Garuda hits another speed bump

Earlier this month the rather bizarre news came that CEO of Indonesia’s Garuda Airlines, the national airline of Indonesia, was sacked for smuggling a vintage Harley-Davidson motorbike and two Brompton foldable bikes on a newly purchased aircraft that was on it’s maiden flight from the factory in France to its new base in Jakarta. 

The plane, a new Airbus A330-900, had flown from Toulouse, France, to the Indonesian capital, Jakarta, on November 16. The jet had not been flying a commercial flight and was carrying only Garuda executives and employees at the time. 

The bikes are worth up to $65,500 combined in the Indonesian market. Garuda’s former CEO, Ari Askhara is accused of evading up to $106,000 in taxes. On top of that, fresh accusations of sexual harassment surfaced following his dismissal.         

The Indonesian government appointed Askhara as Garuda CEO just over a year ago, hoping he would improve the airline’s finances. At the time I provided my perspectives to Nikkei Asian Review on the prospect for the airline given its sketchy past (click here).

Garuda's Challenges

Garuda has long been struggling. A fundamental issue is that the brand strength is not very strong. Compared to a Singapore Airlines or Cathay Airlines, passengers don’t have a strong affinity with the airline. 

Singapore Airlines and Cathay Airways have always placed very high importance on the customer experience and the brand of the airline, going back to the 1960’s. These airlines were led by people with significant commercial or marketing backgrounds and not necessarily engineers or government bureaucrats. They have always tried to innovate to compete based on a superior customer service and experience. 

For example, for many years the in-flight entertainment of Singapore Airlines and Cathay was superior than any other Asian (or Western) carrier. And Singapore Airlines was the first to fly the A380 and introduced Suites to set a new standard in premium travel. These are all examples how they innovate and strive to be the best with the product. In addition, they invest heavily in selecting and training their customer facing staff. They place a lot of emphasise on service delivery in a friendly, professional and efficient manner and this helps reinforce the premium image of these carriers.

Instead, Garuda is more a follower without the same brand status as Singapore Airlines or Cathay Pacific.  The result is that premium and long haul passengers (who typically provide the bulk of profitability for flag carriers) don’t like to travel with Garuda. And domestic passengers only fly with them if the price is low or if there are no alternatives.

Garuda’s share of international long haul is very small and Garuda picks up very little transit volume, for instance serving the Australia to Europe route or serving the India to US market. This is very big business for Singapore Airlines and other regional carriers. In fact a lot of long haul traffic from Indonesia leaks out to Singapore Airlines and other carriers in the region that have a better network and brand. 

Garuda’s international network is very limited and even major Asian cities such as Ho Ch Min and Manila are not served by Garuda. In recent years the company has been looking to expand international services but the reality is that this is likely not going to be contributing positively in the short run as it takes time and money to promote new routes and bring up the load factor. 

Also international routes tend to be more attractive to passengers and more lucrative for the airline if the frequency is high. But again this takes time and a good brand and this is a ‘chicken and egg’ type vicious circle that Garuda is stuck into: because it does not have a strong brand and international network it’s struggles to attract volume into it’s long haul flights and as a result is difficult to expand it’s international network reaffirming it’s weaker offering to international business travellers. 

As a result Garuda has been pushed into focusing on the domestic market. But domestic passengers are often price driven and Garuda is facing stiff competition from low cost carriers in its home market and on regional routes. This is the second big issue for Garuda: it’s cost structure is not competitive to compete effectively with aggressive budget carriers. 

An aggressive fleet renewal program was executed in the past couple of years to bring down average age of fleet and lower operating costs. But Garuda is struggling to fill sufficient seats as a result of strong competition leading to aircraft utilisation that is below industry norms. Garuda has been deferring orders in order to squeeze more capacity from the existing fleet. Unless Garuda can improve aircraft utilisation and improve it’s break-even load factor it will struggle to make any money.

