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Toward full privatization, transformation of Garuda
in the long run, the debilitating financial problems besetting Garuda will raise the question of whether it is still relevant to keep the airline as a flag carrier.
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tate-owned airline Garuda Indonesia reported a loss of US$712.73 million in the first semester of 2020. As of June 30, 2020, the flag carrier booked $917.28 million in total income, down 58.18 percent year-on-year from $2.19 billion.
As of Dec. 31, 2020, Garuda's equity stood at $1.9 billion — $7.5 billion in total assets and $9.57 billion in liabilities. Worse, throughout last year, Garuda only made $1.01 billion, less than one-third of its 2019 mark of $3.3 billion.
The COVID-19 pandemic was one of the main factors contributing to Garuda’s financial downturn, which is also the case of the world’s airline industry. For example, Garuda has to pay the rental fee of 101 aircraft that have remained idle during the pandemic due to a sharp decrease in occupancy rates.
Even before the pandemic, Garuda operated too many fleets in terms aircraft variation, potentially leading to inefficiency. Now, its rental debt has reached Rp 1 trillion per month. The figure will increase exponentially every month if the outstanding debts are not paid immediately.
A number of measures have been taken to save Garuda. For its debts, Garuda has promised the House of Representatives to negotiate them with several lessors. On the other hand, in December 2020, the government through the Finance Ministry agreed to provide an injection in the amount of Rp 8.5 trillion, together with other financially troubled state-owned enterprises (SOE). To this date, though, Garuda has only received Rp 1 trillion in total.
Both measures may be effective in the short term. However, in the long run, the debilitating financial problems besetting Garuda will raise the question of whether it is still relevant to keep the airline as a flag carrier — a concept that allows the government to own majority shares — or whether it is about time to consider full privatization, with Indonesian investors owning a minimum of 51 percent shares in Garuda.
The aforementioned minimum figure for Indonesian shareholders is important to ensure Garuda’s Indonesian nationality survives, as it will be locked within bilateral and multilateral air service agreements. Both models commonly require effective control, proven through the majority ownership of shares and airlines with the same nationality. The failure to do so means losing the rights to several international routes.
The partial privatization of Garuda started in February 2011 when it offered 6.33 billion shares valued at Rp 4.75 trillion to the public by listing itself on the Indonesia Stock Exchange (IDX). Right now, the public owns 13.66 percent shares, with Trans Airways owning 25.81 percent. The government owns 60.54 percent shares as the majority shareholder.
The Organization for Economic Cooperation and Development (OECD, 2018) emphasizes a few areas in characterizing the relevancies of SOEs. First, SOEs are established to provide public services and goods in the presence of market failures that would lead to such services and goods being under-provided.
Second, it’s better to use SOEs as a tool for national development, inter alia to create jobs, drive industrial policy or protect national security. Third, the most important one, SOEs are established for a broader set of objectives other than profit maximization, especially in the field of providing subsidized goods or services through their public service obligation.
All of the three characteristics no longer seem to apply to Garuda. Since 2004, the Indonesian aviation industry has changed its face from a tight-regulated and state monopoly regime to a more liberal and market-friendly environment. The aviation industry has thrived, thanks to the establishment of privately owned airlines, both full-service and low-cost. Moreover, Garuda also has no public service obligation in providing subsidized goods or services.
Considering the abovementioned factors, in the long run, the government should consider deregulating the aviation industry, starting with the full privatization of Garuda. Still, a golden share would be kept for the government as a representative of the state, allowing it to exercise special rights, ranging from appointing the CEO and guaranteeing the fleets’ utilization for humanitarian aid to other demands in the name of national interest.
More allocations should be made for private investors to keep Garuda at a level playing field. Their stronger presence means protecting professional management and commercial affairs from too much political intrusion. Otherwise, the dream of placing Garuda Indonesia at the same level as Cathay Pacific and Singapore Airlines would merely be a castle in the sky.
It is better for the government to focus on SOEs that produce essential goods, supply essential industrial inputs or creation of jobs. Any state budget injection such as government investment would be more useful for other essential sectors. Airport development is one of them, as cargo is essential for the future of Indonesia’s digital market.
While attempting to save the airline industry, the nature of the airline business in itself needs to be kept in mind, as infamously summarized by Richard Branson, the owner of Virgin Atlantic: “If you want to be a millionaire, start with a billion dollars and launch a new airline.”
During these hard times, indeed, protecting Garuda and other national airlines is essential to maintain the national sky bridge. However, during the post-pandemic era, the best protection for a flag carrier is by allowing and encouraging innovation — which comes from privatization.
The vision for this long-run target shall lead to the flag carrier’s transformation from a merely political unit heavily reliant on state injections when things go wrong.
At the end, the airline industry speaks volumes about the freedom of the air business. Expansion and survival rely on this. A post should be assigned to academics and experts. The government and all stakeholders should consider this sensitive issue with a cool head now that we need a solution for the long run.
The opportunity is now, just as the aviation industry is restarting. Do not be late, Indonesia.
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Ridha Aditya Nugraha teaches air and space law studies, International Business Law Program, University of Prasetiya Mulya. Kurnia Togar Tanjung teaches at the School of Law, University of Indonesia. The views expressed are their own.
