Air. This was built, by sheer force of collusion, corruption and nepotism, into the first privately owned Indonesian airline to break the Garuda monopoly of international routes and jet-powered aircraft.

Garuda domestic airfares had been pegged at artificially low levels by legislative decrees, most international routes lost money and without massive government subsidies the carrier would have gone belly-up.

Hit by a drastic fall in tourist and business traffic brought on by the Asian financial crisis, the government pushed Garuda for a new strategy of retrenchment to stop the bleeding and start filling up the coffers again. The steep fall of the rupiah during the crisis had caused the airline's dollar-based debt to soar and its passenger load factor to plunge.

Almost 80 percent of its operating costs at the time were in dollars and Garuda made sizable losses (and gains), purely on the vagaries of a wildly fluctuating rupiah. In 1999, when the rupiah had settled down into some semblance of stability the airline recorded a foreign-exchange gain of Rp114.34 billion.

Robby Djohan took over the helm in June 1998 and brought into force a new paradigm for the ailing airline, and a total restructuring plan meant to ready it for privatization in 2003.

Historically, 1998 was the year of consolidation and averting bankruptcy. The year 1999 would target rehabilitation proper and an improvement in its overall operation performance. The year 2000 would see a badly needed focus on service, 2001 would be notable for improvements in efficiency and finally, in 2002, Garuda would be ready to expand its routes, products, services and its fleet and reopen several of its international routes that were closed.

Next came an interim restructuring plan, which saw a sharp reduction in international flights to Bali, especially from its major markets Australia, Europe and Japan, and hefty discounts for international and domestic travelers to the island.

In yet another management reshuffle a few months later, Djohan was poached by the government to take over the helm at Bank Mandiri, a new bank being formed out of the merger of four state-owned banks.

Abdulgani, onetime chief of listed Bank Duta, who had been learning the ropes from Laksamana's predecessor, Tanri Abeng, became the new captain at Garuda in October 1998.

By June 2000, Abdulgani told lawmakers from the powerful Commission IV of the House of Representatives in a parliamentary hearing that he had been able to do little about tackling KKN (corruption, collusion and nepotism), that had caused the airline, and thus the state, losses exceeding $1 billion. He excused his failure by saying his main priority was to keep Garuda afloat.

Abdulgani, and Djohan in his short tenure, virtually turned the airline around and got it flying straight and level. The poor international image was improved by better standards of safety and reliability, expediting the check-in process, and better communication with customers, which, in turn, heralded a new, though unfamiliar, era of customer loyalty to the national carrier.

The payoff came with international awards for outstanding punctuality and safety records at the turn of the century. This was an impressive achievement but other parts of the master plan dug even deeper. Heavy layoffs, a restructuring of employee benefit and incentive schemes, and a complete rehash of domestic and international routes was quickly under way.

Abdulgani left in January last year but was not replaced until May. State Enterprises Minister Laksamana Sukardi, a senior member of President Megawati Sukarnoputri's Indonesian Democratic Party of Struggle (PDI-Perjuangan), had been pressing for his brother Samudera to get the post.

After months of public outcry and cries of nepotism the government appointed the present holder, Indra Setiawan to the post.

On the domestic front, amid stiff competition from newcomers, Garuda has captured 40 percent of the market through a strategy of going after the "fat" routes, while leaving the loss making distant domestic destinations and other pioneering efforts to the upstarts.

Garuda's competitors include a number of new players as well as the already established airlines, including Merpati Nusantara Airlines, Bouraq and Dirgantara Air Service who, along with the national flag carrier, control over 60 percent of the domestic market. The current 15 airlines fly a total of 153 aircraft. In 1998, six airlines operated 106 aircraft.

Most of the action centers on the more lucrative routes including Jakarta-Surabaya, Jakarta-Denpasar, Jakarta-Yogyakarta, Jakarta-Semarang, Jakarta-Solo, Jakarta-Medan, Jakarta-Makassar, Jakarta-Balikpapan and Jakarta-Manado, where Garuda claims a load factor of between 70 and 75 percent.

Bali Air, launched last September, was the first low-cost "no-frills" airline in Indonesia and achieves an average load factor of 70 percent on its premier Jakarta-Surabaya route. Star Air, launched the year before, claims an average load factor of 80 percent on its Jakarta-Medan route.

Garuda has ignored the domestic fare war sparked off by competitors, claiming it has never used price as a marketing tool. Just as well, as industry sources recently warned that the current discounts of up to 50 percent on domestic fares may eventually lead to the demise of the airline industry, because revenue from flights is well below the minimum required operating costs.

Unlike Europe and North America, where a load factor of 35 percent can commonly generate a profit, experts say that an Indonesian carrier with load factor of 135 percent may not even reach break-even point.

Unfortunately, in its fourth year of the program, when Garuda planned to revamp its entire service, the bombers struck in Bali (see Bali tragedy clips Garuda's wings, November 13, 2002. Garuda's international flights took the brunt of the Bali bombing as 60-70 percent of its flights land at or depart from Denpasar, Bali.

A year earlier Garuda had farsightedly set up a second hub in Denpasar for its international flights, in addition to its existing Jakarta hub now used by Garuda only for domestic destinations.

Management had worked it out that foreigners visiting Indonesia had been reluctant to disembark in Jakarta due to security reasons and set up the Bali hub to receive direct international flights to Denpasar, servicing 21 international routes from Japan, Australia, and Europe.

The Bali bombings hit the national flag carrier where it hurts. International sales at the time made up some 60 percent of Garuda's total revenue and the airline had to shift rapidly into cost cutting mode to limit the impact on its profitability and its ensuing capacity to meet debt repayments.

The average passenger load factor on Garuda international flights quickly fell below 40 percent, half that before the October 12 bombings.

Post-Bali, Garuda stepped up flights to Shanghai and Guangzhou as well as Taipei to underpin the focus on domestic and Asia-Pacific routes. The Shanghai route, announced this week, is Garuda's third to China after Guangzhou and Hong Kong, and is expected to help expand market access to other cities in China, such as Beijing and Xiamen.

Garuda's position among the 20 or so international carriers with hubs in Asia remains weak. Like other government-owned airlines such as Malaysia Airlines and Philippine Airlines, they fight an uphill battle to poach passengers from the stronger, private players, such as Singapore Airlines, Qantas and Cathay Pacific.

The company has recently handed back three leased 747s that serviced routes to Australia, Japan and Europe but on the Jakarta-Denpasar route have upgraded their aircraft to wide-bodied jets.

Though the carrier is now under professional management, political interference looms at every turn and the debt needs to be restructured yet again.

Setiawan said just after the Bali incident that Garuda was not in any rush to seek a rescheduling of its $1.2 billion debt, preferring to rely on the understanding of creditors, the biggest of which is the European Credit Agency (ECA). Garuda owes $610 million to the ECA. "Hopefully, creditors will understand our situation and appreciate our efforts to survive," he said.

The pilots, pressured by the airline and politicians, may also need to appreciate the airline's determination to survive.

Garuda say their pilots currently get between Rp7.9 million and Rp22.8 million ($890-$2,570) a month. Only about 6.6 percent of Garuda employees are pilots but their salaries account for a fifth of the airline's monthly salary budget.

Even if the demands were met in full it would only put pilots on a par with the recently announced Jakarta city councilors' salaries of Rp90 million a month. Hardly a matter of pride for an airline that has pulled itself back into relatively clear skies against all odds.

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