Companies / December 2017

Flying in Stormy Weather

Pahala N Mansury wants to grow Garuda Group by improving its asset value and thereby boost market value, while searching for more income beyond its airline business in the fields of maintenance, repair and overhaul as well as ground-handling services. By Albert W Nonto and Yanto Soegiarto.

During the past 20 years, Pahala N Mansury is the fourth former banker to head flag carrier Garuda Indonesia, in the footsteps of the late Robby Djohan, Abdul Gani and Emiryah Satar. He has a tough mission to save the airline and its group of associated companies from declining profitability.

For Pahala, airlines are quite different from the banking industry, in ways that impact overall performance. Noting that the banking business is more stable compared to airlines, Pahala nevertheless took up the challenge from State-Owned Enterprises Minister Rini Soemarno to take the lead at Garuda Group.

The first thing he learned was that half of the airline business is reliant on external factors. Weather conditions, customers’ perceptions, technology, the season – even the lunar calendar -natural disasters and individual customer experiences all have a major influence.

“At this point, the airline business is quite tough, something different compared to the banking business, which is more stable and reliably profitable. Unlike airlines, the top five banks will keep leading although there are many smaller banks,” he said in an interview.

But Pahala looked forward to a new challenge after more than 14 years in the banking industry. After more than eight months in the hot seat as the new CEO and president director of the flag carrier, Pahala now sees what can be done to maintain Garuda’s position as one of the best airlines in the world while also growing profitability.

As a full-service airline he understands that Garuda has to compete with the world’s best-known airlines. “If you go into ASEAN and the Asian region, you have to take on tough competition with Singapore Airlines, Japan’s ANA and Hong Kong’s Cathay Pacific. If you go down to Australia, Garuda has to compete with a big name like Qantas,” says Pahala.

Technology and changing lifestyles are other external factors that have a big impact. Online travel agent applications make ticket prices very transparent and it is easy for customers to find the best prices. This factor sometimes helps both customers and airlines but at the same time the airlines have to add more value for their customers, given the fierce competition in the industry.

Research show that modern customers with high disposable income will spend money for leisure instead of, for example, buying luxury goods. This becomes both opportunity and a challenge for Pahala.

As Garuda’s revenue comes partly from its international operations, Garuda has to benchmark its operations with other international airlines. For that reason, Garuda must keep improving its long-haul flight performance in the fields of safety, airport quality, regulatory aspects and human resources standards.

Winning Strategy

Pahala sees some winning strategies to keep Garuda flying high and increase its profitability even as he pilots the company through stormy weather. Garuda, he notes, is an aviation company, not merely an airline business. It operates in the fields of airline, maintenance, repair and overhaul (MRO), catering service and ground-handling.

In the future he sees that Garuda Group has to boost auxiliary income from its other businesses and not rely solely on its airline. Its MRO operation, for example, is now working with many world airlines through Garuda Maintenance Facility (GMF). The company recently listed on the stock market to get fresh funds to finance its expansion plan, although the results were disappointing.

He adds that Garuda has valuable assets that will increase its market value and profitability and can be upgraded to boost the bottom line. The company has hangars in a number of cities with plenty of space to park aircraft for engine overhauls. The company has a fleet of more than 194 aircraft, making it one of the world’s top ten airlines. It has a 35-million customer base and more than 1.7 million members of its GarudaMiles frequent flier program. “These assets need to be optimized,” says Pahala.

The aircraft utilization rate has been increased from 9 hours 11 minutes to 9 hours and 41 minutes. This half-hour increase is important for the return on investment in an aircraft. For the time being, he believes, Garuda doesn’t need new investments in aircraft, but should instead increase productivity.

A similar strategy is underway at low-cost subsidiary Citilink, which has increased its average utilization rate from 8 hours and 20 minutes to 9 hours and 9 minutes. The group is working to reschedule deliveries of new aircraft from manufacturers.

As the top award-winning airline in the cabin crew category for four consecutive years, Pahala believes that Indonesian hospitality is a bonus for its competitive advantage that will help the company lead the way against the competition in the five-star airline sector. Quality of service includes aspects such as cabin crew standards, inflight service, food and beverages, amenities, punctuality, safety and connectivity. Meanwhile on domestic routes, Garuda intends to fight to maintain its position as market leader.

“We also believe in the significance of partnerships as the way to grow with partners in the field of terminal management with (airport operator) PT Angkasa Pura, for example. We understand that good customer experience in the aviation business does not belong to Garuda alone but also to the entire supporting industries,” he says.

New international routes, it’s hoped, will help reinforce the company’s fundamentals in the future. With European passengers still dominant on its international flights, Pahala sees the need to try to launch new direct flights, such as the new Jakarta-London route. As a member of Skyteam, Garuda will boost its European Pass program, which allows passengers from Jakarta to fly directly to five different destinations on the continent. At the same time the company will make Jakarta an international hub, for example for passengers from Australia.

Others believe this is a big gamble. Airline industry commentator Arista Atmajati says such long-haul routes linking Australia are already congested and dominated by British Airways, Qantas, Qatar and Emirates. “Admittedly those are golden routes but they are also very competitive. And the other airlines have been serving those routes for a long time. Garuda is expecting that long-haul flights will increase load seats of its Boeing 777 aircraft serving the Jakarta-London route while also improving its financials,” he said.

Lastly, Pahala will keep Garuda operating a lean and fully digitized operation. So far Garuda has introduced digitalization to its front-end operations such as in ticket sales but he sees much room for expansion of digital systems. “To be honest Garuda is still far from an efficient and lean organization. This is not to say that the company will lay off people, but there is still lots of room to improve its level of efficiency to increase productivity with a more agile and lean organization in its entire operations and business processes,” he adds.

While the airline is reasonably digitized, other operational units need to adopt new technology. The catering and MRO divisions are next in line for technology boosts. In catering, digital operations will help monitor the volume of food and beverage stock to manage purchasing and many other activities.

Upgrades are also needed on existing digital services. “We have a mobile application, for example, but its reliability needs to be improved and we have to encourage our people to try harder.” All of these steps should make it possible to post a revenue increase of about 12% next year, he predicts.

A regular passenger with Garuda, Andi Daryanto believes service levels are already good, but more needs to be done to increase passenger volume. Load factors for example need to be boosted to 80% from the current level of 72-73%.

Nor does the “high profile” of Garuda need to be maintained in all aspects of operation. Costs need to be brought down to meet industry averages. As just one example, plenty can be done to reduce food costs. Such steps will improve efficiency and allow the airline to cut its prices to increase load factors, he argues. “Is it relevant for Garuda to still position itself as a premium airline at the moment?” Daryanto asks.

Public policy commentator Agus Pambagio has constantly questioned Garuda’s financial performance over the past five years. Even headed by top-caliber bankers, he says, the company has not performed as well as some of its competitors.

Improving efficiency in its operations remains the big challenge, he believes. At the moment Garuda is less flexible compared to newcomers in the industry that have produced good profits even by operating as budget airlines.

But despite the shortcomings, Arista agrees that that there is a consensus that Garuda is indeed one of the best airlines and its cabin services deserve praise. “Its cabin crew and on-board services are exceptionally good and Garuda has this known hospitality to sell,” he said.