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Garuda Indonesia left to the
wolves
By Bill Guerin
JAKARTA
- Indonesia's two state-owned airlines, flag carrier
Garuda Indonesia and subsidiary Merpati Nusantara, are
flying into yet more doom and gloom. Both are seeking
debt restructuring and are lobbying the government for
further assistance as they face harsh competition from
fledging airlines.
Garuda carried 7.3 million
passengers in 2002 on its 53 aircraft, some 40 percent
of the nation's air travelers, but it is still in dire
straits despite a 2001 debt restructuring. The
state-owned carrier owes some US$900 million to
creditors, the biggest of which is the European Credit
Agency, and needs around $120 million per annum to
service the debt.
Chief executive Indra Setiawan
warned last week that the company could have difficulty
making a $60 million payment due in December. Garuda's
cash reserves are down to $35 million after the slump
across the region this year and the airline had hoped
asset sales would raise cash to help with this payment.
Setiawan says that he wants to hive off a 20-25
percent stake in the wholly-owned maintenance unit PT
Garuda Facility Aero-Asia (GMF-AA), for $40 million to
$50 million. GMF-AA employs more than 3,000 people and
is to be sold off to comply with Jakarta's new four-year
public sector master plan that forces state-owned
companies to focus on their core businesses.
SIA
Engineering, the aircraft maintenance arm of Singapore
Airlines, has denied reports by Setiawan that it has
expressed interest in buying a stake in GMF-AA, although
the denial will be taken with a pinch of salt by many
given Singapore's recent history of investing wholesale
in Indonesian strategic industries. SIA Engineering
already has a joint venture agreement with PT Jasa
Angkasa Semesta to provide aircraft maintenance services
at major Indonesian gateways, including Jakarta,
Denpasar, Surabaya and Medan.
The severe acute
respiratory syndrome (SARS) outbreak, which followed the
Iraq war, hit all airlines in the Asia-Pacific.
Malaysian Airline Systems (MAS), which operates the
newly-revamped national carrier Malaysia Airlines, is
also feeling the pinch. Their first quarter net loss
doubled from a year ago, reflecting the same dual impact
of SARS and the war in Iraq. MAS cut more than 700
flights to SARS-affected areas, just as the airline had
chalked up its first-ever profit after a five-year run
of losses.
The same factors also inflicted a
heavy toll on Singapore Airlines (SIA), Asia's largest
airline by market value, and formerly one of the most
profitable in the world. SIA was forced into the red for
the first time in its history with a S$312 million
(US$177 million) net loss in the first quarter to June.
It is now in the middle of a four-month retrenchment
exercise, the first since it was formed in 1972. Though
SIA is the national carrier of Singapore, it is a
private enterprise and cannot, like Garuda and MAS, go
to the government if it encounters financial
difficulties.
Indonesia, with more than 17,000
islands and a massive land mass, would do well to
consider the thinking behind Malaysia's approach to the
airline sector, after Kuala Lumpur bit the bullet and
treated aviation as a special case. This resulted in MAS
being able to turn its profit.
Like Garuda, MAS
now concentrates on the operational side, in line with
the same concept of having separate autonomous business
units for greater focus and effectiveness. But the MAS
model, where the company is now only the operator and no
longer the aircraft owner, may not appeal to Jakarta
because of the need to take over much of the debt burden
of its two national airlines.
With a budget
still in deficit and election year approaching, the
chances of any priority being given to their fate are
remote. After all, consumers, or voters, are happy
enough with the results of fare wars that are bleeding
Garuda and Merpati dry.
MAS argues that there is
a strong case for even more government participation, to
strengthen staying power, and, underwritten by the
government, free them from the vagaries of market
forces.
Jakarta's approach, however, has left
Garuda and Merpati to the wolves. Tariff wars, spawned
by deregulation and a ministerial decree that
unaccountably regulates only the highest price but not
the lowest, leave Garuda exposed to the new kids on the
block who are fast eroding the carrier's 50 percent
share of the local market.
The government has
pared bureaucracy to the bone. Starting an airline in
Indonesia is as easy as opening a bank was in the New
Order days. An air operation certificate from the
ministry is granted on proof that the would-be airline
has at least $30,000 as initial capital. There are no
regulations on minimum investment or the number of
aircraft needed.
Neither is there any allocation
or control of routes. Operators can decide routes for
themselves, local or international, without any
reference to the government or even the Indonesian
National Air Carriers Association (INACA). New companies
are even allowed to fly the so-called "wet" (highly
profitable) routes.
