Choosing Garuda Indonesia’s Fate

KOMPAS/ALIF ICHWAN

Garuda Indonesia aircraft were parked in the Soekarno Hatta Airport area, Tangerang, Wednesday (25/9/2019)

The grey sky increasingly envelopes Garuda Indonesia as 2021 draws to an end. It means that it is not just cloudy, but stormy. The mounting debt of Rp 70 trillion (US$4.86 billion) has brought this state-owned airline to the brink of bankruptcy.

The pandemic has caused companies across various sectors and sizes to die. The global community encounters bankruptcy and they mostly can understand it. However, this premise often does not apply when bankruptcy approaches a flag carrier.

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The polemic emerged in the country when discussions about the possibility of Pelita Air Service being prepared to replace Garuda Indonesia began getting hotter. Reflecting on President Joko “Jokowi” Widodo's policy to shut down all ailing SOEs, it is possible for Garuda to face a similar fate.

Meaning of ‘flag carrier’

The definition of a flag carrier needs to be straightened out before the debate can continue. The concept of a “flag carrier” was conceived after World War II, when it was proven how lethal fighter aircraft can be. Turning to air transportation, the state limits the majority share ownership of airlines only to their nation. The goal is none other than the national interest and security. Control over the private sector is easier when the call for patriotism is echoed within it.

This scenario became the basis for the United States to mobilize troops if the Soviet bloc carried out military aggression during the Cold War era.

The 1944 Chicago Convention requires every aircraft to have a nationality. Generally, the flag of the aircraft follows the establishment of the airline, whether it is state-owned, such as Garuda Indonesia, or private, such as Batik Air and Sriwijaya Air. The context of a flag carrier is the presence of an airline that is in line with the functions and political objectives of the government. In order to realize these ideals, generally the entirety or majority of the flag carrier's shares are owned by the state.

Garuda Indonesia's mission as a flag carrying airline is not only to provide civil flights to build domestic or international connectivity. The Garuda Indonesia fleet at any time can be used as a state aircraft to carry out state and humanitarian missions. Haj flights are the responsibility of Garuda Indonesia in the absence of private airlines. Likewise, the deployment of soldiers to handle armed conflicts, the delivery of medicines and logistics in natural disasters, state visits and repatriation flights.

This probability needs to be mitigated before determining Garuda Indonesia's fate.

The presence of a flag carrier is crucial to ensure the success of these missions. These cannot be relied on private airlines as they exist to make profit. It is not impossible that there could be a refusal to deploy private airline fleets if shareholders did not agree with the Indonesian government. This probability needs to be mitigated before determining Garuda Indonesia's fate.

The pandemic has debunked the myth that flag carriers cannot go bankrupt. In mid-October 2020, flight AZ1586 on the Cagliari-Roma route marked the end of the Italian flag carrier. Capital injections had been done a number of times before, but how could Italy continue the injections when rationally, to cut losses wins? ITA Airways now replaces Alitalia, but with only 30 percent of Alitalia's 10,000 employees accommodated.

President Jokowi's foreign trip using Garuda Indonesia in early November seemed to provide a breath of fresh air. The presence of the flag-carrying airline is absolute and sacred for the Indonesian people in the midst of this difficult times.

Rescue options

If the government insists on maintaining Garuda Indonesia, there are four important things that need to be considered in the maneuver.

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First, there was talk of opening foreign investment exceeding 49 percent in the context of debt restructuring and capital injection. This policy is a double-edged sword. The air law regime views ownership of a minimum of 51 percent of shares by Indonesian nationals and businesses as crucial to ensuring that Garuda Indonesia's “citizenship” remains red and white.

Air service agreements, both bilateral and multilateral, generally lock in ownership and effective control with nationalities. Failure to maintain nationality will result in an airline losing the right to fly on international routes, including code-share flight schemes. Previously, the Air France-KLM merger had to undergo a complicated structure of share ownership and effective control. It was agreed that 50 percent of the shares were owned by the Netherlands and France so that the two airlines would not lose their rights to international flight routes.

If the Indonesian government has no option other than liberalization, allowing foreign investors to become the majority shareholders, the Foreign Ministry and the Transportation Ministry will need to renegotiate all air transportation agreements. The results will certainly not come overnight and will be exhausting considering the number of bilateral air transportation agreements in Indonesia is not small. This effort requires careful planning and timely results so that Indonesia's connectivity with the world is not interrupted.

Second, it is undeniable that this state-owned airline will urgently need fresh funds. However, it is equally important to carefully select the foreign investors who wish to enter. Their criteria must be in accordance with the state airline's long-term recovery plan. If Garuda Indonesia wants to maintain direct flights to the Blue Continent, external factors such as air law and European Union competition need to be scrutinized.

The mushrooming investment from Middle Eastern airlines in several European Union airlines before the Covid-19 pandemic had also raised cases of group domination or unhealthy competition. Some airport routes and prime time slots needed to be removed as a result. The management of Garuda Indonesia needs to be good at tactics so as not to get trapped.

Recently, Garuda Indonesia and Emirates signed a code-share agreement. This should not be kept exclusive in order to avoid dependence of international connectivity only on a single airline. Code-sharing is only temporary so the government should not get carried away with all the practicalities of the connection. Some state missions still need Garuda Indonesia.

Strengthen air diplomacy

Finally, in parallel, the Indonesian government needs to strengthen air diplomacy. This effort is reflected in the air freight agreement which has proven to play a crucial role in supporting the expansion of a number of Middle Eastern airlines. Qatar can illustrate an ideal example.

The Netherlands followed his advice, and Amsterdam's Schiphol Airport and KLM now enjoy being global players.

The government of Qatar had negotiated incessantly the Sixth Freedom of the Air, creating the right for Qatar Airways to transport passengers from one country to another with a transit in Doha. As a result, with the rapid development of Hamad International Airport (DHB) in Doha, Qatar Airways' own expansion grew smoothly in tandem. As another example, flashback to about four decades ago, the Dutch government listened to the advice of air law academic at the Universiteit Leiden, Prof. Wassenbergh, who first adopted the concept of the “open skies”. The Netherlands followed his advice, and Amsterdam's Schiphol Airport and KLM now enjoy being global players.

The Indonesian government can adopt an open skies strategy to support Garuda Indonesia's long-term recovery plan. One of them is by involving experts, such as air transport economics and air law experts. Lufthansa's dominance is inseparable from the role of air law expert Prof. Regula Dettling-Ott who was entrusted as vice president of EU Affairs for the 2010-2016 period.

The question becomes, if Garuda Indonesia reforms take place, is it ready to place reliable academics in the management ranks to become a real flag carrier airline?

In the end, Garuda Indonesia's restructuring is broader than debt restructuring and banker-style balance sheet restructuring. A fundamental change requires professionals. In the fate of Garuda Indonesia, the fate of many employees who depend on this state-owned airline for their livelihoods also speaks. Whatever the end result, I hope that the Indonesian government will make a humane decision.

ARSIP PRIBADI

Ridha Aditya Nugraha

Ridha Aditya Nugraha, Air and Space Law Studies, Prasetiya Mulya University

(This article was translated by Kurniawan Siswoko).