[Weekend Edition] The Swinging Sixties

Posted on November 20th, 2009 at 5:37 pm by Akhyari


THE EARLY 1960s are considered to have been the glory days of Garuda Indonesia Airlines, with a fleet of new Electras and the hotrod of the skies, the Convair 990A, taking the carrier to Hong Kong, Rome, Amsterdam, Frankfurt, Paris and even Canton (Guangzhou) via Phnom Penh. It was considered among the best airlines in the region. Fast-forward to 2009 and CEO Emirsyah Satar reflects on that era with a promise: “We will be one of the world’s best airlines by 2014 with a five-star Skytrax rating and maybe even an Air Transport World award.” With the backing of the government, which continues to own 100% of Garuda, he appears to have the airline on the flight path toward this goal. Profits are flowing, as are new aircraft, while the incident rate is trending downward.

Satar replaced Indra Setiawan in March 2005 and immediately implemented a business transformation program that contributed to a financial turnaround from a loss of $81 million in 2004 to a net profit of $67 million in 2008. Today the carrier serves 33 domestic and 26 international cities from its major hubs of Jakarta and the Bali capital of Denpasar and also uses Singapore as a hub from various Indonesian cities into north Asia.

In 2008 it operated some 1,350 domestic and 384 international flights per week. With approximately 30% of its traffic being holiday-makers and honeymooners to the storied tropical paradise, Bali is a key component of its business. Ten international and four domestic routes are operated from Denpasar and it’s growing, with passenger numbers lifting 8.6% last year.

Garuda’s problems have been complex and many were beyond its control. For decades it has been the personal plaything of the government, rife with cronyism and nepotism. Recognizing that the carrier was not delivering but not admitting its significant role in that situation, the government deregulated Indonesia’s airline system in 2001 in an effort to stimulate improvements. Chaos ensued and the country’s infrastructure and regulatory oversight were overwhelmed. More recently, terrorist attacks in Bali have damaged the vital tourism trade, most notably in 2002 and 2005. In July, terrorists believed to be linked to Jemaah Islamiyah bombed two hotels in Jakarta.

Safety First
Satar, who is chairman of the Indonesian National Air Carriers Assn., warns that “it is critical for the nation to have a safe and reliable airline industry. That is why at INACA we are looking at ways to instill a safety culture across the industry.” That includes Garuda, which has had five fatal accidents in the past 25 years, according to Flight Safety Foundation’s Aviation Safety Network. It appears that the most recent, the March 7, 2007, runway overrun accident at Yogyakarta that killed 21, may have been a turning point for the airline.

The comprehensive crash report by the National Transport Safety Committee, while faulting the captain’s performance, was critical of Garuda for its lack of training and the country’s Directorate General of Civil Aviation for its lack of oversight (ATW, 5/09, p. 21). Disturbingly, the investigators found that at the time of the crash the regulator had carried out only one safety and security audit on the carrier since 1998 and had not shared the results with Garuda. Those findings reflected the cozy and entrenched legacy relationship between the airline and previous governments that Satar is determined to eradicate.

Fortunately, he has the ear of Indonesia’s no-nonsense president, Susilo Bambang Yudhoyono. The government finally has poured resources into its regulator and engaged the Australian Transport Safety Bureau and that country’s Civil Aviation Safety Authority to train staff and help with oversight.

To carry through change within the airline, Satar brought in safety expert George Snyder to oversee both pilot training and maintenance. Snyder, who led Korean Air’s remarkable operational turnaround from 2000, works with Garuda staff for two weeks of every month. Although it is still early in the process, the airline has seen a decline in reported incidents since a 2004 peak of 1.11 per 1,000 departures to just to 0.04 last year. It is on track to halve that in 2009.

Its reporting system actually may understate the airline’s progress because it records passenger disturbances as safety incidents. Satar explains that “there are no worldwide, generally accepted criteria for what level of incident constitutes a safety hazard. If we are being too broad in classifying ’safety incidents,’ so be it. I would rather err on being overly cautious about this, and be as transparent as possible. This is part of the nonpunitive safety culture we are building at Garuda Indonesia that emphasizes transparency and openness.”

According to the CEO, Garuda has beefed up its pilot training to “internationally recognized aviation standards to address all conceivable emergency situations” and passed an IATA Operational Safety Audit, the only airline in Indonesia to do so, paving the way for it to be allowed back into Europe after the EU banned all Indonesian carriers two years ago following a spate of accidents.

Blue Financial Skies
In tandem with the renewed focus on safety, Garuda is in the midst of a financial turnaround. Satar has an extensive background in banking and finance, having begun his career as an auditor at PricewaterhouseCoopers in 1983. He held senior positions within Citigroup, PT Bank Indonesia and Niaga Finance Hong Kong before joining the airline in 1998 as executive VP-finance. He briefly returned to the financial sector in 2003 to become deputy CEO of Bank Danamon before rejoining Garuda two years later as president and CEO.

When he took the reins, he launched a far-reaching strategic plan that entered the turnaround phase in 2008 underpinned by its Main Corporate Program called Power 8, which reflects the eight major areas of operations, “not the Airbus program” of the same name. He says Garuda was able to book significant improvements in each of the three main target areas last year: Net income, service level and ontime performance.

Profit jumped to IDR669.47 billion ($66 million) in 2008 from IDR60.18 billion in 2007 as a 36.6% lift in operating revenues to IDR19.4 trillion outpaced a 30.3% rise in operating expenses to IDR18.21 trillion. The carrier was not immune to the global challenges, with fuel expenses climbing 52% to 41% of total operating costs while the rupiah depreciated 21% against the US dollar.

