IO, Jakarta – Prabowo Subianto, General Chairman of Gerindra Party, has stated that State-owned Enterprises (Badan Usaha Milik Negara – “BUMN”) are a final fortress of the Republic of Indonesia’s national economy. If BUMN are threatened, the State itself is also in danger. This statement starkly reveals the current condition of BUMN: imperiled from all sides.
BUMNs are the pride of the Nation. Their shares should have been fully-owned by the Government of Indonesia. However, that is not the case. According to Indonesian Stock Exchange (IDX) data, Indonesian government share ownership of PT Garuda Indonesia Tbk. is just 60.50%; PT Trans Airways owns 24.62%, and the public holds 14.86% of shares. 57% of the National Gas Company (Perusahaan Gas Negara – “PGN”) shares are currently owned by Pertamina, with the remaining 43% held by the public, including foreign investors (which include Petronas). Compare this with Temasek Holding, the Singaporean national wealth funding company. Until now, the Singaporean Department of Finance remains the sole shareholder of Temasek.
A member of the DPR Financial Commission, Ecky Awal Mucharam, has stated that the current debt environment is extremely worrisome. With a steady depreciation of the Rupiah exchange rate, BUMN finances are in dangerous territory. Using a current exchange rate of Rp 14,396.00 per US Dollar, total non-financial institution BUMN debts have reached Rp 677 trillion. If we combine this with public BUMN financial institutional debts, including those of BUMN banks, total BUMN debts stand at USD 325.92 billion or Rp 4,682 trillion.
59% of non-financial institution BUMN debts are in foreign currencies, and 53% of these are owed to foreign parties. Due to a skewed exchange rate, the installment repayment of debt principal and interest has become a severe burden to companies. Bank Indonesia (BI) data shows that up until Quarter I-2018, the current non-financial institutional BUMN debts accrued this year amount to USD 47.11 billion. This means that there has been a significant spike of USD 7.1 billion within the past two years alone.
The EBITDA, or “earnings before interest, tax, depreciation and amortization” is an income indicator that roughly describes a company’s ability to repay its debts. In this case it is an even worse indicator, as an ever-higher debt-to-EBITDA ratio means that debts grow faster than income. According to S & P, 16 out of the 20 BUMNs analyzed show a continuing trend of a leverage ratio strengthening against a weakening cashflow ratio.
Ecky concludes that the spike in BUMN debts is the result of the current aggressive infrastructure construction. This forces BUMNs to take on debts to finance their infrastructure “business”. This condition is followed by weak cashflow to companies, because of the mismatch between the need to repay debts to creditors and the insufficient capital provided by the Government. Furthermore, the projected demand rate is frequently too optimistic. Ecky cited examples of the State Electricity Company (Perusahaan Listrik Negara – “PLN”) with its notorious over-capacity, or a certain number of toll routes with relatively few users. Such debts will have far-reaching consequences, because they do not only affect the Company’s finances, but also investor perception. Global ranking agencies even warn against the financial condition of BUMNs involved in Indonesian Government assignment projects.
Spiking debts have yet another negative impact. In August 2017, Minister of Finance Sri Mulyani Indrawati announced the list of BUMNs that have not submitted dividends to the State. Sri stated 21 BUMNs are still loss-making, including losses within the year and accumulated losses over the past few years. Some of this is caused by competition and lack of efficiency, such as the case of PT Garuda Indonesia Tbk. and Perum Bulog. Some BUMNs have been enduring losses for a long time and are even being restructured, such as PT Merpati Nusantara.
The BUMNs that endure operational loss because of being less efficient than their competition: PT Garuda Indonesia (Persero) Tbk., Perum Bulog, PT Krakatau Steel (Persero) Tbk., PT PAL, PT Dok Perkapalan Surabaya (Persero) Tbk., PT Infofarma (Persero) Tbk., PT Balai Pustaka (Persero), PT Boma Bisma Indra (Persero), Perum PEN, and PT Berdikari (Persero). BUMNs that are currently being restructured include PT Nindya Karya, PT Merpati Nusantara Airlines (Persero), PT Kertas Kraft Aceh (Persero), PT Survey Udara Penas (Persero), PT Industry Sandang Nusantara (Persero), PT Iglas (Persero), PT Kertas Leces (Persero), PT Djakarta Lloyd (Persero), PT Istaka Karya (Persero), PT Varuna Tirta Prakarsya (Persero), and PT Primissima (Persero).