A third issue facing Garuda is that it’s revenue mix is heavily skewed towards ticket sales and the company leaves a lot of ancillary revenue on the table. Recent analysis shows that Garuda scored 60 out of 66 global airlines in terms of ancillary revenues as % of total revenues (only 1.7% for Garuda) and 62 out of 66 airlines globally for ancillary revenue per passenger. The average Garuda passenger generates only $1.8 in incremental revenue beyond ticket sales. The profit margins for ancillary sales tend to be much higher than ticket sales and Garuda needs to be much more aggressive in capturing incremental income from its customers. 

What needs to happen?

A lot needs to happen for Garuda to turn into structural profitability. To capture profitable long haul business travellers it will need to continue to strengthen it’s brand by improving it’s service and image. To be competitive in domestic and regional markets, operational excellence and cost focus are key. Low cost is critical for the domestic market and the launch of the Explore brand could be the key here.

But Garuda has already been working on these issues for many years. To truly elevate the company to higher performance a fundamental cultural shift is needed in the company to break through bureaucracies and invigorate a culture where all the staff make small incremental changes and contributions to elevate the performance to a higher level. 

As part of a previous strategic revamp of the airline (called Quantum Leap) the easy bits were done focussing on the ‘hardware’ (brand, logo, livery, fleet renewal, uniforms). Now a mindset change is needed amongst the staff to elevate customer service and improve the customer experience and bring about operational efficiencies. 

If you look at staff productivity the key is the invest in technology (IT) and a KPI measurement system that is very specific to each department and functions and work on small changes to improve productivity and reduce wastage. There are literally hundreds of KPI’s to all amalgamate into the operational performance of an airline. At the high level you have crew/ ASK and overheads as % revenues but you need to peel down many layers to understand where are the opportunities to improve efficiency. 

I suspect the staff productivity is relatively low across most areas, including engineering, crew and the various central overhead functions. By measuring and benchmarking their performance, Garuda can launch specific programs to improve productivity through a combination of process re-engineering, investing in IT and automation, outsourcing, etc.  

There are various high-level measures to calculate an airline's staff productivity, including staff/aircraft, ASK/Staff, staff cost % of revenue, etc. A quick look comparing Garuda against Singapore Airlines illustrates the issue for Garuda:

The analysis shows that Garuda requires fewer staff per aircraft but this is primarily a reflection of the differences in fleet composition: Garuda predominantly flies narrow-body aircraft on it’s domestic network whereas Singapore Airlines on average flies much larger wide-bodies on it’s long haul destinations. But Garuda’s staff productivity (measured in the number of ASK's produced per staff) is about 25% lower than Singapore Airlines and Garuda’s staff costs as a % of revenue is 14% compared to 11% for Singapore Airlines. At first glance a gap of 3% does not appear to be that large but if Garuda would be able to reduce staff costs to the same level of Singapore Airlines it would turn around performance of the airline from loss making to moderately profitable.

But Garuda is a state owned enterprise and the question is how to get a different mentality and contribution from the staff when people are comfortable and set in their ways. Old habits die hard.

Another option is for the company to refocus its international expansion more selectively on the big emerging markets of China and India. Clearly this is where a lot of growth is coming from and the Indian and Chinese carriers do not have a strong brand themselves creating an opportunity for Garuda for a fresh start.

Garuda should also find ways to increase ancillary revenues. Profit margins on ancillary products and services are much better than ticket sales and there are many quick wins that Garuda can capture to improve it’s revenue mix and profitability by providing a more varied ancillary product mix. In comparison, leading low-cost carriers in Asia generate 15-25% in ancillary revenues with pax spending of $15-30 per pax. Moving partially towards these numbers can help Garuda a long way in restoring profitability.

Garuda has a long road ahead to turn it into a sustainably profitable business. The recent shenanigans at the top have made this road a little steeper again. 

Michel Brekelmans is Managing Director at SCP/Asia, a consulting firm that supports business executives and investors in business intelligence, growth planning, M&A support and organisational performance improvement across the Asia Pacific region. With over 20 years experience in strategy consulting, and based in China and Singapore since 2002, he is highly experienced in solving complex management decisions regarding the growth path of their business and major investments. www.scpartnersasia.com