Asia Times Online
June 13, 2001

http://www.atimes.com/se-asia/CF13Ae02.html

Southeast Asia

Indonesia's Garuda defying gravity
By Bill Guerin

JAKARTA - The Asian economic crisis hit regional carriers where it hurts. Hong Kong's Cathay Pacific registered its first loss in 20 years, Malaysian Airlines sold part of its fleet and deferred deliveries of new aircraft, Korean Air shelved major expansion plans and debt-laden Philippine Airlines temporarily ceased operations.

However, Indonesia's national carrier Garuda, still 100 percent government owned, faced a much worse scenario than most. Beset by a poor international image and widespread accusations of corruption and mismanagement, the drastic fall in tourist and business traffic should logically have caused the airline to go belly up. Revenues dropped 30 percent in the last quarter of 1997, wiping out profits for the year

Yet now, the airline carries almost 6 million passengers a year in 83 aircraft, employs upwards of 15,000 people and flies to 21 international destinations. Privatization is on the cards, expected in 2003, and Garuda now serenades Indonesian television viewers with a very frequent three-minute mini-oratorio where a classical tenor sings the praises of the new Garuda. The fleet comprises 42 aircraft, 24 Boeing 737s, seven Boeing 747s, six A-330s and five DC-10s after it decided earlier this year to stop operation of its five F-28s in a move to modernize its fleet.

Garuda is no stranger to struggle. When it acquired its first aircraft, a DC3,in 1948, Indonesia was still locked in a bitter struggle for independence from the colonial Dutch and some of the first flights ran blockades. Garuda Indonesian Airways was officially incorporated on March 31, 1950 but the road to progress was thwarted for most of the 32 years of the new order regime. The former first family and their cronies treated Garuda as their private company, using its services without bothering to pay and commercial contracts for insurance and the purchase of materials were often pushed down the throats of management.

The airline's first step early in the crisis were implemented when Robby Djohan took over the hot seat. In a long period of retrenchment and resizing and to staunch the bleeding and improve revenue, Robby returned 18 leased aircraft including MD-11s, AB-4s, Boeing 747-200s and Boeing 737s. He also reduced the number of employees from 13,684 to 9,480 and closed down 17 unprofitable routes to the United States and some destinations in Europe, and met a market need with the creation of one-stop Europe services.

Aircraft types were simplified to maximize load factors, flight frequencies were reduced and non-core businesses, the Garuda Maintenance Facility, ground handling, Garuda Information System, Garuda Medical Center and Garuda Aviation Training, were spun off. Debt of US$1.2 billion to various domestic and international creditors, including $610 million to the European Credit Agency (ECA) for leasing aircraft, $38 million to state-owned airport operators PT Angkasa Pura I and PT Angkasa Pura II, $9 million to the government and $460 million to various other parties, spurred on a rehabilitation program and by December 1999 Garuda had reached an agreement with the foreign creditors to reschedule its debt and extend the maturity to 16 years.

Improvements in Garuda's performance reflect in no small way the wisdom of appointing Lufthansa Consulting AG and Deutsche Bank in mid-1998 to assist with the corporate and debt restructuring programs. Lufthansa helped to re-engineer Garuda's commercial and operational aspects, while Deutsche Bank acted as its financial advisor. German support for Indonesia is legendary, stemming from the close government relationship with Suharto and B J Habibie - who was briefly president - and Lufthansa is aiming to become the first ever to inaugurate a nonstop flight between Indonesia and Europe.

Their Indonesia manager, Tobias Ernst, confirms that they are just waiting for demand. With its code-sharing agreement with Singapore Airlines, Lufthansa effectively has 10 flights in and out of Jakarta each week. Lufthansa kept its Indonesia operation on full power during the economic crisis from 1998 to 1999 and its Indonesian service is an important component of Lufthansa's Asia-Pacific operation, which accounts for the second largest source of revenue for the airline after its German domestic services. Garuda beware.

In December 1999 Garuda fought off a government plan to invite Singapore Airlines (SIA) to help manage the airline and acquire an equity stake. The airline was right to be wary of Singaporean manna from heaven. The country was the first to sign an "open skies" agreement with Indonesia, although having only one airport and access point, Changi. SIA operates more than 120 flights a week to Indonesia and works closely with the Department of Culture and Tourism and the tourism industry to encourage what SIA would term a mutually beneficial revival of tourist passengers inbound to Indonesia.

