Wings and a Prayer
January 7, 1999

The Far East Economic Review

Dan Murphy in Jakarta

Garuda Indonesia is named for the imposing half-man, half-eagle that the Hindu god Vishnu rides through the heavens, but the state-owned airline's performance has never been close to other-worldly. In fact, the economic crisis and mismanagement pushed losses so high earlier this year that Garuda is lucky to be flying at all.

"All of the bad things that were going on--borrowing short to fund our operations, the corruption--were catching up with us," says Garuda's new president, Abdulgani, recalling the start of an overhaul of the national carrier that began in June. "Four months more and it would have been the end."

Six difficult months later, Garuda is pulling itself together. Abdulgani and his predecessor, Robby Djohan, have led the makeover and "they've been making all the right moves," says Barry Grindrod, editor of Orient Aviation. Abdulgani rose from adviser to president in November when Djohan, who remains on Garuda's board, moved on to restructure a group of sick state-owned banks. In their short tenure, the two men cancelled corrupt contracts, cut staff, started negotiations on the rescheduling of trillions of rupiah of foreign debt and improved morale.

But Garuda has a long way to go. The airline remains deeply in the red and still needs government subsidies. The simple fact is that most of Garuda's income is in the devalued rupiah, while most of its costs are in U.S. dollars. Abdulgani says there are three keys to turning Garuda around: receiving one last injection of government cash, finding a foreign partner with deep pockets and adding dollar-generating international routes. Analysts say that won't be easy. They add that if Garuda fails to find foreign cash fast, it will remain, at least for now, a bit player in international aviation with a diminished ability to provide vital domestic services. As Garuda languishes and its fleet ages, its regional competitors are likely to build even bigger leads.

Although other carriers in Southeast Asia such as Thai Airways International and Malaysia Airlines face similar problems, none are suffering as much as Garuda. Tourists have flocked to other Asian countries to take advantage of their weak currencies, but in Indonesia scenes of violent unrest have kept tourists away. Indonesia earned $3.6 billion in hard currency from foreign travellers in the first 10 months of the year--20% less than a year earlier. "They are in one of the most difficult positions among the Asian carriers," says Carlos Heinemann, general manager of Indonesian operations for German airline Lufthansa.

The question isn't whether Garuda will survive. Even though Indonesia is under pressure from the International Monetary Fund to privatize state assets, political considerations will ensure that Garuda--in some form--is kept in the sky. In a nation of 17,000 islands, air travel is essential and Garuda plays a leading role in connecting the dots. The airline, which was formed shortly after the country won independence in 1946, is also a symbol of national pride. What remains to be seen is whether Garuda will make enough money on its own to improve its services or will have to continue to rely on subsidies from an increasingly cash-strapped government.

Past mismanagement has left the airline in dire straits. Cancelled flights frequently leave travellers stranded. Even flights on Garuda's bread-and-butter Jakarta-Surabaya route are often delayed. Analysts say that unless drastic action is taken, the airline's service will continue to deteriorate and its ability to cover the vast archipelago will slowly fade. Most of the routes to remote islands such as Flores and Timor have already been handed over to Merpati, a separate state airline that's in even worse shape than Garuda.

As Garuda continues to struggle, the number of routes and frequency of flights will fall, cutting off the far corners of the nation from tourism and commerce. "Travellers need regularity and continuity, something we can't give them right now," says Benny Rungkat, chairman of the Indonesian Air Carriers Association, which represents Garuda and four small domestic airlines.

Abdulgani says improving on-time performance is among his top priorities, since it will help attract the international business travellers who are needed if dollar-generating foreign routes are to be viable. Analysts give Garuda credit for its progress since June, but they say it could be months or even years before passengers start to notice an improvement and regain faith in the airline.

Making the changes and improvements required to build an efficient airline will take money--lots of it. If the airline hopes to make that money itself it will have to raise fares. But higher fares would put air travel beyond the reach of all but the wealthiest Indonesians. Already, the four-hour flight from Jakarta to Manado in Sulawesi costs about $550--more than a year's wages for an average Indonesian and the same price as a discount ticket to London on major international airlines. If fares rise any further "there wouldn't be any passengers left," says Rungkat. The government, which sets all domestic air fares, had planned to push prices as much as 40% higher in December, but the increase was scrapped at the request of the airlines.

