Massive Strides

Having already beefed up its Asian and Pacific regional operations, the latest widebodies will ultimately replace older aircraft and allow Garuda to launch a host of new mid-range and long-haul routes around the globe.

Considering its past, Garuda has already made massive strides towards its long-term goals. Seventeen years ago, as the 20th century headedtowards closure, the airline was in crisis as Indonesia itself was being ravaged by political and economic upheaval. In 1998 the carrier’s staff staged mass demonstrations calling for top management to be replaced, citing corruption and gross mismanagement.

The government reacted by appointing a new president, Robby Djohan, to run the airline. A banker and tough businessman, he acted quickly. On his first day he declared: “There are hundreds of problems at Garuda. Corruption has been going on for a long time. We knew that, but while Suharto (he had resigned as President of Indonesia just a few months earlier) was President there was nothing we could do about it… I know who the bad guys are and my first priority is to get rid of them. They will soon be out of the door. ” According to insiders one example of the gross corruption going on at the time involved six widebody jets which were each being leased for US$400,000 amonth but were recorded in the airline’s books at US$500,000, with the additional sum (US$600,000 overall every month) being split among various senior executives, most of them associates of the country’s former President.

Djohan put a stop to all of this, got rid of “the bad guys” and began rebuilding the airline. It is a process that has been continued by succeeding chief executives, particularly two other former bankers, Abdul Gani and more recently Emirsyah Sitar, who stepped down earlier this year (under Indonesian law chief executives of state-owned enterprises must leave after five years).

Even then, life hasn’t been easy for Garuda. Like the entire airline industry it suffered after the September 11 2001 terrorist attacks in the US and was hit badly by the Bali bombings, the 2004 Indian Ocean earthquake and tsunami, and the SARS scare, all of which contributed to a downturn in air travel and Indonesian tourism.

There were other incidents that clouded Garuda’s image. In September 2004 a human rights activist, Munir Said Thalib, travelling to Amsterdam via Singapore on Garuda Indonesia Flight 974, was assassinated by off-duty pilot Pollycarpus Priyanto, who had slipped arsenic into his drink. He died about two hours before arrival into Amsterdam. Priyanto, along with chief executive Indra Setiawan (he was CEO from 2002 to 2005) and his deputy Rohainil Aini, were all convicted of his murder, although it was alleged it had been done under orders from Indonesia’s state intelligence agency, the BIN.

There was also the crash of a Garuda 737-400 at Yogyakarta in March 2007 in which 21 people died. Three months later the European Union slapped a black ban on all Indonesian carriers over safety concerns. Though that was actually directed at the country’s regulators for lack of oversight it further dented perceptions ofGaruda’s own safety. It was not until 2009 that the EU exempted Garuda from the ban, enabling the airline to return to Europe.

Garuda posted annual net profits every year from 2007 through 2013 but plunged to a US$373 million loss last year in the face of high oil prices and the local currency, the Rupiah, reaching a record low exchange rate against the US$. But there was black ink again in the first quarter of this year with a profit of US$11. 4 million, a dramatic turnaround from the US$168. 04 million deficit in the same period a year earlier.

Arif won’t forecast a full year figure but says he expects Garuda will “continue recording positive performance” until the end of this year. “As a public company, we can’t be predictive. However, as we can see, we performed strongly in the first quarter amid heavy pressure in the airline industry. ” The improvement is the result of a series of measures aimed at slashing costs…with a fair bit of help from the lower cost of fuel. Indeed, fuel costs in the first quarter dropped almost 30 per cent to US$264. 3 million from US$376. 5 million during the same period last year. Arif said the carrier has been optimising and repositioning its aircraft and has focused on developing its network in China and the Middle East. This has seen passenger traffic increase 17 per cent, well above the capacity increase. A big winner for the company has been revenue from charter flights, which soared by more than 13 times year-on-year to US$39. 2 million from only US$2. 86 million. With the government announcing visa-free travel to Indonesia for Chinese tourists, since early this year Garuda has been offering regular charter flights connecting Denpasar (Bali) and Manado (North Sulawesi) with several cities in China including Chengdu, Chong Qin, Ningbo, Kunming, Jinan, Harbin, Xian, Shenyang and Chengzhou. Apart from China, it has also been expanding charters to the Middle East, encouraged by the country’s large umrah (minor haj pilgrimage) market.

During his first few months in charge Arif has been busy eking out further cost savings. “We are increasingly becoming more secure in the face of future competition. We will slash our operational costs byabout five to 10 per cent as a strategy towards efficiency. We hope to save US$200 million in operational costs,” he said. However, Arif stressed the tightening of operational expenditures will not be at the cost of the quality of services offered by the national flag carrier.

He has also reduced unnecessary spending on sponsorships (the carrier does invest heavily in sponsorship of English Premier League side Liverpool) and advertising, with more focus being placed on sales promotions.

