Garuda Indonesia: Reborn

Since the shares are traded on the Indonesia Stock Exchange on February 11, 2011, Garuda Indonesia (GIAA) had never on my watchlist. The reason is simple: It is an overvalued stock which represents a poor company. But now, after more than a year, GIAA seemed to look pretty, and it’s not because of some make up or something. In the full year 2011, the company had 39.1% increase in revenue, and its net profit rose 56.1%, from Rp518 to 809 billion. Pretty enough to be taken? Actually, not yet, but probably soon.

GIAA is one of state-owned companies that had poor financial performance in the past. The company almost continuously recorded net loss from year to year so that causes a huge deficits on its balance sheet, which in turn causes a deficiency of capital. It was only in 2008, GIAA is no longer had deficiencies, but it was not due to an increase in performance, but because of the increase in paid-up capital. Until the company held an IPO in early 2011, GIAA is a poor company at all.

But GIAA is too big to fail. Company’s status as the national flag carrier that carries the name of Indonesia to the international world, also makes it impossible to be bankrupt. So, GIAA have to get up! But how? Is the airline industry a tough industry, which never promising huge profits? Perhaps, not really. If the airline industry does not promise huge profits, then how can you explain Tony Fernandes, a young entrepreneur from Malaysia, could have a wealth of US$ 470 million just from Air Asia?

Perhaps, GIAA just need to be managed better. But a proper management certainly need a supervision. The way? By taking the company to the stock market, of course. After GIAA changed its status from a private into a public company, now the people, especially the investor, can research the corporate actions, including the development of its performance each quarter. In a blueprint of long-term development plan of the company, the IPO is an initial stage of 'Quantum Leap', a number of strategies that will be implemented in the period 2011 - 2015, in order to enhance the growth of the company.

For me, this concept of quantum leap is quite interesting, because its implementation is actually running. After the IPO, there are seven points that will be done in the frameworks of quantum leap. They are, 1. Increasing the dominance over the domestic market, 2. Improving services in the international market, 3. Entering the low-cost carrier through PT Citilink Indonesia, 4. Rejuvenate and increase the fleet of aircrafts, 5. Strengthen the brand of 'Garuda Indonesia' through the promotion and improvement of services, 6. Improving the cost efficiency, and 7. Improving the quality of human resources. Well, all sounds good. Now what about its progress, especially in the last year?

We start the ‘leap’ from point number one, increasing the dominance over the domestic market. During the year 2011, GIAA had an average 28% of market share in the domestic market. This achievement is higher than 24% in 2010. During the year 2011, GIAA had 12.0 million passengers in the domestic market, up 37.9% compared to 8.7 million passengers in 2010. The increase was higher than the average increase of passengers of all Indonesian airline company, which was 16.2%. However related to average market share of 28% which was mentioned above, it should be noted that it does not include the market share of Citilink, a subsidiary of GIAA in the industry of low cost carrier (LCC). Because the LCC market in Indonesia is dominated by Indonesia Air Asia and Lion Air, then the total market share of GIAA would be smaller if the market share of Citilink is counted. But fortunately Citilink has its own strategy to increase its market share, we will discuss this matter below.

So what did GIAA do to achieve the growth? By adding new flight routes (up to seven routes), particularly in eastern Indonesia, with a focus on the city of Makassar, South Sulawesi. GIAA is now serve the direct route which connecting the following cities: Makassar, Balikpapan, Gorontalo, Ternate, Kendari, and Ambon. In addition to adding flight routes, GIAA also develop the program of Garuda Frequent Flyer (GFF), which is a membership program for passengers who regularly use the services of Garuda Indonesia. The program is actually exists since 1999, but it was in 2011, when the program is promoted through intensive promotion program, which offers bonuses for new members. As a result, the number of GFF members at the end of 2011 increased by 21.1% over 2010, to 568 thousand members. And this is certainly good. Another strategy is to continue to enhance cooperation with the customers of corporation. The result, GIAA had 1,469 coporate customers in 2011, both local and foreign companies, up from 1,060 in 2010.

Point number two, improving services in the international market. The strategy is to increase the frequency of flights to and from South Korea, Hong Kong, China, Japan, Thailand, Singapore, Malaysia, and Australia. International flights are also no longer concentrated only in Jakarta and Denpasar, but also in Makassar. To increase the number of customers, GIAA enhance cooperation with customers from corporation (as noted above). And the results? The number of passengers on international flights increased by 21.5% to 3.2 million passengers in 2011. The next project is to improving the international flight services to Saudi Arabia, particularly to serve the passengers of pilgrimage, by create commercial agreements with partner airlines in the Middle East. However GIAA currently has no partner, maybe later.

Point number three, related to the company's entry into the low cost carrier (LCC) industry, through its subsidiary, Citilink. Citilink has been established since 2009, but the company obtained its flight license in 2011. Citilink currently has 9 units of aircraft, much less than Lion Air (72 units), Sriwijaya Air (24), and Indonesia Air Asia (17). Although the company was still a 'baby', but the growth is quite satisfactory. The number of passengers carried during the year 2011 increased 42.2 % compared to 2010, thanks to the addition of six route of domestic flights. Now, the brand of 'Citilink' is also familiar in the mind of airline service users.

