Garuda Indonesia Case Analysis

GARUDA INDONESIA

_______________________

A Written Analysis of a Case Submitted to

FERNANDO B. BALMOCENA, Ph.D., M.B.A. Professor

School of Business Management XAVIER UNIVERSITY Cagayan de Oro City _______________________

In Partial Fulfilment of the Requirements for the Course BUSINESS POLICY AND DECISION MAKING (Strategic Management) (BA13) ____________________

by MATTHEW JOSELIN I. BARRAQUIAS PATRICK G. DABLIO MARY ANN G. EMANO JEMSON F. YANDUG JULIENE MARIE L. MAGBANUA

Second Semester, 2014-2015

2

Facts of the Case

Garuda Indonesia is an airline company owned by the Indonesian Government. The airline has been vastly developed since being established in 1950. Remarkable growth has been achieved mainly due to the fact that in the early years there was minimal competition in the airline industry in Indonesia. Being the first Indonesian airline, Garuda Indonesia monopolised the commercial air transportation services. This situation allowed more than reasonable company performance for many years. However, since the government introduction of an open domestic airline industry in 1990, Garuda Indonesia started to face difficulties. Garuda competed against a number of private airlines, which possessed expansive strategies in developing routes as well as increasing the number of aircraft. The performance of Garuda Indonesia gradually decreased to a low when operational profit and cash flow reached negative figures during the period 1993 to 1997. Further, the seat load factor and on time performance were also worsening. On January 6, 1988, the company elected a new president, Mr. Mohammad Soeparno. Upon the inherited difficulties and poor management of the previous administrators, current operational plans were established. These plans were subdivided into three classifications - marketing, operations and finance. In marketing, the company improved the sales by better designing souvenirs, expanding wine list on international flights, resumption of serving snacks and soft drinks on short domestic flights, promoting executive class, changing of logo and whole livery

3

and introducing Visit Indonesia Air Pass with three different packages. Also the following are integrated to enhance the operation system; owning 77 aircrafts, in-flight immigration inspection on Tokyo-Jakarta Bali flights, the agreement with Continental Airlines, and the process of purchasing tickets by using American Express cards. Lastly, the company extended the financial condition through leasing training facilities to other airline companies then recorded a net income of 300 million rupiah from its activities.

Problems: A. Minor: 1. Garuda’s lack of competitiveness in service aircraft technology, computer and communication technology. 2. Heavy debt burden resulting to high interest payments, consequently low operating income. 3. Inheritance of a weak system from prior administration. 4. Cost disadvantage in almost all operational aspects. 5. Poor asset management.

B. Major: 1. Whether to formulate new policies or to continue using existing policies. 2. Long-chain bureaucratic decision-making structure inherent in being a stateowned enterprise.

4

3. Exhaustion of the company’s and the Government of Indonesia’s offshore borrowing capacity to support further growth.

Main Problem: In what way can Garuda Indonesia increase its operational success in order to gain back its good reputation in the industry – is it by formulating new set of policies or by continuing proven-and-tested existing policies?

Alternative Solutions A. Minor Problems: All of the minor problems stemmed from inheriting the weaknesses of the past administration. Garuda’s lack of competitiveness in service aircraft technology, computer and communication technology could be addressed by raising more capital through its acquired subsidiaries enough to update its technology as it was lagging behind most of the airline companies. But, since they are heavily burdened with debt with high interest payments each year, and with the income from its subsidiaries with its own slight income, this solution may not materialize. Merging with other private airlines with the support of the Government will be an aggressive yet practical alternative. Since most of the development needed to improve the operations of the airlines is hindered by the heavy debt burden, it would be advisable for the company in

5

cooperation with its sole owner – the Government of Indonesia – to try to have a meeting with its creditors proposing a debt restructuring to ease its debt burden to be able for the company to start its improvement. Cost disadvantages and poor asset management were among the weaknesses inherited from past management. Policies need to be formulated regarding utilization of their assets well enough to maximize its worth to profits and minimization of costs. An insignificant income in its first income after years of losses could be higher if it were not for these cost inefficiencies. System overhaul is needed for the company – changing its operating system, training of employees and updating technology - in order to be competitive.

B. Major Problems: If Mr. Soeparno were to continue using the existing policies, it might bring about desirable effects since these policies are already proven effective since there were used by the previous administration which yield the first profits after years of losses. If he were to formulate new set of policies, scrapping out the policies used by the prior administration, it might not still be the best policies needed to improve the company. The right approach in formulating policies would be having an active and intensive assessment of the weaknesses of the existing policies and improving it. Also, decision making in Garuda is a more tedious process compared with most private airlines. Decisions have to go through a long chain of bureaucratic procedures

6

as it is a state-owned enterprise. Full privatization would be an alternative solution than staying being a state-owned enterprise. If Garuda would be a private enterprise, its decisions would not have to go through vigorous bureaucratic procedures. Hence, decision-making would be easier and faster and consequently, success of the company would be fast approaching. But all of these developments need to be financed. Financing all of these is a nearto-impossible situation. The company as well as the Government have exhausted their capacity to borrow offshore and they’re earning less than they need to capitalize. As mentioned above, this could be addressed by merging with other private airlines to raise capital needed for the company to finance all of its desired developments. Issuing stock and bonds to the public would be also a feasible alternative but not for this time as it has a bad reputation in the airline industry.

Main Problem: Objectives in this case are needed to guide one’s answer to the problem and this is to establish a policy which could change the company’s bad reputation by the end of the quarter, to be more professional in commercial air transport by the end of the year and also to increase the financial condition by reaching at most 10% profit before tax. With these objectives, the company can become one of the world’s top 10 airline company and gain back its reputation they once had decades ago. There are three possible courses of action where assured conditions might be accomplished although coupled with disadvantages. The first one is to continue the

7

previous successful policies which the company can be supported financially from the government and generate profit but probable government interference may occur. The company can also formulate new set of policies, then recover and improve certain areas with the low cost but high quality of services. However, limited funds might be available, as well as time, and the government may not approve thereof. Another alternative solution would be privatization. From this, the matters apprehended after are improved; decision-making, profit-sharing, and approval for future proposals. In addition, there would be potential investors and the company would assert maturity and independence.

Conclusion The best solution for the problem is for Garuda Indonesia to fully privatize after analysing the alternatives. This solution could screen up loopholes and improve previous policy then take the opportunity to come up with a more effective promotional strategy in order to endorse to prospective customers their airline. Unlike choosing the second alternative, there might be a slow growth rate and ineffective implementation of new policies that could result to low operational output. While in the first alternative, the enterprise might not have a room for improvement and may affect its operation. Also, by fully privatizing, Garuda would be able formulate new policies that best suits for the company comes easier. Second, they can now enforce decisions for itself for the advancement of the company. Third, the company would be able to raise capital on its own through its subsidiaries or issuing new stock or bonds. Fourth, given the capital they have obtained, they would be able to overhaul their entire operating system. Aircraft

8

technology and communication technology could be updated and their ticketing and reservation system could then be in computerized structure. Employees should also be trained in order for Garuda to overcome their poor pre-flight, in flight and post-flight services. Fifth, through formulation of new policies regarding its costs and asset utilization, Garuda will be able to reduce cost and manage its assets effectively and efficiently. To be able to achieve this plan, the company should conduct a meeting with the government regarding the plan and prepare a written contract of agreement. After that, a presentation of a business plan is created to attract potential investors. In addition, an expansion of business operations would also be good by establishing business relation with other international airlines and make a network with related industry to strengthen marketing strategies. Furthermore, a self-analysis every now and then could accommodate the company’s prosperity and resiliency.