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.