No fewer than 74 airlines
are registered with the Ministry of Transport, but only
19 remain in Indonesian skies now, all engaged in a
bitter and protracted battle for a domestic market
expected to yield 9.7 million passengers this year.
Merpati was forced to serve pioneering routes to
the country's remote regions as busy and profitable
routes were dished out to airlines owned by the family
and cronies of former president Suharto, most notably
"Tommy" Suharto's Sempati, which folded in 1999.
It was also forced to buy CN-235 aircraft
assembled by Dirgantara Indonesia, the brainchild of
another former president, B J Habibie, when he was
minister of research and technology.
Reeling
from stiff competition on busy routes, Merpati once
again has to concentrate on flying routes that other
airlines consider unprofitable.
The airline has
asked the government to bail it out, so far to no avail,
with an injection of at least Rp 200 billion (US$24
million) to improve its performance. Merpati lost Rp 40
billion in the first quarter of this year, a massive
drop from Rp 43 billion in total profits for 2002. It
still owes about Rp 1 trillion, most of it to the
Indonesian Bank Restructuring Agency.
With
Garuda ordered to concentrate on its core flight
services, it may be time for Jakarta to bring back the
bankers. A month after Suharto stepped down in May 1998,
banker Robby Djohan, local hero and favorite of the
International Monetary Fund, was brought in by then
state enterprise minister Tanri Abeng to turn Garuda
around. The move came in the nick of time. With income
mainly in rupiah and costs mostly in US dollars, Garuda
was about to be grounded.
Though the airline
posted losses of $46.4 million that year, with the
assistance of Deutsche Bank, which lobbied no less than
50 foreign and domestic creditors, Garuda rescheduled a
total of almost $1 billion in foreign debt.
This
was no easy task, given the track record of an airline
that had never conducted its business transparently and
which was known to have never published audited
accounts. The government had enforced low domestic
airfares, using subsidies to keep Garuda in the air.
Though professing to know little about airlines,
Djohan, in less than six months, stemmed the bleeding,
sorted out the cash flow, streamlined the human
resources (Garuda's workforce was downsized from 13,684
to 9,480 workers) and slashed unprofitable routes in a
comprehensive reorganization of the carrier's domestic
and international routes.
The fleet was trimmed
down to size and surplus leased aircraft were handed
back. Lufthansa was called in to improve management and
upgrade services. The two were bent on "re-engineering"
Garuda into a viable entity ready for privatization,
which was the new buzzword of the reformasi
(reformation) era. In the first few days after Djohan
took over the helm at Garuda, several costly contracts
with companies connected with Suharto cronies and family
were scrapped.
Djohan went on to become the
architect of the country's biggest-ever banking merger
when four insolvent state-owned banks were merged into
the new Bank Mandiri, which is in effect 30 percent of
the banking sector.
Just for good measure,
Djohan had managed to create a significant boost in
image for an airline that had been generally looked on
as in the "avoid if you can" category, at least in the
eyes of foreign travelers.
The airline, born
shortly after Indonesia's independence in 1946, is,
however, a symbol of national pride to Indonesians. As
with so many other state owned cash cows, government
interference in Garuda had been rife throughout
Suharto's New Order era. Money drained away into the
pockets of senior managers when contracts were marked
up. Garuda paid way over the odds for its leasing deals.
Djohan's Man Friday at Garuda was another
well-known banker, Abdulgani, who eventually took
control when Djohan moved on to Bank Mandiri. Setiawan
last year replaced Abdulgani, but his appointment
encountered bitter opposition from Garuda employees and
United Development Party (PPP) politicians. The former
had wanted Samudra Sukardi, brother of the state
minister for state-owned enterprises, Laksamana Sukardi,
to take over Garuda.
However, under Setiawan,
the airline returned to profitability in 2002 with a net
profit of $576 million in the first semester of the
year. This year's net loss of $193 million in the first
half of the year would suggest that failing to bail out
Garuda now will cost the government even more in the
long run.
Garuda needs more government cash, as
the only other two options to nurse it back to health
are no longer realistic. All bets are off, at least for
the short term, on finding any strategic foreign
investor interested in such an ailing airline. The
second option, of reopening dollar-generating
international routes, is just as unlikely given the
present state of the global airline market.
As
Garuda loses its domination of the domestic market, and
its fleet slowly becomes obsolete, domestic and regional
competition will grow stronger and leave Indonesia's one
time pride and joy at its weakest ever, destined to sink
slowly out of sight over the horizon.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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