Garuda striving to fly high again amid massive losses, problems

The government reorganized last month the management of state- owned national flag carrier Garuda Indonesia, having last year recorded massive losses mostly due to inefficiency and poor planning. The Jakarta Post's Rendi A. Witular talked with Garuda's new chief executive officer Emirsyah Satar about the new management's strategy to bring Garuda back into the black. Here is an excerpt from the interview:

Question: How do you rate Garuda's condition as you take charge of its direction?

Answer: The business condition of Garuda is fairly critical. Last year, we recorded an operational loss of almost Rp 600 billion (US$63.8 million), or an average of Rp 1.7 billion in losses per day. Our on-time performance is also very poor, below the average of the airline industry of 85 percent. I benchmark the industry based on the standard set out by the AAPA (Association of Asia Pacific Airlines. However, for the last couple of weeks, our performance has climbed to 87 percent. Aside from that, the productivity of Garuda employees is also below par, only 80 percent of the AAPA's standard.

The conditions are also exacerbated by the rising cost of fuel, and problems with route management. More than 50 percent of our routes -- domestic and international -- are not feasible and have recorded losses. The poor route management has also contributed to the low utility of our aircraft.

So, how do you fix these problems?

Our first move is to prevent activities that have caused operational losses. We will reorganize our route structure by increasing the frequency of flying in routes that have the potential and reducing the frequency of unprofitable ones. We will also consider shutting down certain routes that are not profitable, but before we do that, we will slowly reduce the route frequency in order to avoid the immediate termination of communication with cities served by the routes.

In the meantime, we will probably close routes bound for Europe. We have a code-sharing cooperation with Malaysian Airlines for lifting Garuda passengers to Europe. The European and American markets will be for our future expansion, but not in the immediate future. In the foreseeable future, we will focus more on serving routes within Asia, regional routes -- including Australia -- and domestic ones.

Aside from that, we will also improve the performance of our low-cost carrier Citilink by spinning-off the airline from Garuda so that it stands alone as a company.

For years, the airline has been unable to function properly as a low-cost carrier because it is part of a division of Garuda, with the same paradigm as a full-service airline. Citilink is expected to play a dominant role in the domestic market, since the growth in this market is mostly on middle to lower-end passengers.

Overall, we have estimated that our load factor will reach 74 percent this year from last year's average of below 70 percent. We have also estimated that our passenger growth will increase by between 10 percent and 15 percent from nine million passengers last year. As for profitability, we have projected that we can avoid losses.

What about problems in fuel costs?

Fuel costs also contributed to our losses last year. About 27 percent of our operational costs are from fuel. If global fuel prices increase by 20 percent, our operational costs will rise by 6 percent. To compensate for the rising fuel costs, we will increase the fuel surcharge for domestic and international destinations soon. Other airlines have increased their surcharge to almost US$65, while Garuda is still lower than that.

Fuel cost is an expenditure that we have to manage wisely. We have assumed an oil price of $30 per barrel in our expenditure plan for this year. But in the current condition, it is impossible that oil prices can return to that level. The only way for us to address the problem is to manage the cost. We will try to be more efficient.

Are there any plans to purchase new aircraft?

Based on our current condition, Garuda will only lease aircraft in the future. That doesn't mean we will have low- quality aircraft. We will lease new aircraft with the latest technology. The advantage of leasing is that we will have the flexibility of having the latest aircraft on the market without being stuck with them should there be new and more modern ones.

In order to improve efficiency in the utility and maintenance of our fleet, we are planning to operate one type of aircraft only for domestic, regional and international routes, respectively. For example, for domestic routes we are likely to use only the Boeing 737 type, since we already have some 48 aircraft of that type. For regional use, we are likely to use the Airbus, as for the international routes, we are still undecided.

Aside from the economic factor, Garuda's creditors have still not allowed it to purchase any aircraft, as stipulated in the restructuring agreement.

How will you manage Garuda's massive debts?

At present, Garuda's debts stand at $826 million, with the largest portion coming from the European Export Credit Agency, while the remainder is in the form of promissory notes and bank loans.

The debt is fairly burdensome amid a sharp decline in our working capital due to the operational losses. Two years ago, Garuda had capital of Rp 3.2 trillion, but now it has declined to Rp 1.6 trillion. This problem is part of an agenda to be discussed with the government as our shareholder in the next couple of weeks. We are still undecided as to whether to restructure the debts, issue bonds or seek bank loans to address the shortage in our capital.

What about plans to go public?

Going public is part of our agenda. When? It is still undecided -- maybe in four or five years time, after we manage to improve the performance of the company. This year will be a consolidating period for the airline, next year will be the rehabilitation period, the third year will be for the improvement of services and quality, and the fourth year, for expanding our businesses and competitiveness.