By June 2000, Garuda CEO Abdulgani, who succeeded Djohan, was ready to apologize to lawmakers from the influential Commission IV of the House of Representatives in a Parliamentary hearing. "I am sorry if I have been too slow in tackling KKN," he said, referring to the corrupt, collusive and nepotistic (KKN) practices that had inflicted state losses totaling $1.077 billion. This was not enough for corruption watchdog, Indonesian Corruption Watch (ICW), which fired off a statement saying, "Garuda's losses are due to poor performance of the management as well as KKN practices across the board, including in aircraft leasing and catering services." At the same time it called for a State Audit Agency (BPK) investigative audit of Garuda.

ICW urged the government to seek evidence from Garuda's partners, such as Airbus Industry and a consortium of banks made up of Morgan Grenfell, Banque Paris, Credit Lyonnais, DGZ, KfW and Bank Ekspor Indonesia. Suspect projects were the leasing of four Airbus A330-300s from a joint venture between the Japanese Yamasa Corporation and the banking consortium, the leasing of two Boeing B747-200 jets from the Japan Fleet Service, the leasing of a Boeing B747-400 from the International Lease Financing Corporation and a maintenance agreement on 17 Fokker F-28s with the other state-owned air carrier Merpati Nusantara and private firm PT Sakanusa Dirgantara.

ICW said that corruption in the Yamasa and Morgan Grenfell-led leasing project started in 1989 when Garuda, led by then company president Soeparno, leased nine Boeing B300-300s without performing proper feasibility studies and Garuda officials colluded with the two lessors to mark up the contract so that Garuda had to pay more, inflicting losses of about $1 billion in the process.

Abdulgani, however, pointed out that his current priority was to keep Garuda afloat, and, in the event, little more has been heard about the sins of the past.

A secure future is still some way off, though. Beset by the political madness in Jakarta which causes the rupiah to fluctuate wildly against the dollar, the audited 2000 figures show the extent of the problem for an airline with almost 80 percent of its operating costs in dollars.

Garuda's foreign exchange losses in 2000 were some 598.41 billion rupiah ($53 million) due to the weakening of the rupiah against the US dollar. Net profit was down 90 percent to 53.24 billion rupiah due to this sharp increase in foreign exchange losses. Operating revenues rose 22 percent to 9.28 trillion rupiah from 7.54 trillion rupiah, while operating expenses increased 15 percent to 8.41 trillion rupiah from 7.31 trillion rupiah. This gave them net operating revenues of 873.42 billion rupiah, an increase of 75 percent from 231.83 billion rupiah in 1999. Conversely, In 1999, when the rupiah was relatively more stable, the airline recorded a foreign exchange gain of 114.34 billion rupiah.

On the domestic front, amid stiff competition from newcomers, Garuda will focus on operating more flights to routes categorized as "fat" instead of expanding. Good thinking, as the Jakarta-Surabaya, Jakaying this blatant perk by saying they want to make it easy for their international passengers to transit to other cities in Indonesia.

AWAIR CEO, Rachmat Soebakir, gave a wake-up call to Garuda and SIA/Silk Air in disclosing that the company wants to be a "generator" for the domestic airline industry - bringing in more and more international tourists to fly all over Indonesia. AWAIR sets its fares lower than Garuda's but above those of other airlines. "Our strategy is to grab international passengers and bring them to fly in Indonesia to boost our passenger numbers on domestic routes," Rachmat says. Incidentally, President Abdurrahhman Wahid is a shareholder.

Garuda should retain pole position, considering that out of 106 aircraft flying Indonesia in 1999, Garuda had 43 (with a total of 8,340 seats) compared with state owned subsidiary Merpati's 29 (1,609 seats) and the rest from Merpati, Dirgantara, Bouraq and Mandala.

Last year total domestic seat capacity was some 10 million. By the end of this year, with the new airlines, this will increase to 15.56 million, including 13.6 million seats available from Garuda and competitors Bouraq, Dirgantara, Mandala and Merpati and the rest from the newcomers.

Domestic passenger traffic is almost 8 million now, and with a projected annual growth rate of 10 percent, there will be a huge oversupply of domestic seat capacity, but the market potential remains enormous, particularly if and when the economy recovers. Passenger totals of 13 million are forecast for 2008, levels already achieved in 1996 and 1997. Political instability apart, there are reasons for optimism, such as the increased traffic expected as a result of regional autonomy and a 6.6 percent annual growth in Asia-Pacific air traffic.

Garuda's future, like that of Indonesia, will depend much on the mad politicians in Jakarta, who purport to represent their people and country, drawing back from the brink and deciding that the economy is much more important than their own self-centered andgreedy headlong rush to disaster.

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