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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

A BANKER FLIES AN AN AILING AIRLINE


c o v e r    s t o r y
How to Rebuild: That is the question for Crisis-hit companies laden with debt and overcapacity. The region's recovery depends on their answers

Economies: What's ahead for 16 leading economies

c a s e  s t u d i e s
Investing: Two views of rising regional markets

Bad Loans: "Mr. Condom" tries to save the "Krung Thai-tanic"

Early Bird: Hanglass benefited from pre-Crisis downsizing

Corruption: Cleaning up Garuda Indonesia

Taboo No More: Japan's Hoya gave up employment-for-life

v i e w p o i n t
Viewpoint: The need to reform Thailand's social values

WHEN THE RUPIAH PLUNGED as the Crisis gripped Asia, so did Indonesia's state-owned airline. But it didn't have very far to go. In 1997, Garuda Indonesia was already something of a flying basket case. For most of its 53 years, the carrier suffered as government officials meddled in many boardroom decisions. "Garuda had too many bosses before," explained former chief executive Robby Djohan, who led the company for just six months last year. But when the country's currency lost more than half its value in just weeks, Garuda hit a wall - hard. With income mainly in rupiah and costs mostly in dollars, like many other Indonesian firms, Garuda was in the brace position. The airline posted losses of $46.4 million last year. "It almost collapsed," says Sofyan Djalil, a senior official overseeing state enterprises.

Practically everything about the airline needed an overhaul. The carrier's inefficiency has long been a matter of ridicule for regular travelers in Indonesia. Flights were frequently canceled, leaving passengers stranded. International flights ran well below capacity. The company was hugely overstaffed, while hiring and advancement were determined by nepotism rather than competence. "There was a parasitic mentality," admits Pudjobroto, a Garuda manager. "Staff thought that as long as they are comfortable, who gives a damn about the company? Now that has changed."

Djohan, an experienced banker with a reputation for aggressiveness, was part of that change. He arrived as CEO in June last year, a month after president Suharto stepped down. With him came Abdulgani, also a banker, but in contrast, soft-spoken and courtly. (Abdulgani took the controls in November when Djohan left to run the new state bank Mandiri.) Once the pair took charge, they immediately canceled several contracts with companies connected with the Suharto family. Both Djohan and Abdulgani crafted a plan to save the airline. Among the measures: heavy lay-offs, a revamp of the employee benefit and incentive schemes, and a complete reorganization of the carrier's domestic and international routes.

To implement the restructuring scheme, the pair turned to Germany. Garuda asked Deutschebank to advise the carrier on its finances, while the consulting arm of airline Lufthansa was called in to improve management and upgrade services. "We are re-engineering," says Abdulgani simply. The aim is to reorganize every aspect of the airline with privatization as the eventual goal.

Deutschebank has the tougher assignment. Garuda is trying to persuade 50 international and domestic creditors to reschedule a total of almost $1 billion in foreign debt. Deutschebank's "main role will be lobbying foreign creditors to take a haircut," says a source at the bank. But Garuda's track record gives little reason for creditors to be sympathetic. As with many other Indonesian state enterprises, transparency was hardly a Garuda buzzword. The carrier was never a truly commercial enterprise. It never published a thorough balance sheet. Domestic airfares were kept artificially low by parliamentary decree, while several international routes lost money. Only enormous government subsidies kept the carrier in the air.

Garuda had promised to present a detailed five-year revitalization plan to its creditor committee by the end of June. The airline wants to conclude a debt-restructuring agreement as soon as possible. Without one, the carrier cannot access new capital, let alone contemplate privatization. "Only when the debt restructuring has been finalized and we know how far the [debt] burden will be carried, can we really commit to [significantly retooling the company]," Abdulgani admits.

The government is counting heavily on Abdulgani's banking experience to pilot the airline through the severe turbulence. "Garuda has very complicated financial problems so we gave the job to a banker," says legislator Burhannudin Nabitubulan. "And we think he is clean." Integrity is certainly a major concern. Besides contracts with politically favored associates, Garuda has suffered from other types of graft. In a typical leasing arrangement, the carrier would pay $1.1 million a month for a plane which competing airlines could hire for just $600,000. The difference would be eaten up along the chain of managers and middle-men. The carrier has canceled overpriced leases. Concedes Abdulgani: "There was a lot of government interference in Garuda."

On the service side, the company has axed loss-making international routes, such as Jakarta-Los Angeles, and is putting more efficient planes on domestic ones. Management has also changed inflight menus and updated attendants' uniforms. Swissair has taken over the maintenance of Garuda's six Airbus 330 jets. Meanwhile, bloated staff ranks have been culled, leaving the carrier's employee-to-aircraft ratio closer to the industry standard of 167. Walter Prezler, one of five German executives seconded from Lufthansa, has predicted a $30-million profit this year. "We're on target," he says, noting that passenger traffic began recovering late last year and the rebound has continued into 1999. Load factors are reported to be around 68%. That's not bad. Still, the airline's steep climb back into clear skies will take years.

Reported by Tom McCawley/Jakarta


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