Abdulgani knows his back is against the wall. He points to the urgency with which changes have been made as evidence of the airline's will to survive. In the past six months, Garuda has begun a programme to eliminate a third of its 12,000 jobs by 2000 and has abandoned unprofitable international routes. It has also cut nearly 40% of its domestic flights and returned leased planes it can no longer afford, shrinking its fleet to 42 from more than 60 before the rupiah plunged in August 1997. In 1990, Garuda had more than 80 planes. Deutsche Morgan Grenfell has been brought on board to help reschedule $400 million in debt. And, most importantly, says Abdulgani, the airline has cancelled a batch of corrupt contracts with friends and family of former President Suharto.

Abdulgani says that, in principle, the company shouldn't be subsidized; but he also knows that the coming months will be crucial, and wants to go to the well one last time: He is asking for 1.5 trillion rupiah ($200 million) of government loans to be forgiven in the first quarter of 1999. Abdulgani says government officials have indicated their willingness to forgive the loans, but a final decision has yet to be made. He argues that the government contributed to the airline's troubles by forcing it to fly unprofitable foreign and local routes and should bear some of the cost of getting the company back on its feet. Garuda has long lost millions of dollars a year flying half-empty Boeing 747s to Los Angeles, Athens, Rome and other cities around the globe as a symbol of national prestige.

Corruption and mismanagement meant that even in the boom years, the bloated airline lost money, surviving only on government largesse. In 1996, after two years of heavy losses, the government pumped $850 million into the carrier. Still, the airline stubbornly resisted efforts at reform. The government first announced plans to privatize Garuda in 1994, but the sale was repeatedly postponed due to the company's failure to clean up its act. Frustrated by his inability to wean the company from its lavish subsidies, former Transport Minister Haryanto Dhanutirto denounced the flag-carrier last year as a "parasite."

Garuda had a few parasites of its own, in the form of Suharto family members. The former president's grandson, Ary Sigit, held inflated aircraft leasing and insurance contracts; his youngest son, Tommy, also held aircraft leasing contracts; and his second son, Bambang Trihatmodjo, had a ground-handling contract, says Abdulgani. The deals sucked about $100 million a year out of the airline, he says. Shortly after Suharto's fall from power in May, thousands of Garuda employees demonstrated in front of the airline's headquarters demanding the contracts be terminated.

Analysts say it's that kind of employee loyalty that may help pull Garuda out of its crisis. "What was impressive about that protest was that it showed the staff really wants Garuda to succeed and will make the sacrifices," says Orient Aviation's Grindrod. He contrasts that with the experience of Philippine Airlines, another Asian carrier fighting for its life, where acrimonious labour relations have hampered efforts to find a foreign partner.

The determination of Garuda's employees is likely to be tested soon. Analysts say the airline must find a foreign partner to provide cash and management expertise and help increase its international business; it must also return to dollar-producing international routes if it hopes to make any profit. "You can't go it alone any more," says Rungkat. "If you only maintain domestic routes, you die." Garuda says it's already talking to potential investors but refuses to name them.

Some are sceptical about its chances of success. "They have this idea they're going to find a white knight," says an aviation-industry executive who has done business with Garuda for years. "But for what? The domestic routes? That's always been missionary work anyway." The domestic market has been pulverized by the economic crisis and analysts say Garuda doesn't have much to offer investors. "They desperately need a foreign buyer, but who would be prepared to go in when the economy is so dire and they're so deep in debt?" asks Grindrod.

That debt is also likely to prevent Garuda from building up its international services any time soon. The airline was recently forced to cut a number of international routes it couldn't afford. Even when the Indonesian economy was surging ahead at 7% a year, Garuda wasn't able to compete with stronger airlines with better management and solid reputations such as Singapore Airlines and Northwest. Frustrated former Garuda customers can be found in most airports around Asia and their experiences have made the airline a second-choice carrier, even for many Indonesians. But Abdulgani is determined to build the airline's international services. He says the United States, for instance, remains an important potential market for the airline even though it can't afford to fly there now. Other Garuda officials say they also hope to reopen flights to Abu Dhabi and Manila.

Abdulgani is confident Garuda will one day live up to its illustrious name. He even sees the economic crisis as an opportunity. The political change the crisis has brought, he believes, will allow him to reshape the airline with only its health in mind. "This is Garuda's big chance," he says.