Minister of BUMN Rini Soemarno has admitted that 13 BUMNs suffered losses in 2017, for a total of Rp 4 trillion.
BUMN as Victims of Image-building
Ucok Sky Khadafi, Director of Centre Budget Analysis (CBA), said that some BUMNs currently have good finances while others have poor ones, and there are considerable assets. The problem is that our State Budget is in a pit of deficit. Furthermore, Indonesia’s Government Bonds are no longer attractive. The only remaining financial source is selling off State assets, including BUMN. “There are many ways to effect this. The most common is to cause the Company to suffer losses, then to sell its assets. So, our BUMNs are actually in a healthy condition, but BUMNs are sacrificed for image-building. For example, the Government sets Pertamina with a single-price policy in Papua but neglects to provide funds to execute the program. Pertamina has to deal with the single-price policy all by itself,” he said.
Ucok further said that BUMNs become unhealthy under Jokowi government because many of Jokowi volunteers insist on being made Commissioners in BUMN, even though they lack the skills. “Compare this with SBY volunteers – they didn’t insist on being Commissioners managing BUMN, but they involved themselves in political activities instead,” he pointed out.
Meanwhile, economic observer Fuad Bawazier showed how BUMN profits or losses are measured from the main business. If the main business endures a loss and the Company sees its assets sold off – decades’ worth of assets being marketed – while this may generate a temporary profit, it gets all used up to cover losses. That is not a healthy business model, as losses will accumulate and there will be nothing left in the end. “The State should always act in the best interest of the people, according to the provisions of Article 33 of the ’45 Constitution, but it seems to have moved away from this goal. The current leader has the power to put things that are actually abnormal in a gray area. For example, the Company endures losses, sells assets, while employees do not get production compensation because the Company has suffered a loss,” he said.
Sabda Pranawa Djati, Secretary General of the Central Management Council of Indonesia’s Association of Labor Unions, conclude that BUMN performance decays are due because their Commissioners and Directors are not professionals. Many campaign team members are taken on without providing any added value to the Company. “These BUMNs are forced to allow themselves to sustain losses, so that private parties can come in. The appointed Directors come with baggage, whether they get into the structure of the Company or its business partner. The Management does not optimize their performance. Private parties with capital strength bring in money and slip into government projects in the region, and finally erode the Company’s finances,” Sabda said.
“That’s the mode of their corruption – they invest the BUMN assets along with their business partners. They establish subsidiaries and sub-subsidiaries and sub-sub-subsidiaries to keep the Financial Audit Board (Badan Pemeriksa Keuangan – “BPK”) from being able to track them. The Directors and Commissioners in these sub-subsidiaries and sub-sub-subsidiaries are generally former management from the original company who eat out the Company’s finances from the inside.”
BUMNs are riddled with both political interest and investor interest. “We don’t want to allow our need for foreign share divestment to cause us to lose our sovereignty. We don’t want BUMN to become mere ATMs for political interests.”
In 2018, two major BUMNs came under the spotlight: PT Garuda Indonesia (Persero) Tbk. and PT Pertamina (Persero). Garuda Indonesia endured losses in Quarter I-2018. However, the loss was minimized at 36.5% to USD 64.3 million, or equal to Rp 868 billion (exchange rate Rp 13,500.00), from an amount in the same period in 2017 at USD 101.2 million, or about Rp 1.36 trillion.
Despite having endured losses, Garuda Indonesia’s President Director Pahala N. Mansury said that the Company recorded an increase operational income of 7.9% to USD 983 million, or equal to Rp 13.27 trillion, from the amount in the same period in the past year of USD 910.7 million. In Quarter I-2018, Garuda Indonesia recorded 8.8 million passengers, or increasing 5% from the amount in the same period in the past year. Cargo being transported also increased 3.2% to 1,119,000 tons. Income from cargo in Quarter I-2018 grew 9.1% to USD 61.3 million, or equal to Rp 827.5 billion.
If Garuda Indonesia still recorded a loss, it is otherwise with Pertamina. There is a letter circulating with the news that the Minister of State-owned Enterprises (BUMN) Rini Soemarno, allows PT Pertamina (Persero) to release or sell Company assets. The permit for selling assets is quoted from a letter signed by Rini Soemarno addressed to Pertamina’s Board of Directors. In the letter, Rini principally approves the Board of Directors’ plan to take actions in order to maintain and save the financial health of the Company, in this case comprising the release of Pertamina’s upstream assets.
