Competition between State-owned Corporations
Just forget the idea of Pelita Air Service replacing Garuda Indonesia. It would be ideal for Pelita and Garuda to engage in sound competition to win consumers’ sympathy, particularly in the fairly big domestic market.
There have been many narratives lately that Pelita Air Service is being prepared to replace Garuda Indonesia.
The question is, is Pelita Air poised to replace Garuda as the national flag carrier to serve both domestic and international routes? If so, is it true that Garuda Indonesia will no longer be operated?
Pelita Air Service is a charter flight or company that belongs to Pertamina, and already experienced in operating of small aircraft like ATR 42-500, ATR 72-500, CASA 212-200 and helicopters. Apart from that, Pelita Air’s charter flight segment mostly serves customers from oil and gas mining companies, several non-oil and gas companies, as well as state institutions.
On 28 April 2022, Pelita Air turned a new leaf by service a scheduled Jakarta-Denpasar flight. The State-owned Enterprises (BUMN) Minister described the flight as a new paradigm, while at the same time warning against any reoccurrence of errors that had happened elsewhere. This could be intended to imply avoiding the debt entanglement and corruption affecting Garuda Indonesia.
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Pelita operating a trunk route means it has taken a step forward to prepare itself as Garuda’s future successor. With its two Airbus A 320-200 aircraft, during the initial stage Pelita will concentrate on serving the Jakarta-Denpasar and Jakarta-Yogyakarta routes operating out of Terminal 3 at Soekarno-Hatta International Airport.
Pelita is now entering the new and highly competitive arena of operating trunk routes and will be facing four major commercial aviation groups: Garuda Indonesia Group, Lion Group, Sriwijaya Group and AirAsia.
In fact, there isn’t much information available about Pelita’s future business plans, other than outfitting its current fleet of just two Airbus A 320-200s with the new “ribbon” livery, so called because it resembles the branded colorful strips of its parent company, Pertamina.
Following the two aircraft, it plans to procure several more aircraft to reach a total of six aircraft by the end of the year and 20 aircraft next year. The service model it applies is not that of the low-cost carrier, but rather a mid-level carrier because it offers meals. For booking tickets, it is presently cooperating with several travel agencies and does not yet offer bookings through the Pelita website.
A number of Garuda Indonesia airplanes are parked at Soekarno-Hatta International Airport Terminal 3, Tangerang, Banten, Friday (11/6/2021).
Garuda Indonesia’s fate
What about the fate of Garuda Indonesia, which will be replaced? By the deadline of its debt deferment of 20 May 2022, the Garuda Indonesia management will receive good news from the government, its majority shareholder, that House of Representatives (DPR) Commission VI overseeing industry, investment and business competition has approved state capital participation (PMN) worth Rp 7.5 trillion. The decision was made on Friday, 22 April 2022.
It also asserted that the injection of government fund was not meant for debt repayments, but rather operational activities.
It is clear that Garuda is being given a vitamin shot to breathe new life in the national airliner to improve its unstable operation, resulting from its cost burden and the impacts of Covid-19. With this capital injection, Garuda is expected to rise up and conduct its business in a more productive and efficient way as Covid-19 subsides and all domestic and international flights reopen amid the eased curbs for all air travelers.
Most importantly, Garuda cannot miss the opportunities of Idul Fitri transportation. In the middle of the year, there will be peak travel during the school holidays and certainly, a chance to serve the umrah (minor pilgrimage) program, which was halted for the past two years.
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Another big opportunity this year is the resumption of the haj program, for which Indonesia has been allotted a quota of 100,051 pilgrims. Saudia airline and Garuda Indonesia have been designated to serve these passengers. In addition to regular pilgrims, Garuda also has an opportunity to transport special haj pilgrims known as ONH Plus, as well as Furoda haj pilgrims.
The income from haj flights is Garuda’s biggest hope, because it has a fixed value and liquidity that can will improve its performance and available cash flow, which will eventually enable the flag carrier to resume operating all the aircraft it needs to finally start repaying its creditors. This will elevate confidence among its employees, stakeholders and consumers.