I think, the establishment of Citilink is a brilliant idea. GIAA is able to get into the LCC industry without losing its identity as VIP-class airline company, as its subsidiary in the LCC industry has a different brand: Citilink. This strategy is the same as the brands of two cars, Ferrari and Fiat, where Ferrari is a supercar, while Fiat is a regular car, but the two brands are actually belonged to a single Italian automotive company.

But unlike the Garuda Indonesia who has become the real leader in the premium class flights, Citilink still have to fight to defeat the domination of Lion Air and Air Indonesia Asia in the LCC market. However Citilink growth in 2011 are fairly decent, so we'll see the progress in the year 2012.

The fourth point is to rejuvenate and adding new fleets of aircraft . The realization? During the year 2011, GIAA sold off 17 units of old aircraft, and bought (or rent) a total of 15 new aircraft, so the average age of aircraft of the company becomes more young, from eight years in 2010, to six and a half years in 2011. However, because the number of sold planes is more than the incomings, then the fleet is reduced from 89 at the end of 2010, to just 87 by the end of 2011. But you do not need to be disappointed. On April 11, 2012, GIAA officially acquired 11 units of brand new Airbus. Based on the quantum leap plan, GIAA will have 194 units of aircraft in 2015. Where’s the money from? From the combination of IPO and debts. And so far, the plan to increase the fleet is running without any problems.

The fifth point is to strengthen the brand of 'Garuda Indonesia' through the promotion and improvement of services. From any other strategies that have been discussed above, I think this is the best one. In the past year, GIAA develop the brand of 'Garuda Indonesia Experience' for its premium-class flight by adding a number of brand new aircraft, enhance the appearance of aircraft interiors, and the coolest, by presenting 'Indonesian hospitality' for all passengers. The hospitality is interpreted by providing Indonesian aromatherapy, Indonesian delicacies, flight attendants with typical Indonesian batik outfits, and traditional music of Indonesian archipelago. That's awesome! In this case GIAA is not just trying to serve its passengers, but also promote the beloved Indonesia in the form of its hospitalities, not only to the foreign passengers but also to the passengers from Indonesia itself. And once again, this is awesome.

The two final points, namely to increase the cost efficiency and improve the quality of human resources, is not interesting to discuss. GIAA claims that while its revenue increased 39%, but the operating expenses rose only 33%, and even then due to rising prices of jet kerosene by 39% from US$ 90 to 125 per barrel. Excluding the costs of fuel, the company's operating expenses rose only 4%. But even with these data, it appears that the net profit of GIAA was very vulnerable to fluctuations in the price of aircraft fuel. The management stated that they have increased the plane utilization to save expenses, but maybe they have to start thinking about how to minimize their dependence on fuel price fluctuations. But frankly, I don’t even know how.

About to improving the quality of human resources, in 2011 GIAA has organized a variety of programs, such as managing the talent according to the capacity and qualifications of each employee, including organizing the regeneration of company's leaderships. The company also organizes transformation program of corporation culture, where each employee of Garuda is required to work fast, thrift, discipline, friendly , responsive, creative, honest, discreet, and obedient (seems hard!). The company also held a training program of leadership, training of flight personnel, corporate university, conducting employee relations, employee engagement, to human capital information system. Well, sounds serious, is not it?

In conclusion, GIAA has been through the year of 2011 with hard work, and the results are also quite good. Yup, the Garuda has been reborn. The journey of quantum leap is still long ahead, but maybe from now on we can expect that GIAA will be completely transformed from an unorganized company into a profitable enterprise. Now how about its shares?

Although its performance is improved at the end of the period of 2011, but with ROA of only 4.8%, GIAA is not a profitable company at all. GIAA is also has a deficit of Rp6 trillion on its balance sheet. But that does not prevent its shares to continue to rise in the last four months. Currently GIAA is at 670 position, thanks to the news of company's cooperation with Amadeus IT Group, to provide 'Passenger Service System', in order to improve service for customers.

Indeed, in addition to actively working in the framework of the quantum leap, GIAA is also active in announcing its corporate actions to the public. Before the announcement related to Amadeus, GIAA also announced a strategic partnership with Telkom and Bank BNI as fellow state-owned enterprises, the purchase of Airbus aircraft, the issuance of a business license from the Ministry of Transportation for Citilink, and a cooperation with CFM International for aircraft engine maintenance. These positive news might contribute to the high-flying stock of GIAA lately. However, as the PER has now reached 18.4 times, it is difficult to say that the current price is reasonable, given that the airline industry has a high level of risks, one of them is the fluctuations in fuel prices as we have discussed above.

But still, the Eagle is now eye-catching. Let's wait what would be the next breakthrough of the company, and hopefully we will find a better performance in the next financial period. We count on you, Mr. Emirsyah Satar!

PT Garuda Indonesia (Persero) Tbk

Rating performance in Full Year 2011: BBB

Stock rating on 670: BB

Original article was written at April 25, 2012