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oon after July's JW Marriott and Ritz-Carlton bombings, Garuda Indonesia president and CEO, Emirsyah (Emir) Satar, started to monitor the cancellation of bookings for flights to Indonesia.

Up to now, less than 5 percent of the bookings have been cancelled, equating to about half the level of cancellations recorded after the first 2005 JW Marriott bombing, thus easing the company's concerns. However, Garuda does not take bombings lightly, given their impact on passenger numbers.

After the 2002 Bali bombings, the carrier's revenue dropped by a sizable 30 percent, reflecting how important the Bali route is to the carrier. This explains why Bali's Ngurah Rai airport is Garuda's second hub.

Garuda, like its regional counterparts, has been struggling with the global recession and its impact on the number of travellers and ultimately the airline's revenues. The bombings have worsened the impact of the crisis and prolonged the time it will take to recover from it.

The airline industry is reaching saturation point with the proliferation of budget airlines, which are squeezing the operating margins of all existing market players. The drop in fuel costs, however, has given airlines a temporary breather.

Fuel typically accounts for 30 percent of an airline's operating costs. But as the global economy recovers, so will fuel prices. It is no surprise the industry continues to face considerable turbulence.

For the last four years, Garuda has come a considerable way in catching up with its regional counterparts, but also realizes it still has some way to go.

Emir has navigated the carrier through two key phases and is preparing for the crucial third.

The 2006-2007 period was the survival and consolidation phase. This was followed by the 2008-2009 turnaround phase and the carrier is about to enter its growth phase in 2010. Garuda's operating performance and, more importantly, safety standards have improved.

Aside from its IATA Operational Safety Audit certification, the carrier's incident rate has been brought down to 0.41 per 1,000 departures, its lowest in recent years. And, just this month, the European Union lifted its ban on Indonesia airline flights to Europe.

With regards to Garuda's operations, On Time Performance (OTP) has risen to 84 percent, the passenger load factor last year was brought up to 73 percent, and aircraft utilization up to 9 hours per day.

A closer look at Garuda's finances shows the airline started generating profits in 2007. Last year, operating profits reached Rp 1,187 billion and net profits Rp 669 billion, out of revenues of Rp 19,400 billion.

Its capital, which was negative in 2007, also turned positive in 2008, although it is still low by regional standards.

Interestingly, Garuda compares well to its regional counterparts when it comes to weathering the current global slowdown. One of the major advantages the airline has is the nature of its routes, which are largely short haul.

The global recession has impacted long-haul flights and premium services - business and first class - much more than short-haul flights and the normal economy service. Another plus is the size of its domestic business, which has not suffered as much from the global recession.

Only half of Garuda's revenue comes from international routes, while Singapore Airlines, Malaysia Air System and Thai Airways, given their smaller domestic markets, rely much more on revenue from international routes. Moreover, Garuda's domestic business carries higher margins than its international flight business.

As Emir explained, the EU ban lift is important to Garuda because it has restored the airline's image and credibility, not so much because of its commercial impact. Amsterdam will be the first of its three European destinations to be restored sometime mid next year, followed later by Frankfurt and London.

Going forward, Emir is focusing on several areas to compete more effectively. One is to lighten the company's heavy debt burden, which was a legacy of the past when airlines preferred to own their fleet, rather than lease, as most do today.

The company expects to finalize its debt restructuring by September this year. What remains to be completed is the conversion of Bank Mandiri's mandatory convertible bond, amounting to Rp 1,019 billion, into equity. Earlier, the government also converted its loans to Garuda into equity.

This conversion is expected to reduce the annual interest burden of the company, which reached a sizable Rp 365 billion last year. Sometime mid next year, the company is planning to go public and sell 30 percent of its shares.

The company expects to raise Rp 4.2 trillion, which translates into a Garuda valuation of about Rp 14 trillion or US$1.4 billion.

Assuming net profits reach Rp 1 trillion next year, that valuation reflects a PE (price-to-earning) ratio of about 14 times. Proceeds of the IPO will be used to further pare down its debt and to modernize its air fleet as it enters its growth phase.

Another area of focus is growing revenue by adding domestic and international routes as well as increasing flight frequency.

This year, Garuda launched its Jakarta to Malang, Jakarta to Kendari, Jakarta to Kupang, Jakarta to Tanjung Karang and Jakarta to Pangkalpinang routes.

Abroad, it has introduced a Denpasar to Hong Kong and Surabaya to Hong Kong route. Starting in August, Garuda will also fly to Sydney, Melbourne and Seoul from Jakarta, in addition to its existing routes from Denpasar to the three regional destinations.

To service this growth, the carrier will be adding five Boeing 737-800s and returning one Boeing 737-300 as its lease expires. These new planes are more fuel efficient and thus will help keep fuel cost under control.

The new planes also feature roomier seats and state-of-the-art audio and video entertainment systems, which are crucial to compete with regional carriers. With those purchases, Garuda now has 47 Boeing 737s, in addition to six wide-bodied Airbus 330-300s and three Boeing 747-400s.

Garuda also operates two Boeing 737s as part of its low-budget service, called Citilink, based in Surabaya. The plan is to purchase a total of 50 new Boeing 737-800NGs and 10 Boeing 777-300ERs, in part to replace its existing fleet. Planes will be delivered in stages, starting in July 2009 for the Boeing 737s and in 2011 for the Boeing 777s.

When asked about intense competition from local low-budget airlines, Emir responded diplomatically that the domestic market was large enough to accommodate the current number of players.

In fact, budget airlines complemented Garuda services, he added. He said Garuda positioned itself domestically as a premium airline, focusing on the middle to upper market.

The low-budget airlines, given their low-priced tickets, cater to the middle to lower market segment, and thus play an important role in introducing new customers to the airline market.

In other words, they actually help expand the market.

"Garuda, thus, faces the challenge of providing enough added value, in terms of service and convenience, to justify its premium pricing and further attract passengers that would like to upgrade," he explained.

Conversely, Garuda positions itself as a lower-priced airline when it competes abroad, with similar amenities than its more established regional rivals.

It is employee issues, however, that have been Emir's most difficult challenge, especially when it comes to changing people's mind-set.

One way that he has tried to address this issue is by introducing meritocracy by measuring performance and providing bonuses to those providing excellent service. Another was to not only adjust salaries to the market, but also adjust the corresponding job specifications to the market.

This is an ongoing process, but results are already being felt, he argued.

"As a former banker, I realize that in banking, one tends to deal more with numbers and intangibles, while in the airline industry, the results are more tangible and real. That is more satisfying," he concluded.