Earlier this year, in an effort to further ease pressure from volatile economic conditions, Garuda also raised US$500 million from the issuance of global Islamic bonds, with the funds being used to refinance the company’s US$350 million in debts maturing this year and to fund part of its capital expenditure. According to its latest financial report total liabilities stood at US$2. 3 billion as of the end of March this year. Arif said that during the first quarter a cross-currency swap and fuel hedging mechanism had been conducted to prepare for future fluctuations inthe rupiah and fuel prices and he believed Garuda will remain secure until the end of the year.

Optimising the network is a major priority through dropping unprofitable routes, lifting capacity on money-makers and looking for new markets with good potential. Garuda, currently operating 53 domestic and 18 international routes, now has a fleet of 133 aircraft. These are 80 Boeing 737‑800s (three more on order), 10 Airbus A330-200s and 11 A330-300s (13 on order) and seven 777-300ERs (three on order).

In addition 10 ATR 72‑600 turboprops (15 more on order) and 15 Bombardier CRJ1000 Next Gen regional jets (three more on order) operate domestically under a sub‑brand, Garuda Explore. It serves dozens of destinations across the vast Indonesian Archipelago with airports that can’t handle larger jets.

Low-cost subsidiary Citilink has 35 A320-200s with orders in place for 15 more -200s as well as 35 new A320neos.

With new deliveries this year the total fleet (excluding Citilink) is expected to increase to more than 150.

Despite the ups and downs, there are plenty of signals the revitalisation plan is already paying off. According to Arif, Garuda’s domestic marketshare as of March this year increased to 45 per cent from 37 per cent a year earlier, overtaking its biggest competitor, budget Lion Air, which saw its share drop from 41 per cent in 2014 to 34 per cent in the first three months of 2015. Garuda, a member of the Skyteam alliance, aims to carry 25 million passengers in 2015, while low-cost Citilink expects to see 11 million passengers.

The cost-cutting and efficiency gains don’t seem to be impacting on the airline’s growing reputation for service. Earlier this year it was awarded a five-star rating by global airline and airport review organisation Skytrax, only the seventh carrier to achieve this level (the others are Asiana, Cathay Pacific Airways, Hainan Airlines, All Nippon Airlines, Qatar Airways and Singapore Airlines). It has also won awards for being the best regional airline and the carrier with the world’s best cabin staff.

Apart from expansion in China,Garuda is also eyeing growth in the fast-rising Middle East market and in Europe. Now operating to Amsterdam and London, Arif says Germany and France are on the agenda because they are far more stable economically than other European destinations. He said Garuda aims to fly to Paris and Frankfurt, probably from next year, although there are issues with the planned use of 777s. He says calculations are still being done regarding the operation of non-stop services from Indonesia using the Boeing aircraft because of weight limitations applied to runways in Indonesia. In Jakarta, the runway takeoff weight is restricted to only 329 tonnes while the 777-300ER’s maximum capability is actually 351 tonnes.

“Economically, this is not feasible. We are still calculating and finding ways with regard to destinations to get a higher income…apart from opening new routes in Europe, China and the Middle East, we will also expand our network and streamline our operation schedules. ” While the future is looking bright for Garuda there is no shortage of potential challenges to a smooth ride. Local rival Lion Air is an aggressive and rapidly growing competitor. With a fleet of 101 jetsit is taking delivery of three A330s in the final quarter of this year and plans to use these widebodies on domestic routes, as well as deploying one to the Middle East to replace a 747 it currently uses for flights between Jakarta and Jeddah. It also has a large number of narrowbodies on order for delivery over the next few years.

Whether that sparks a capacity war may be problematical because one of the major challenges facing all Indonesian carriers is congestion at the country’s airports. The annual number of passengers at Soekarno-Hatta International Airport inJakarta reached 60. 13 million back in 2013, nearly three times its design capacity of 22 million. Land is being acquired to build a third runway but construction won’t even start until next year.

In the meantime Indonesia’s state flight navigation service Airnav and airport operator Angkasa Pura II have teamed up with the UK’s National Air Traffic Services (NATS) to prepare a system to increase the existing runway capacity from 72 flights to 86 flights an hour. The chairman of the Indonesia National Air Carriers Association (INACA), Bayu Sutanto, warned the country’s airline industry is reaching its saturation point because an increase in seat capacity is not being supported by an increase in airport capacity and improvements in infrastructure.

But Garuda will be hoping that problem has been fixed by the time its A350s and 787s begin arriving. When that will be is uncertain, although there has been speculation it will not be until the early 2020s. Nevertheless, Arif says that with their reduced fuel consumption and range capability the A350s and 787s will be options for Garuda to reposition itself as a leading premium carrier in the competitive long-haul market out of Asia.

Garuda will be hoping that problem has been fixed by the time its A350s and 787s begin arriving.