What are the assets to be sold according to the Circular signed by the Minister of BUMN Rini Soemarno on 29 June 2018?
- First, share-down of selected upstream assets (including but not limited to participating interest, share ownership, and other forms) with continued maintenance of Pertamina control over strategic assets, and by seeking credible partners with strategic value, such as upstream access in another country.
- Second, spin-off of RU IV Cilacap Business Unit and RU V Balikpapan Business Unit to subsidiaries and potential farm-in partners of the subsidiaries, in line with the Refinery Development Master Plan (RDMP).
- Third, additional investments in order to expand the network for selling general petroleum fuel at an economical price, such as Pertashop.
In selling its assets, the question is: is Pertamina suffering a financial crisis or is there a hidden agenda? According to Arie Gumilar, President of the United Pertamina Labor Unions’ Federation (Federasi Serikat Pekerja Pertamina Bersatu – “FSPPB”), some parties strive to cause Pertamina to suffer losses, so that there will be a potential for covering Pertamina’s losses by selling assets. In order to cover the loss as the impact of government policies such as single-price petroleum fuel, gasoline and diesel fuel sale prices are set to remain until 2019. This burdens the Company’s cash flow, and when cash dries up, they offer to sell their assets.
“What we are worried about is the root cause why Pertamina has cashflow problems, which forces us to sell assets. It’s like an amputation – methods such as participating interest in the work area, refineries, are spun off, and this will later make it easier for us to let go of our assets. On the contrary, the reference for a petroleum and natural gas industry that’s strong both upstream and downstream should be a merger. That is how it goes globally. However, Pertamina has been amputated, and it becomes weaker. If government policy is continued, it is possible that Pertamina may suffer negative profits this year,” Arie said. He further said that unsubsidized petroleum fuel becomes a burden on cash flow. Pertamina’s business cash continues to become eroded, so that it can make no more necessary expenditures that require money.
Sudirman Said, former Minister of Energy and Mineral Resources (Energi dan Sumber Daya Mineral – “ESDM”) stated that the Government’s plan to sell its assets is caused by the fact that BUMN management in this government is very much “transaction-oriented”. “There have been many corporate actions, such as mergers, sales of assets, spin offs, and similar. This also occurs in Pertamina. As long as such corporate actions are based on professional reviews and there is no vested interest behind them, that is fine, but any corporate actions pressured by time, pressured by urgency, are bad policies,” Sudirman clarified.
Sudirman further said that the plan to sell some assets when Pertamina’s finances are under pressure, no matter what you call the transaction, will be viewed by the market as Pertamina being under pressure. Pertamina’s bargaining position will not be as good as if the asset sale or partnership is done when Pertamina is in a strong position.
Meanwhile, Said Didu, BUMN observer, explains that the fact the Ministry of BUMN will be selling Pertamina assets is caused by the main issue of Pertamina having insufficient cashflow. This is shown in the letter sent by Pertamina’s Board of Directors to the Minister of BUMN on 29 June 2018, concerning Pertamina’s financial problems. These problems were caused by the fact that Pertamina has been given Government assignments that stray from the directives of the BUMN Law year 2003 for more than 2 years (since 2016). “The assignment imposes 3 major burdens on Pertamina, i.e. sales of absolutely unsubsidized gasoline, sales of diesel fuel with subsidies of only Rp 500.00 per liter, and the petroleum fuel single-price policy,” Said Didu said.
The condition is worsened by the increase of oil prices and the weakening of the Rupiah exchange rate. Gasoline price should have been increased to Rp 8,500.00/liter and diesel fuel price to Rp 8,350.00/liter. However, Pertamina is instructed to sell gasoline at only Rp 6,500.00/liter and diesel fuel at Rp 5,150/liter, forcing it to subsidize Rp 2,000.00/liter for gasoline and Rp 3,200.00/liter for diesel fuel.
With current global oil prices and the Rupiah exchange rate, if the policy isn’t changed Pertamina will be overdrawn at Rp 30 trillion per year. “This is difficult, because the current government is unwilling to increase petroleum fuel prices and is also unwilling to increase subsidies. Therefore, Pertamina sent such a letter to request the Ministry of BUMN to save Pertamina by hypothecating potential income through participating interest from upstream petroleum and natural gas sales. I am uneasy with this method, because it will reduce Pertamina’s competitiveness in the long term, as partners will certainly want to take a yield with the better quality. I think Pertamina is not selling its assets, but hypothecating its yield to other parties, so the purchase is made first. For example, there is a bid for down payment of crude oil, for…let’s say, 100 barrels per day. A person who is interested in getting 20% has the right to get 20 barrels per day,” Said explained.