Offsetting those problems was a 6.1% growth in the country’s economy and a 13.2% hike in international tourist arrivals to 6.2 million. Other numbers were in positive territory as well. Passenger yield increased from 7.5 cents to 9.5 cents even though load factor slipped 1 point to 76.5% due to ASKs rising 11% to 20.1 billion while RPKs grew 9.7% to 15.39 billion.

“Our financial performance in 2008 surpassed all targets and the positive financial performance was also supported by increased performance in services and operations. Improvements to our services resulted in a rise in our Skytrax rating from three-star to three-star-plus while the OTP in 2008 surged to 84.1% compared to 76.7% the previous year,” Satar says.

And that is just the start, he adds. He is bullish on Garuda’s financial future, declaring in July at the opening of its new offices that “we have set a target in 2014 to get a net profit of $370 million.” It is off to a good start this year with a net profit in the first four months of $32.9 million compared to $5.3 million in the same period of 2008, according to the Sydney-based Centre for Asia Pacific Aviation.

Rising international traffic has underpinned the airline’s success, as domestic boardings grew just 2.4% to 31.9 million in 2008, with weak third and fourth quarters due to an increase in ticket prices related to fuel surcharges. The only dark cloud is its debt of $670 million, which Satar indicates he hopes to have agreed by October. The major creditor is the European Credit Agency, to which Garuda owes $369 million, and it is understood it has signed off on a seven-year extension. Once the debt position is resolved, the carrier will move to an IPO for about 20% of the company in the middle of next year.

Great Expectations
Satar says that despite the problems, deregulation of aviation has had “a positive overall impact for the country.” He points out that as an archipelago state with more than 17,000 islands and a population of more than 230 million, Indonesia has huge market potential. At the same time, the air transport sector is fractured, with some 50 certificated airlines although not all are currently operating.

In 2008 Garuda had a 32.5% share of domestic passengers from Jakarta’s Soekarno-Hatto International, an increase of 1.8 points over 2007. It enjoyed an overall 26.5% share of international passengers to Jakarta and Ngurah Rai Airport at Denpasar, down 1.2 points due to increased international competition. Its overall domestic market share was 23.5%, up 1.2 points, while international share was 16.5%, virtually unchanged.

The major competitor is Lion Air, Indonesia’s largest private airline with 42 aircraft including the first 25 of 178 737-900ERs it has ordered. It also acquired four 747-400s used by defunct Oasis Airlines to compete for hajj flights. Last year Garuda carried 259,000 hajj passengers, up 10.4%. For the hajj it uses or leases four 747-400s, seven 767s and three A330s.

Garuda’s market share of the total Indonesian air travel market, including routes it does not serve, is still low, Satar concedes. “This proves a huge potential on other routes, domestic or international that has not been taken by Garuda Indonesia.”

He says the carrier has looked at a couple of airlines as acquisition candidates but turned away because the business case did not stack up. He does not rule out mergers in the future “if they make financial, operational and commercial sense.” But Garuda also is pursuing organic growth. He tells ATW he has big plans for the Citilink operation, which was established in 2000 as a regional lower-cost airline with a fleet of F28s and re-launched last September as a “true low-cost carrier.” He confides that “the operational and financial performance of Citilink has not been up to expectations. However, we are planning to add more aircraft to the current fleet of three 737 Classic series and this added capacity should improve performance.” An order for up to 25 A320s, 737NGs or E-190s is to be placed shortly.

Garuda is rebuilding its fleet around three types: A330s, 737-800s and 777-300ERs to be delivered from 2011. The program was launched at the Singapore Air Show in 2008 with an order for 50 737-800s and 10 777-300ERs that started arriving this July and will all be delivered by 2014. In addition, it has leased 12 737-800s and ordered four A330s and Satar is on the lookout for more.

New Image
In July the carrier unveiled its passenger makeover with a redesigned livery and a new inflight and ground service product called Garuda Indonesia Experience. It covers 24 passenger touch points involving pre-flight, inflight and post-flight. Inflight includes signature Indonesian food and beverages and in a first for the country the airline will be introducing AVOD progressively on domestic flights in all classes on its 737-800s.

“We see the Garuda Indonesia Experience as a key product for the future as it will deliver a service experience that is unique to Indonesia and Garuda,” says Satar. Now that the EU ban has been lifted, he is focused on taking the new Garuda to the world as quickly as possible, with plans to launch Jakarta-Dubai-Amsterdam service in mid-2010 using A330-200s. Service to Frankfurt, Paris, London and Rome will follow, he says. The A330s are smaller than he would like but he is keen to get the brand into the European arena as rapidly as possible. They will be replaced with nonstop services when the 777-300ERs are delivered in 2011.

More immediately, the airline is adding 18 new domestic and international routes this year and boosting frequencies to markets such as Australia that are its most profitable. “We have just added new nonstop services to and from Jakarta to Sydney, Melbourne, Shanghai and Seoul. We hope to announce Brisbane and Auckland soon,” he notes.

Satar has grand plans for the airline in five years’ time: Bigger profits, more aircraft and routes and a greater role in the region including eventual membership in SkyTeam. The Quantum Leap plan launched this year calls for the fleet to grow from 61 aircraft to 116 to support a rise in weekly frequencies from 1,700 to 3,000, with net profits nudging $350 million by 2014.

Of course such goals have a familiar ring to them, similar targets having been voiced by many of his predecessors. Satar gives every impression that this time things will be different and that Garuda soon may reprise the glory days of the Swinging Sixties.

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