The resumption of all flights carries a very big market opportunity. Therefore, Garuda should be ready. The PMN injection should be used optimally because as Idul Fitri ends, air travel is expected to return to its normal, pre-pandemic levels of operation. Consumers are impatient after waiting two years to travel again and visit their family and relatives in far-off regions.
In brief, since the pandemic is under control and flight activities reopen, Garuda has already recovered in its short-term target, at least in its financial report for the second half of the year
Nonetheless, it should also consider what is to come next. What about the future fate of Garuda Indonesia? Its total liabilities reaching Rp 198 trillion and its hundreds of creditors cannot be settled in a mere year or two. Even the Rp 7.5 trillion capital injection could be used up in an instant. So, a rescue strategy is needed as well as further development to ensure the airliner’s long-term continuity.
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Garuda Indonesia's Boeing 777 aircraft at Terminal 3 of Soekarno-Hatta International Airport, Tangerang, Banten, Tuesday (26/4/2022).
Sound competition
From the above, it is evident that Garuda is preparing to take off again, taking to the skies over islands and seas as it recovers from its previous condition. Meanwhile, Pelita has just started to enter the new world of scheduled flights, which has market characteristics that are different from its previous service. The two will be battling, competing and racing to win the sympathy of domestic customers.
Learning from the problems that caused Garuda’s losses, debt accumulation and internal corruption, the shareholders should, first and foremost, conduct thorough supervision of the company’s draft business plan, especially in determining the types of aircraft and routes. Prioritizing prestige to result in losses should be avoided, such as flights to Europe that applied the three service classes of first, business and economy to result in big losses.
Another example of its mistake is choosing the Bombardier CRJ-1000, which was actually unworthy. It would be better for Garuda to use only two aircraft brands, Airbus and Boeing, for greater effectiveness and efficiency of its maintenance and aviation personnel.
For Pelita Air Service, it is important to note that the reference of “new paradigm” means it should of course start from the paradigm of competition, because it will be competing with other airliners that are more experienced, have earned customers’ sympathy and public popularity. As a newcomer, Pelita is entering the medium service segment, which is rather ambiguous.
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It would be more appropriate for Pelita to establish itself as a low-cost carrier (LCC), remembering that LCC doesn’t mean cheap. We can learn from the United States’ Southwest Airlines as pioneering LCC in 1967, when it faced other reputable airline companies like Delta, American and United.
Southwest has maintained very good performance until now, continuing to make profits for 47 years until 2019. The secret to Southwest Airline’s success is its use of only one type of aircraft, the Boeing 737, with a fleet now totaling 735 aircraft to make it the largest Boeing user in the world.
This strategy has accorded Southwest a big discount from Boeing. Aircraft maintenance and repair facilities and infrastructure do not vary very much, so it has higher efficiency. Likewise, the type rating of its pilots is uniform so it is easier to schedule the rotation of its aircrew. The other secret is not providing food and beverage services while retaining entertainment services, with all Southwest aircraft now equipped with Wi-Fi.
Southwest’s business model was later copied by other LCC airliners, such as Ryan Air, Jet Blue, AirAsia and nearly all other LCCs in the world. This is also why LCCs have now surpassed their older peers that continue to operate as full-service carriers (FSCs). LCCs excel because they apply the concept of low profile, high profit, while FSCs apply the high profile-low profit concept.
Millennial market opportunity
Considering the above situation, just forget the idea of Pelita Air Service replacing Garuda Indonesia. It would be ideal for Pelita and Garuda to engage in sound competition to win consumers’ sympathy, particularly in the fairly big domestic market that will grow further, in line with the growth the millennial generation that currently dominates the Indonesian population.
The millennial generation is very fond of working with gadgets, making noncash transactions, is smart, works fast, is interested in traveling to tourist destinations or unique and iconic locations.
For this reason, Garuda, Pelita and all airliners should prepare to welcome the emerging millennial market and offer optimum services, especially onboard Wi-Fi. Another characteristic to be taken into account is that the millennial generation is not loyal to one brand. They will swiftly change to other products that are better and offer greater benefits.
Yona Mardiona
Yona Mardiona, Observer and former airline employee
This article was translated by Aris Prawira.