The plan for selling Pertamina assets will be perceived by the public to mean that Pertamina’s finances are a mess. “Management tells the mass media that Pertamina is doing fine. Its cash flow is still doing well, its balance is still doing well. The Government also issues a similar message. But any company forced to sell their product at a lower price than the cost of materials plus processing will have financial trouble sooner or later. Even if it gets covered up, one day the public will know that Pertamina is in deep trouble,” Sudirman said. He also believes that Pertamina is in a mess from extreme financial problems. “Pertamina’s loss is about Rp 20-30 trillion a year because it is overdrawn because of its 3 burdens,” he said.
Pertamina has always been profitable and has never recorded a loss until now. “The problem we are facing is cashflow trouble caused by the government policy that fails to adjust petroleum fuel price with its economic value. When the difference between economic price and allowed sales price is not too big, Pertamina can still absorb it. But when the gap becomes bigger because of increased global oil prices and increased USD exchange rate against the Rupiah, Pertamina sustains a double hit, and it is very difficult to resolve,” Sudirman said.
The burden is directly caused by the duty to sell unsubsidized petroleum fuel (diesel fuel and gasoline) at low prices and extremely large volumes. If the Government wants to be transparent, the subsidy mechanism must be executed through the State Budget and must be approved by DPR RI. However, imposing the subsidy to the corporation violates two regulations simultaneously, i.e. the State’s own financial regulations and the corporate regulations. The Government cannot simply dump the effects of its policy on the Company, which has the legal and ethical duty of generating profits.
The concern is that the sale of Pertamina assets will threaten our energy sovereignty. Sudirman said that it depends on what assets are being sold. If vital assets are released and control of these assets is transferred to third parties, especially foreign parties, our energy sovereignty will be threatened, whether directly or indirectly. However, if it is supporting assets that are being released, the impact would probably not be as bad.
According to Sudirman, selling assets will not necessary generate positive impact on today’s financial condition. Cashflow issue is a short-term issue. Selling assets require time; we cannot rush the process. If asset sales are performed in a hurry, the market will respond negatively. Even if a Pertamina asset sale is executed, we don’t want to have it interpreted as a “fire sale”. Sudirman Said concludes that the problem is that Pertamina is having short-term financial problems, such as getting money to buy oil, lease ships, etc. What it should be offering is selling the prospect of long-term income. If the oil that we should have enjoyed for 20 years runs out before 20 years, it will threaten the sustainability of Pertamina’s business.
Pertagas is Owned by PGN
PT Perusahaan Gas Negara Tbk. (PGN) officially holds 51% of PT Pertamina Gas (Pertagas) shares. The Pertagas share takeover transaction has a value of Rp 16.6 trillion, which is the purchase price for the 2,591,099 shares owned by Pertamina in Pertagas.
The Chairman of Pertagas’ Labor Union, Nugraha Junaedy (or “Nugi”), said that gas has several advantages: it causes little pollution, its prices remain competitive, and we have a very large gas reserve. PGN purchased Pertagas as a follow-up action from its holding company, Pertamina. Basically, all Pertamina workers approve of holding assets, but they question and do not support the means of holding the asset, i.e. by acquiring a State company. When PGN enters Pertamina, that means both Pertagas and PGN are subsidiaries of PT Pertamina (Persero).
“We already have a deed for transferring 57% of PGN shares to the government via Pertamina. This means that PGN has become one of Pertamina’s subsidiaries. If PGN has already become Pertamina’s subsidiary, why would PGN need to acquire Pertagas? 100% of Pertagas belongs to the State already, why must PGN (as subsidiary to another State-owned company, in this case Pertamina) acquire it? The correct thing to do is to synergize between these two Pertamina subsidiaries. How come an acquisition is made without clear reasoning?” Nugi said.
