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

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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. Remarkabl
e
growth has been achieved mainly due to the fact that in the early years there wa
s
minimal competition in the airline industry in Indonesia. Being the first Indone
sian
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 f
low
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 sub
divided
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 s
oft 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, i
n-flight
immigration inspection on Tokyo-Jakarta Bali flights, the agreement with Contine
ntal
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 acti
vities.
Problems:
A. Minor:
1. Garudas 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 stateow
ned enterprise.

4
3. Exhaustion of the companys and the Government of Indonesias 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 po
licies 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. Garudas 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 lagg
ing
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 pri
vate
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 i
s
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 burde
n 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 utiliza
tion
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 highe
r 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 abo
ut
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 an
d
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 proc
edures

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as it is a state-owned enterprise. Full privatization would be an alternative so
lution
than staying being a state-owned enterprise. If Garuda would be a private enterp
rise,
its decisions would not have to go through vigorous bureaucratic procedures. Hen
ce,
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 n
earto-impossible situation. The company as well as the Government have exhausted
their
capacity to borrow offshore and theyre 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 n
ot for
this time as it has a bad reputation in the airline industry.
Main Problem:
Objectives in this case are needed to guide ones answer to the problem and this i
s
to establish a policy which could change the companys bad reputation by the end o
f the
quarter, to be more professional in commercial air transport by the end of the y
ear and
also to increase the financial condition by reaching at most 10% profit before t
ax. With
these objectives, the company can become one of the worlds 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 t
he

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previous successful policies which the company can be supported financially from
the
government and generate profit but probable government interference may occur. T
he
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 im
proved;
decision-making, profit-sharing, and approval for future proposals. In addition,
there
would be potential investors and the company would assert maturity and independe
nce.
Conclusion
The best solution for the problem is for Garuda Indonesia to fully privatize aft
er
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 st
rategy in
order to endorse to prospective customers their airline. Unlike choosing the sec
ond
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 alterna
tive, 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 bes
t
suits for the company comes easier. Second, they can now enforce decisions for i
tself for
the advancement of the company. Third, the company would be able to raise capita
l on its
own through its subsidiaries or issuing new stock or bonds. Fourth, given the ca
pital they
have obtained, they would be able to overhaul their entire operating system. Air
craft

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technology and communication technology could be updated and their ticketing and
reservation system could then be in computerized structure. Employees should als
o be
trained in order for Garuda to overcome their poor pre-flight, in flight and pos
t-flight
services. Fifth, through formulation of new policies regarding its costs and ass
et
utilization, Garuda will be able to reduce cost and manage its assets effectivel
y 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 ad
dition, an
expansion of business operations would also be good by establishing business rel
ation
with other international airlines and make a network with related industry to st
rengthen
marketing strategies. Furthermore, a self-analysis every now and then could
accommodate the companys prosperity and resiliency.