Indonesia’s Garuda Faces More Problems

The Indonesian government, the owner of Garuda Indonesia Airlines, appears determined to dig an even deeper hole for its debt-ridden national flag carrier with the resuscitation of a moribund low-cost subsidiary, Citilink Airlines, blowing up yet another of the government’s privatization plans.

Citilink, which has been grounded numerous times and hasn’t flown since January, is scheduled to begin flying from Surabaya Monday along many of the same routes flown by Merpati Nusantara Airlines, a low-cost carrier that is also owned by the government. Merpati is in nearly as bad shape as Citilink. In August, the government forced Merpati to lay off half of its bloated 2,600-person work force, including half of its 600 pilots, ground half of its 35 airplanes, and move to the city of Makassar.

"Garuda has relaunched Citilink again after being closed several times due to many unexplained reasons,” Sofyan Djalil, the state-owned enterprise minister told reporters in Jakarta last week. “This time, we want the customers to have plenty of options. Garuda will undertake full-service flights, while Citilink will focus on the low-cost carrier market.”

The government has continually delayed attempts to privatize Garuda along with numerous other state-owned companies since at least 1998. They include Garuda, Merpati, Krakatau Steel and other dubious jewels in the Indonesian government crown. Few of them are noted for sound business practices, however, and the previous minister for state-owned enterprises, Sugiharto, was sacked and his ambitious privatization plans were scrapped in 2007. Only five companies currently appear to be on the block, including Krakatau Steel, three units of PT National Plantation and Bank Tabungan Negara, the state savings bank.

As with Garuda, it appears difficult to see how government officials can get a Krakatau Steel initial public offering off the ground anytime soon, despite a big push to get the enabling legislation through the House of Representatives and engineer an IPO before the end of the year. Stock markets across the globe have been falling precipitously for months, Jakarta’s along with it. Last year, Krakatau Steel reported earning approximately Rp15 trillion, with a net profit of only Rp365 billion (US$39 million).

“I am doubtful that the government can meet a schedule to launch this year,” Poltak Hotradero, research head of Recapital Securities, told a local reporter. “I don't think the management could respond to the government's will as it is also their responsibility to make the IPO succeed.”

“Why do people always think that we have a hidden agenda for privatization?” complained Muhammad Said Didu, the ministerial secretary of the SOE ministry, to local reporters. “Our main goal is to develop the SOEs so they could be more transparent and efficient. I do not think we are to blame for the delay. We submitted this early in the year. Ask the House, not us. They are the one who delayed it."

Although Garuda’s top administrators say they hope to get the privatization underway as early as the first quarter of 2009, the plan seems problematic. The airline is nearly US$800 million in debt to a flock of creditors, including nearly US$500 million to the European Credit Agency. A top official of the state-owned enterprise ministry said in August that the airline would probably have to turn a profit for at least two years before it could be attractive to investors.

The airline turned a minuscule profit of Rp258 billion (US$27.7 million) in 2007 after three consecutive years of losses. Given skyrocketing jet fuel prices, which continue to put pressure on airlines across the globe, it is doubtful that the carrier will be in the black anytime soon.

Overall, Indonesia’s airlines and the government that regulates them have been a mess for years. Since Indonesia’s budget airline industry took off in 2001, airlines have been launched with dubious maintenance standards, sparking fears that the country’s endemic corruption is at least partly responsible for a dreadful safety record. The crowded, competitive market has forced most carriers to cut costs and fares to avoid bankruptcy. By 2007, there were 19 scheduled airlines and 36 non-scheduled operators in the country.

Government officials also have been working for months to persuade the European Union to reverse a ban instituted against all of the country’s airlines in 2007 from flying to European countries.

A strong new transport reform law is expected to be pushed through the parliament later this year. Under its provisions, the government would create an independent regulatory body to supervise all flight activities and air traffic control system. It would also adopt aviation standards from the International Civil Aviation Organization.

As with Merpati, which is being forced to move its headquarters out of Jakarta, Garuda is moving eight-year-old Citilink from Jakarta to Surabaya. Citilink's six new destinations from Surabaya will include Banjarmasin, Jakarta, Batam, Balikpapan, Mataram and Kupang with ticket prices averaging less than Rp500,000 per person.

"We were trying to reposition our place in the low-cost carrier market after almost a year of neglect, and we wanted to develop our reach to the eastern side as well,” Garuda’s Chief Executive Officer, Emirsyah Satar, told the government-owned Antara news service. "The business climate in East Java, especially in Surabaya, is rapidly growing. Therefore, it needs transportation support, especially for the business community."

Garuda said it ultimately plans to provide as many as 25 aircraft over the next five years for Citilink, hopefully to make it semi-autonomous. Garuda is providing two 737-300s initially and expects to add three more by the end of the year. In the meantime, in a bid to improve its reputation Garuda is in the process of ordering a flock of new planes, including 50 Boeing 737-800s, 10 Boeing 777-30ERs and three Airbus planes under lease. The 737-800s are scheduled to be delivered in 2009, with 10 777-30ERs in 2010.

"The launch of the Citilink program from Garuda will not affect other airlines in the market," Taufiq Ismail, a senior travel consultant from Dwidaya Tour and Travel Agency, told local media. "They have launched this before and it didn’t work. People tend to choose airlines which perform safely and punctually, such as Lion Air and Air Asia. It is not always about the ticket price. Citilink usually has higher prices than other airlines.”