The plan to have PGN acquire Pertagas has been a long time coming, and there was a lot of going back and forth before it was implemented on the basis of a flimsy review. “If we are divesting a State-owned company, the main priority is how to ensure that the yield of the divestment can increase Pertamina’s business, or at least Pertagas’. That’s what should have been controlled for the business to improve: not from the business entity perspective, but from the perspective of synergy between operations and trading, from the activity, because the purpose of holding is to generate a cheaper, more affordable gas price for the public and to allow more people to enjoy it. However, the Ministry of BUMN prioritizes the business entity first, while we are currently reviewing the plan,” Nugi said.
Currently, 57% of PGN shares are owned by Pertamina, and the remaining 43% by the public, including foreign investors. Petronas is one of these foreign investors. With Pertagas’ acquisition by PGN, Pertagas income, which should have been 100% going to the State, now has 43% of it going to the public that includes foreign investors. This means that State income – or more specifically, Pertamina’s income, is reduced. If Pertagas income to Pertamina is reduced, there should have been actions for bigger development, and there should have been studies for that too.
If Pertagas is now sold, its profit potential no longer belongs 100% to the State, as some of it would have been moved to PGN – a company a portion of whose shares belong to the public, including foreign investors. Pertagas is a Pertamina subsidiary with quite a good ranking among other subsidiaries. “Currently, we are taking preventive action and we hope that the Ministry of BUMN will cancel the Conditional Sales Purchase Agreement (CSPA) and the entire acquisition process,” Nugi said.
Percentage-wise, Pertagas’ financial condition is stable and has been healthy for the past 5 years. This is in contrast with PGN, whose financial condition worsens every day. Again, it cannot be said often enough that Pertamina’s petroleum fuel burden is extremely large. “Furthermore, the principal permit for asset sale must also have an additional study performed. However, the principal permit for the sale of Pertamina assets has been signed. The Minister of BUMN signed the principal permit simultaneously with the CSPA. We don’t know what the division is like, but the fact remains that the CSPA is part of the divestment sales of a nation’s State-owned company. Divestment sales of a State-owned company are generally done if the Company sustains losses, like from a big project, but Pertagas financial condition has always been stable. On the other hand, PGN’s profits in the past 5 years fell 84%,” Nugi said.
“Basically, we agree that PGN may become a Pertamina subsidiary, but it is unnecessary that Pertagas be acquired by PGN, what for? PGN and Pertagas should synergize, as both PGN and Pertagas have their own internal issues to resolve. The teams at Pertagas and PGN should resolve their respective internal issues to improve their respective performance, and simultaneously synergize for efficiency. We think about the business entity after that, because it is necessary to review both companies, PGN and Pertagas. Are we going to merge them? What form is the merged company going to be? Etc., etc., that does not take a short time. The team only started discussions about such things as mergers, acquisition, advantages and disadvantages in December 2017,” Nugi added.
“We noted many issues that must first be resolved. The resolution of PGN issues should be done in synergy with Pertagas, in order to provide benefits to the public, such as cheap gas prices. This will increase the number of people using gas and reduce the subsidy for petroleum fuel. But the way it is done is wrong – the Government did not reorganize the business first, but reorganized the business entity structure first,” Nugi complained.
PGN does have numerous assets, so that Pertamina now has additional assets. When Pertamina has more assets, its income should increase as well. This is what we need to resolve first. As for the Government giving PGN to Pertamina and giving Pertagas to PGN, in the end the issue will be a rights issue. The percentage of government shares will increase because there is capital increase. “I think it is high time for the Ministry of BUMN to explain this, because the information is conflicting. There is no clear explanation about the follow-up actions for the acquisition of Pertagas by Pertamina and the transfer of Pertagas assets to PGN,” Said Didu, BUMN Observer, said.
Suggestions for Pertamina
What Sudirman is most worried about is that the Board of Directors, especially the President Director, is being replaced too frequently. “Since 2014, Pertamina was led by 4 President Directors, including two acting President Directors. This is a bad practice in decision-making. Extremely large companies need stability of management and leadership. If the management is repeatedly changed, the work atmosphere will be negatively affected, and this will cut productivity,” he said.
Pertamina is like a big mother ship. It must be steered very carefully and thoroughly, and everything must be system-based. If professionalism is abandoned and the political and personal agendas of policy-makers are prioritized, the State will be harmed very much. The minimum tenure of CEO world-class oil companies is 7-8 years, and it is very common for Boards to remain unchanged for tens of years. Pertamina holds Board of Directors replacement ceremonies every year. This is an extremely bad governance practice. Too frequent replacement of Boards means that decisions have not been made after careful consideration. It is difficult to avoid a suspicion of political agendas behind such decisions.
