New captain for Garuda

State Minister for State Enterprises Laksamana Sukardi set a good example of good governance by deciding not to appoint his elder brother as new president of PT Garuda Indonesia, even though Samudra Sukardi was the most qualified candidate for the position, as judged by his technical competence, his managerial record and the full support he received from the state company's employees.

Laksamana selected Indra Setiawan instead, another Garuda senior executive. Though Setiawan was not a member of Garuda's management like the other four contenders, and was not widely tipped among the favorites during the race, he was considered the best alternative, due to his "independent" status of not being affiliated with any political party.

It was surely a great sacrifice on the part of Laksamana, and understandably a painful thought process for him, to decide to stop the advancement of his brother's 27-year career at the national flag carrier. It seemed a strange twist of fate for Samudra that he was to be the first public official to find that close connections, and in this case family ties, to those in power can turn out to be a liability instead of an asset for career advancement.

This country is still in the early stages of developing a system based on high ethical and moral standards, and has yet to instill a high sense of probity in government and society, which has for more than three decades been "polluted" by widespread corruption, collusion and nepotism, which were the notorious hallmarks of Soeharto's authoritarian government.

However impeccable the integrity of the two Sukardis, however small the risk of their professional judgment and conduct being compromised by their family ties, public opinion at the moment cannot yet accept such an obvious potential conflict of interest. The problem is that Laksamana is directly in charge of supervising state companies. Samudra's position might not have been not so awkward had Laksamana held another portfolio in the Cabinet.

But Setiawan, a 25-year career executive of Garuda, is not a second-rate choice either. It is also greatly helpful that Setiawan is taking over when Garuda is already in a much better condition than in 1998, when the company was already technically bankrupt, with negative capital of almost $235 million, $1.8 billion in foreign and domestic debts, low working morale due to steady losses from 1993 to 1998 and rampant corruption, collusion and nepotism.

His predecessor, Abdulgani, who took over the airline's management cockpit in November, 1998, had succeeded in stopping the company bleeding, restoring it to profitability in 1999, rescheduling and restructuring its debts, improving employee working morale and, most importantly, developing good governance practices.

However, Setiawan's tasks are not less challenging in view of the increasingly tougher competition both within the domestic and international market and the declining number of air travelers. The domestic market has shrunken to about eight million air passengers now from as large as 14 million before the 1997 economic crisis, while the number of scheduled airlines has increased to ten, with six more gearing up to take off this year.

Setiawan's top priority should be to fine tune the right business strategy already laid down under Abdulgani's leadership by investing more resources to improve passenger comfort and convenience and to strengthen the system of good corporate governance.

Abdulgani's strategy of focusing on improving safety and reliability to international standards, expediting the check-in process, and applying information technology to enable 24-hour communications links with customers, has succeeded in regaining passenger confidence and loyalty. Garuda has even gained international awards for its outstanding punctuality and safety records over the last two years.

The new president should capitalize on these impressive achievements to further increase efficiency and load factor because an airline is a technology-intensive industry, where the fixed costs -- plane, fuel and support facilities -- are destined to remain relatively high.

Load factor is crucial because the airline's main product -- passenger seats -- is simply a commodity, and a perishable one at that. When a plane takes off with empty seats, the commodity is spoiled in that the company can either earn money from it (the seat) or get nothing at all. That is because the high fixed costs make the marginal cost of adding passengers on a partially-filled flight almost negligible.

In a market where the products -- passenger seats -- are similar and the technology (planes) are mostly a choice between Boeing and Airbus, the only clear competitive advantage comes in price, route networks and the product's value-added features such as ground and in-flight services and modern communications networks to generate convenience and comfort for passengers.