Clear skies or turbulence ahead?

Garuda’s new management is strapped in for an uncertain journey

Clear skies or turbulence ahead? airplane

Garuda Indonesia, having been mired in one controversy after another, is hoping to soar to new heights under new management. After firing Ari Askhara over a Harley-Davidson smuggling scandal in December, the publicly listed national flag carrier has taken off with Irfan Setiaputra, a seasoned corporate executive, as CEO; and Triawan Munaf, the former head of the creative economy agency in President Joko Widodo’s 2014 cabinet, as chairman of the board. 

Minister of State-Owned Enterprises Erick Thohir has made clear the first order of business is to restore good corporate governance and the company’s image. After months of violent turbulence, the winds of change cannot come soon enough for Garuda. 

It’s no exaggeration Garuda had a rough 2019. In June it was found guilty of financial engineering by the Financial Services Authority (OJK), fined, and forced to “fix and restate” its 2018 financial report. After correcting for accounting errors, the new results marked an astounding $179 million net loss from an $800,000 profit. 

Its marketing and public relations team did not do much better either. In the following month, it shot itself in the foot trying to silence a complaint from a business class passenger by filing defamation charges against the restaurateur-YouTuber. Social media empowered customers have often complained about the crumbling quality, especially the inflight catering. 

To make matters worse, Askhara was caught running a smuggling ring using underutilized cargo spaces on poorly performing international flights. The story turned raunchy as it was later alleged female flight attendants were sexually harassed at the workplace, with some allegedly pimped by their male coworkers. Union leaders, who have been rumored to be rubbing shoulders with the CEO, have denied allegations of involvement. Askhara’s dismissal in December brought his power trip to a crash landing.

To be fair, Garuda's performance should be judged against the global aviation industry, which had a rather gloomy year in 2019. The International Air Transport Association (IATA) revised its 2019 industry profits estimate from $35.5 billion to just $28 billion, down from $30 billion in 2018.

Rising fuel prices did not help. In 2019, operating costs grew by 7.4 percent industry-wide, while revenue growth reached 6.5 percent. As a result, revenue margins decreased to only 3.2 percent in Q1 2019 from 3.7 percent in the same period in 2018. Profit per passenger dropped to $6.12 in the first quarter of 2019 from $6.85 in the same period in 2018. 

The good news is the industry is still soaring in Asian markets. Bloomberg reported Asia-Pacific accounted for 40 percent of global aircraft deliveries to Q3 2019. Airlines in China led the parade of nations by buying 163 aircraft, followed by 53 for India. China Southern and China Eastern purchased 61, followed by IndiGo at 38, signaling potential future demand. However, some airlines were impacted by the grounding of the Boeing 737 Max. China Southern Airlines and Air China combined had to ground 40 of their aircraft due to manufacturing defects. 

How does Garuda fare under these circumstances?

As of December 2019, Garuda operated 165 aircraft consisting of 34 large-bodied aircraft, seven Airbus A330-200, 17 Airbus A330-300, and 10 Boeing 777-300ER. It also operates 73 Boeing 737-800 NG, 13 ATR 72-600, one Boeing 737 Max 8 and 18 Bombardier CRJ1000. These planes serve 22 international routes and 68 domestic routes. In comparison, Singapore Airlines operates 129 wide-bodied aircraft with 62 international destinations in 32 countries. Thai Airways, another regional peer, operates approximately 100 aircraft with 63 international destinations.

When it comes to racking up accolades and ratings, Garuda has a clear edge over its global peers by not servicing major international routes. Among European hubs, it only serves London and Amsterdam. It does not fly to the US or Africa. In comparison Turkish Airlines caters to 242 destinations in 122 countries. However, Garuda does not have to deal with customers from different cultures with different languages, tastes, and mannerism, that can easily give rise to complaints. As a result, Skytrax, a consultancy, gave it a 5-Star rating, while Turkish Airlines had to settle for a 3-Star. Suffice to say, these ratings may mask Garuda’s true service performance and, as such, the new management needs to look beyond these ratings in setting its goals.

Garuda’s operating profit margin was 1.7 percent in 2018, a rebound from -2.2 percent in the previous period. This is better than some airlines in Asia such as Thai Airways, Air Asia X (Malaysia), and SpiceJet (India). However, the average load factor of Garuda to Q1 2019 was about 70 percent - lower than the Asian average at 80 percent. 

On costing, Garuda is quite competitive compared to its Asian peers in almost all cost components. These include salaries, landing costs, aircraft staff, aircraft maintenance costs, depreciation costs, and fuel costs, except for aircraft rental. The portion of expenditure on fuel to revenue at 32 percent is only slightly higher than the industry average of 30 percent. The portion of salary to revenue at 13 percent is lower than the industry average of 15 percent.

Garuda's new management must move quickly to restructure its aircraft rentals, as its rental costs to revenue ratio stands at 24.7 percent, much higher than the industry average of 9.7 percent. This means it spends a quarter for every dollar it receives in revenue, whereas its average peer only has to pay a dime. 

New management needs a strategy 

First, management must fully understand who its customer base is. Route simplification is one of the radical steps that may be needed so it can fly more efficiently. If high-cost routes to Europe do not produce favorable load factors, intensification of routes to Middle East destinations might be an option worth considering. Garuda may want to consider focusing on migrant workers and Indonesian Umrah pilgrims. It should also reconsider forcing its Jakarta-bound passengers to change aircraft in Kuala Namu, Medan, in the dead of the morning, on their way from Amsterdam. This strategy was intended to better serve tourists than business travelers, and, at 60 percent occupancy rate on average, it has not been very successful.

Secondly, Garuda should not get sucked into the glamor of typical Asian flights. For example, business travelers on European airlines are used to minimalist inflight catering. Some flag carriers, such as British Airways and Scandinavian Airlines, offer only a diminutive cake and mineral water for their European regional flights. Brussels Airlines offers efficiency solutions that are quite attractive. It divides the economy class segment so that economy-promo passengers are all seated in the rear cabin. Middle-seat-free is also a business class flight concept adopted by a majority of European airlines, including Lufthansa, Scandinavian, KLM, and Air France. 

This strategy may be more suitable for domestic markets where Garuda clearly has an advantage. The majority of its domestic customers are business travelers who will not easily switch to low-cost competitors. Long haul flights, however, should still provide full services like its rivals.

So, clear skies ahead for Garuda. After a careful study of Skytrax’s airline quality report, the global airline industry is witnessing quality degradation by major airlines such as Emirates, Etihad and Cathay Pacific. Those successful at keeping quality high are Qatar Airways and Singapore Airlines, who offer the best practices that Garuda should aspire to.

 



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Harya S Dillon is secretary general of the Indonesian Transportation Society.

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