“More importantly, our State politics are circulated once every 5 years. On the contrary, the management of a company must be professional and stable. If political dynamics become too dominant in the management of a State-owned company, it is the people and the entire country that will be harmed. BUMNs belong to the people, to the State. They must not be affected and damaged by temporary political interests,” Sudirman said.
Arie hopes that the Ministry of BUMN, the Ministry of ESDM, and everybody else, including President Jokowi, can see that Pertamina is a strategic company and won’t let it collapse. “Because if Pertamina collapses, it is the people who must bear the burden again,” he said.
A Constant Loss
Within the past 5 years, Garuda Indonesia continues to sustain losses: 2014 saw USD 371 million, in 2015 it was USD 77.9 million, in 2016 it was USD 9.3 million, in 2017 it was USD 213.4 million, and in Quarter I of 2018 it was USD 64.3 million.
The General Chairman of the PT Garuda Indonesia Workers’ Union (Serikat Karyawan PT Garuda Indonesia – “Sekarga”), Ahmad Irfan Nasution, stated that Garuda Indonesia endured losses, because it is a BUMN with a retail sales system. Therefore, it is very vulnerable to the impact of external factors. For example, a rumor of terrorism might cause the number of tourists to drop. And this does not include “past sins” (debts), a former Director got taken to court, and incompetent appointment of Directors.
Alvin Lie, Aeronautics Observer, said that Garuda as a BUMN has been enduring losses for the past few years, since Emirsyah Satar became its Director. Garuda endured losses, among others, because they needed to buy new airplanes. Garuda must procure new airplanes whether it wants to or not, in order to keep its fleets young, competitive, and efficient. He further said that Garuda’s biggest problem, one that hobbles it, is mostly the large cost of airplanes.
“What we must note is that the purchase of airplanes must be made very carefully, because even a single airplane costs about USD 70 million, not including the purchase of its supporting equipment. This will naturally affect finances: where can they get leasing, what’s the interest rate, etc. Within the past few years, all airlines suffer from harsh conditions, including even Singapore Airlines and Cathay Pacific, because oil prices increased again: the oil price is a significant component of flight operational costs at about 40%. So just the costs for buying airplanes and airplanes fuel, plus HR costs, already amounts to 80% of all expenses,” Alvin Lie said. Garuda’s Board of Directors did attempt to reduce its financial burdens by means such as efficiency in business operations, rescheduling of debts, and seeking cheaper sources of funds, but to no avail.
Arista Atmadjati, Director of Arista Indonesia Aviation Center (AIAC), believes that Garuda’s loss has taken place for a long time, and that it started when Garuda shares were offered on the Stock Exchange in 2011. At the time, PT Garuda Indonesia (Persero) Tbk.’s initial public offering (IPO) was Rp 750.00 per share. Since then its price has fallen far from the initial price, down to Rp 300 per share at the moment. Investors appoint officials from fields that are not in line with the airline business. This makes a lot of its policies not suitable with field realities, such as stopping all incentives. Garuda was boycotted by the Association of Indonesian Tours and Travel Agencies (ASITA) for that reason.
“Garuda’s latest policy is cooperation with Grab. That’s as bad a mismatch as I’ve ever seen: Garuda is a premium or full-service airline, but Grab does motorcycle-based services. The cooperation is in the form of point exchange, but that’s not “apple to apple,”” Arista said. Garuda also has another policy of cooperating with Sriwijaya Air, while they are of different classes. Furthermore, Garuda unnecessarily operates small airplanes. It should have cooperated with Citilink as its subsidiary, or have Citilink cooperate with Sriwijaya Air, as they are in the same class. In fact, Citilink employees who want to upgrade their Citilink flight to Garuda must pay in full. Another unsuitable policy is related to market penetration. Garuda now uses the tagline “Semua bisa terbang dengan Garuda” (“Anyone can fly with Garuda”), which is similar to Air Asia’s “Now everyone can fly.”
Arista Atmadjati said that Garuda’s management since 2017 is worse than ever before, because the organization is too big (8 Directors and 1 President Director), while 5 Directors should do. The obligatory ones should include Director of Planning, Director of Engineering, Director of Operations, Director of Marketing, and Director of Finance. The organization of Garuda representatives is also unwieldy. There should only be 2 Area Chiefs, because there are Branch Chiefs under the Area Chiefs. 4 Area Chiefs is excessive.
