Tuesday, December 27, 2005

Garuda Indonesia to be privatized next year

The flag carrier Garuda Indonesia is scheduled to be privatized next year in a bid to revive the debt-ridden airline.
Minister of State-Owned Enterprises (MSOE) Sugiharto surprised investors today with his statement that government would sell some of its shares in Garuda Indonesia to make it more competitive. He made the statement after an inter-ministerial meeting on Garuda today.
Government decided to postpone privatization of SOEs and failed to achieve the target of Rp3.5 trillion (US$350 million) for the budget year 2005. MSOE tend to completely scrap the policy with zero income target from privatization to the 2006 state budget and set the higher dividend payment instead.
The previous economic team led by Aburizal Bakrie (currently coordinating minister for people's welfare) actually demanded the privatization should be conducted this year. Then minister of finance Jusuf Anwar (sacked early this month) also supported Aburizal. But Sugiharto rejected the privatization arguing dividend payment from SOEs already far above target for the state budget and there was no need for selling government shares. Further privatization of listed-SOEs have been postponed accordingly.
But that might not be the case of Garuda. The company has been forced to restructure its huge debts for a second time few months ago. In 2001, the airline signed a US$1.5 billion debt restructuring with European Credit Agencies (ECA) and other creditors such as state-owned Bank Mandiri to extend the payment period to 16 years from 12.
Garuda's annual principal and interest payments amount to some US$110 million . But rising fuel costs and tighter competition have made it difficult for the carrier to comply with the repayment schedule.
As a result, Garuda would suffer financial losses for 2005 but the management claimed it would be less than last year's loss of 811 billion rupiah (US$80.6 million ). The company largely blamed the impact of the October 1 triple suicide bombing on the resort island of Indonesia, which killed 20 bystanders. Foreign tourist arrivals to Bali, Indonesia's top destination, fell 48.4% in October 2005 compared to a month earlier.
So, what's the privatization plan?
First of all, government should ask the House of Representative's approval. Maximum amount of shares to be sold would be 49%. There are several options. First, selling the shares to strategic investors, either financial institutions or airline companies. "We open the opportunity to financial investors or airline companies. But we prefer airline companies to bring in new culture," Sugiharto said.
Other option is initial public offering (IPO), selling the shares in stock market. Under the 2001 debt restructuring, Garuda was supposedly commence the IPO in 2003.
What's wrong with Garuda?
Garuda used to be the monopolist, which control the market. Garuda, named of Hindu God, is depicted as an immensely big and strong bird of golden or sometimes white colour who can take any shape he pleases.
But, following the deregulation in the aviation business, the competition among airlines has become even stiffer. There are around 27 Indonesian carriers compete against Garuda in local market.
Consumers seems to get benefit of the competition with step increase in number of passengers from 12.5 million in 2002 to almost 25 million this year. But those 27 airlines are in big trouble due to cut-throat price war. Most of them are undercapitalized. On top of that, regional carriers such as Malaysia's Air Asia, Singapore's Tiger Airways, and Australia's Virgin Blue, have gained access to Indonesia market.
Combined with poor management and cultural problem, Garuda has continually shrinked into smaller and weaker bird like Merpati, also an ailing state-owned airline. It's market share drops to below 25%.
Surprisingly in early October 2005, Garuda signed an agreement to buy 28 airplanes from Boeing (10 of Dream Liner and 18 New Generation) with total cost of US$2 billion, during a visit of President Susilo Bambang Yudhoyono to New York.

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