Privatizing Garuda airline

Privatizing Garuda airline

The government has finally flashed the green light for the
privatization of the national flag carrier, Garuda Indonesia,
within an overall restructuring of its capital and management. As
Minister of Finance Mar'ie Muhammad said in a hearing with the
House Budgetary Commission on Tuesday, since the airline is not
able to fulfill listing requirements for the domestic stock
exchanges, let alone international exchanges, it will invite new
investors through private placement.

The minister declined to elaborate on the planned
privatization but assured the House commission that the new
shareholder will have to be an international company with a good
reputation and that it will be selected through a competitive
international bidding process.

We see the term "strategic investor" used by the minister in
reference to the new shareholder for the state airline as a
reflection of the concerted effort to improve Garuda's overall
competitiveness in the fiercer international competition in the
airline industry. The global competition in air transportation
has indeed reached such a point that most of the major airlines
have even set up various forms of strategic alliances through
mergers, cross share holdings, tie-ups in computer reservation
systems and route and flight-code sharing arrangements.

There are, we think, several factors which have been affecting
Garuda's performance over the last three years. The airline's
share of the domestic market, formerly the largest source of its
revenues, has been eroded by private carriers, which have become
more aggressive and creative since the easing of restrictive
rulings. Even in the regional market, covering Singapore, Taiwan,
Australia and other neighboring countries, the competition is
poised to become keener as a result of further deregulation of
the domestic private airlines.

Because Garuda's competitiveness in the international market
is not strong, the airline is not able to offset the revenues it
loses in the domestic market with income from international
services. The blunt fact is that Garuda's human resources --
right down from ground staff up to cabin and cockpit crew members
-- have not been adequately prepared for meeting the increasingly
keen competition in the international air services.

In such a highly competitive service industry as the airline
sector, the clear competitive edge should come in terms of
pricing and the range and quality of ground and in-flight
services. Garuda, being a state-owned company and a flag carrier,
faces layers of bureaucratic procedures, whereas the global
market requires highly professional management with adequate
managerial autonomy.

One of the objectives of the privatization is obviously to
remove those trappings and handicaps so that the management will
have broader leeway for more creative play in the international
marketplace. But the most important thing, we think, is that the
new shareholder should be able to form a strategic alliance to
strengthen Garuda's management and international operations.

But whether Garuda will be able to attract the kind of
shareholder that is capable of forming such a strategic alliance
will depend on the factors included by the government in
assessing the bidders. Therefore, we think, the evaluation should
not emphasize just the amount of equity funds to be brought in,
but also the overall business plan proposed by the bidders for
improving Garuda's performance.