Aiming for the Jakarta-Jeddah Route
Garuda Indonesia’s leadership is pursuing various avenues to overcome the company’s losses. The airline has minor pilgrimage and haj customers in its sights.
A mid Garuda Indonesia’s financial adversities, an idea emerged to overcome losses from the Jakarta-London-Denpasar route, among others by finding an aircraft with a low rent fee of under US$500,000, or around Rp7 billion, per month. “(We) have the aircraft. Maybe in June it can be in operation,” said Garuda Indonesia Finance Director Fuad Rizal on Thursday, May 2.
Fuad said the Boeing 777 aircraft will be used to take passengers from Soekarno-Hatta Airport in Tangerang, Banten, to Heathrow in London. From Heathrow, the flight will head to Ngurah Rai Airport in Bali. The aircraft will replace another Boeing 777 aircraft with a rent fee of US$1.5-1.7 million. If the plan is realized, the company would save as much as US$1-1.2 million.
Garuda’s flights to Europe are still operating at a loss. A former Garuda official said the company is still covering Rp1 billion for one flight. “We’re still (operating) at a loss with Europe (flights),” said Fuad. He was unwilling to mention the exact loss. “Depends on whether it’s peak or low season, and on the number of passengers and fuel prices.”
Garuda Indonesia has had a long history of flights to Europe. In the 1960s, the company opened a flight to Amsterdan with a Jakarta-Bangkok-Mumbai-Karachi-Kairo-Rome-Frankfurt-Amsterdam route. After a ban in Europe due to various accidents, Garuda again began flying to Amsterdam in 2010.
Four years later, the airline opened a route to the Gatwick Airport in London with a transfer in Amsterdam. The route used to fly five times per week, but after only several months the number was cut down to three times a week.
In October 2018, Garuda shut down the direct return flight from Jakarta to London. The company’s CEO at the time, Pahala Mansury, said the flight was discontinued because there was not enough passengers. The decision was made after the state-owned enterprises (SOEs) ministry asked the company to review the route. The airline can only accommodate passengers at a 75-percent capacity.
The decision was questioned by the tourism ministry. Tourism Minister Arief Yahya hoped Garuda Indonesia would keep the direct flight from Jakarta to London because UK is among countries that contribute the most number of foreign tourists at around 350,000 individuals annually, with quite a high growth rate. In the end, Garuda offered the route again in December 2018.
The changes in flight routes are part of Garuda’s efforts to alleviate its losses. Fuad Rizal has even mapped unprofitable routes, for example domestic flights using Bombardier CRJ (Canadair Regional Jet) and ATR (Avions de Transport Régional) carriers. “We are optimizing. Routes that are operating at a loss are discontinued,” he said. Garuda relegated this business line to its subsidiary, Citilink, and another airline in the Garuda Group, Sriwijaya.
Garuda’s management is also negotiating with an aircraft lessor to cancel an order for new ATRs. The company is under the obligation of an old contract for the purchase of ATRs. Some of the armada’s units have arrived, but there are still seven units planned to be delivered over the next five years. An SOEs official said the lessor agreed to cancel the order for the remaining seven units on the condition that Garuda would rent seven second-hand ATR units owned by the lessor for half the price of new aircraft. The seven units are as old as the propeller planes used by the company at the time.
Fuad was unwilling to explain further, but he did not deny the negotiation process. “I’m optimizing our aircraft and routes to clear the ‘fat’ in the company,” he said. “But (we) can’t make cuts in a loss condition.”
GARUDA’s financial troubles were inherited. The government has time and again given the company fresh capital, including Rp1 trillion in August 2006. At the time the government also injected capital to another state-owned airline, Merpati Nusantara Airlines, in the amount of Rp450 billion. But these steps did not improve conditions.
Garuda attempted to obtain capital through an initial public offering (IPO) in early 2011. The government released 6.3 million of its shares, or equal to 27.98 percent of the total capital placed and deposited. The price offered was Rp750, with the company hoping to receive Rp4.3 trillion.
But only half was bought in the IPO process, or around 3.32 billion shares, or equal to 52.5 percent. The rest, around 3.008 billion shares (47.5 percent), had to be taken by three emission guarantors that had expressed their full willingness to purchase the remaining shares. The three companies were Danareksa Sekuritas, Mandiri Sekuritas and Bahana Securities. They had Garuda’s shares for around one year, until CT Corp owner Chairul Tanjung took over the shares from all three.
At first, Chairul purchased 2.47 billion shares (10.88 percent) at the price of Rp620 per share. The purchase was made by Trans Airways. The total spent was around Rp1.5 trillion. The rest was concluded in the second stage. According to a CT Corp official, the corporate action was taken on the request of Dahlan Iskan, who was then SOEs minister. Dahlan has not yet responded to our request for confirmation. The founder of the Jawa Pos Media Group, however, uploaded a post titled A Local Mbah Surip for Garuda on the blog Dahlan Iskan’s Journal on April 30, 2012.
According to the post, Danareksa, Bahana and Mandiri Sekuritas were overwhelmed when they had to buy unsold Garuda shares for Rp750 each. Furthermore, just moments after the IPO, the price plummeted to Rp570, once even hitting Rp395. As a result, the three state-owned securities company lost hundreds of billions of rupiah. To make matters worse, the money used to purchase the shares was loaned. “Despite the loss, the interest still had to be paid,” wrote Dahlan. This is the reason Dahlan agreed to let the three companies immediately release the Garuda shares to curb their losses.
The government wanted the shares to be sold to strategic partners, such as international aviation companies with good reputations. The three securities companies made an offer to various international investors but with no results. Offers were made but on a list of conditions, such as a cheap price and not just 10 percent.
Dahlan took the initiative to contact five major companies in the country. “Requesting help. Would your group be willing to purchase Garuda shares owned by three SOE securities at the current market price?” The text message was sent to Nirwan Bakrie, Chairul Tanjung, Sandiaga Uno, Rahmat Gobel, and Anthony Salim. Three immediately agreed to help. Dahlan let the businessmen speak directly to the company, and Chairul ended up as a Garuda shareholder.
But Garuda’s finances still did not improve. The board of directors racked their brains, renegotiated the company’s order for aircraft, and pursued efficiency. Now the management hopes to capitalize on minor umrah pilgrimage trips and the haj season soon to arrive.
The plan is to redirect aircraft that were flying to London to these trips to Saudi Arabia. In January, Saudi Airlines flew to Jakarta six times per day, while Garuda only flew to Jeddah three times. He hopes to have Garuda fly to Jeddah six times and Saudi to Jakarta only three times. “More aircraft for the Jakarta-Jeddah route,” he said. The target is to make profit. “If possible a profit of US$20 million in the first quarter, US$30 million in the second quarter.”