“Garuda’s condition is out of the ordinary – don’t treat it the same as a normal company. All Garuda employees have lost their sense of crisis, everything runs as if that’s the norm. I suggest that Garuda should reduce the number of its Directors from 9 to 5. Even worse, it now has a Director of Cargo. What for? That’s unnecessary because Garuda does not have cargo airplanes, that’s odd. The contribution of cargo to Garuda’s income is also only 10%. Furthermore, everyone at Garuda has lost all sense of crisis. Now they act as normal – they receive bonuses, paid vacations, educational benefits. Garuda provides so many incentives, such as paid vacations at 50% of pay. So if any employee takes 2 weeks’ leave, they will get 50% pay. Educational benefit each May at 1x pay, performance bonus, religious holiday benefits. They lose trillions, but they can afford to give out performance bonuses? That’s odd – that’s not in line with business logic. I’m sure that’s just the Board of Directors’ way of keeping employees quiet. They give performance bonus to employees, employees finally simply accept them. Incentives should be delayed, especially since Garuda employs about 6,000 people throughout Indonesia,” Arista Atmadjati said.
Ahmad Irfan said that the high number of Directors is just one part of the waste. “If we compare Garuda with other airlines with equally strong domestic and international routes, they only hire 7 Directors,” he said. Other than the large number of Directors, Ahmad Irfan also highlights the competence of Directors. “For example, it is best to get a banking person to serve as Director of Finance, we do not deny that. But they take in the Director of HR from some random place. He’s so confused and inexperienced he has to learn everything again from scratch for a long time. Garuda’s current Director of Marketing comes from Pertamina, which sells extremely monopolistic goods, while Garuda sells oligopolistic goods. The cultures for selling oil and selling plane tickets are extremely different. We think that the Government must be careful, which Director can be generic and which Director must be specialists in the field,” he said.
Tengku Burhanudin, Secretary General of the Indonesia National Air Carriers Association (INACA), believes that the number of Directors is the domain of shareholders. According to him, in order for a company to be able to provide prime service, there must be a specific division for it. The Directors must be appointed according to their competence, e.g. Director of Engineering, Director of Service, and Director of Marketing must understand airline issues, and the President Director must understand how to manage a team of executives.
For the past few years, Garuda Indonesia sales performance continues to decline, because many parties see how much debts they have taken on. However, according to Ahmad Irfan, if they are still selling, they will definitely have the ability to pay debts. The fact is, reduced seat load factor also results in a reduced number of passengers. The Government must see that some things cannot be sold.
For many years since 1970, Garuda Indonesia has always played with large-type airplanes, such as Boeing and Airbus. Garuda also plays with ATR and Bombardier-type planes. Ahmad Irfan said that the last two types contribute greatly to Garuda loss. “The thing is, we never played in flights with ATR-type airplanes. If we use them, we will lose big, if we don’t use them, we still have to pay the instalments anyway,” he said.
Arista Atmadjati said that Garuda’s losses occur due to a series of bad strategies. In terms of airplanes, Garuda has airplanes similar to Wings Air’s planes, propeller-driven airplanes like ATR 72. This is not suitable with Garuda’s initial intention to participate in all routes, including short regency flight routes instead of just the major ones like it should. Garuda enters the regency flight segment by flying to, say, Pangkalan Bun, Berau, Lhokseumawe, Mamuju, Baubau, and other remote destinations.
This is bad, because the market is both small and of middle to lower classes, which is not in line with Garuda’s middle-upper class targets. The district flight segment should be Citilink’s by right, but they actually set up Citilink routes head to head with Garuda’s. in contrast, Lion Group is disciplined in this matter: it does not take regency routes at all, but leaves them for its lower-class subsidiary, Wings Air.
Tengku Burhanudin concludes that Garuda now also plies the regency/municipal scale because regional economy is starting to develop. “Demand for travelling is high, especially since our country is an archipelago. Nowadays we have many advanced airports, we have much more terminal capacity than before. For example, in the old days the only air route in North Sumatra was Jakarta-Kualanamu, but now we also have Jakarta-Silangit, which is a new target destination. Garuda cannot just fly to Medan, it must also fly to Silangit because there is a market opportunity there. If the runway allows for it, why not,” he said.
Ahmad Irfan views the debt loads from two perspectives: the fact that debt loads are heavy, and the inability of Garuda to pay off its debts. “Do we need to restructure debt loads? If it’s cheaper and better, OK. But restructuring is frequently just the burden of the subsequent Board of Directors. What happens right now is the impact of restructuring organized by Pak Emil, which Pak Pahala must deal with. Then if there is another restructuring, the burden will be handled by the next Board in line. The illness never gets better. Therefore, it will be better if Garuda strengthens its sales. They might, for example, create ticket selling programs for their employees –if they don’t give commissions to the employees, at least reward them,” he said.
Arista Atmadjati said that Garuda sought more debt in March 2018 by issuing USD 750 million’s worth of bonds in Singapore. Garuda robs Peter to pay Paul because it never achieved operational profits for the past 15 years. On the contrary, Garuda actually sells its assets by selling their airplanes to cover these debts.
Garuda used to own about 20 airplanes, but it gradually sold them all. Garuda leases about 95% of the total of its 200 airplanes, which means that its leasing instalments are quite big. Garuda mostly issues bonds abroad to gain money through debt, only to use them to pay airplane leasing instalments, and the money gained from operating the airplanes is used to repay the bond debt. Garuda generally leases new airplanes with an average age of 5.5 years. Garuda’s biggest operational cost is for leasing at 25%-35%, for fuel at about 27%, and about 20% for maintenance, leaving only 16% for wages and benefits.
According to Alvin Lie, Garuda’s marketing strategy relating to routes is already five-star. Garuda has Citilink as its subsidiary, which serves low cost routes and short-distance flights using ATR propeller airplanes. The problem is, Garuda, which is marketed towards the upper class, now also serves the working class, confusing everybody. Its domestic competitors have better branding positioning. For example, Lion Global Group uses Batik Air for full service flights, uses Lion Air for low cost carriers, and uses Wings Air for medium-level short-distance flights.
Garuda’s marketing perspective is haphazard. Garuda should utilize its airplanes more. With that many airplanes, flight hours should be increased every day, among others by adding new routes when the old routes are saturated. The most effective way to gain return on investment of airplanes is by utilizing the airplanes themselves. When they are 8-10 years old, airplanes are no longer efficient and safe, and are less attractive. “We see how Singapore Airlines use airplanes aged at most 5 years. When airplanes get 5 years old, they sell the planes to other airlines, or they lease airplanes for at most 5 years. Some airlines use only secondhand airplanes as their product strategy. But in general, all of the world’s airlines lease their airplanes, including Garuda,” Alvin Lie said.
Garuda Needs Support
The Government should care about Garuda more than just in terms of providing capital, but also policy, for example by inviting Garuda’s Board of Directors when the President goes abroad. In this way, Garuda can also fly to that country. Alvin Lie said that it is a way to show Government concern.
Ahmad Irfan said that Government support is required in order to increase the sales level of Garuda Indonesia tickets. “For example, BUMN or Civil Servant (Pegawai Negeri Sipil – “PNS”) business trips can be made using Garuda. This is to prevent Garuda’s bankruptcy, which will also cut deep into the State Budget. The debts need to be cut down, and it must also stop procuring airplanes at prices higher than market price. Garuda must try to renegotiate contracts in order to adjust to the market price. If Directors are required to make efficiency measures, they must serve as an example. “We believe that the people love Garuda. However, if Garuda does not maintain good and on time performance, does not maintain good service, its customers will leave,” he said.
Compared with the case of Merpati, the Government does not consider Garuda’s current condition to be important enough to notice. “I see that it is not too serious – unlike Merpati, which was allowed to run out of business slowly without Government intervention. Now it is up to Garuda’s Board of Directors to resolve its current condition. I personally feel pessimistic that Garuda can get out of its trouble, because its BOD is not competent in the airline business. There were also many political issues in Garuda in 2005-2011, some of them affiliated with political parties. Take Emirsyah Satar, for example. He was sentenced to 2 years’ imprisonment, but he was never arrested because of his political affiliations,” Arista Atmadjati said.
According to Tengku Burhanudin, as long as it can maintain its cashflow, a company can survive. It must be admitted that Garuda has a heavier load than its competitors. Therefore, Garuda would likely remain in this condition for the next 4-5 years. Only then can we hope for actual improvement in Garuda’s condition – breaking even, and even becoming profitable. “Because this is not a seasonal business, but a long-term business,” he said. (Dessy Aipipidely/Ekawati)