A View on Cross Shareholding Model for Garuda Indonesia

Garuda Indonesia (GIA) is in big trouble, commercially, financially and the worst, it is facing big loss in their human resources as the impact of flying banned from EU. For the last 3 consecutive financial years, GIA has been making big loss as the factor of increased fuel prices, competition from budget airlines and the cost of repaying about $790 million in debts. With such situation, I wonder if they can achieve its target of making profit in 2007 as their income started to fall off after hit by the banned decision.

On December 2006, Emirsyah (President Director), mentioned that GIA had several discussions with potential partners offering its stake to sell for raising USD 300 million to finance its expansion. This will cut major portion of Indonesian government’s shares in this company. Frankly speaking, I have no idea about the detail plan of this strategic partnership. However, capital injection through IPO, private placement, bond issuance and commercial loan would not bring GIA to the healthier status. GIA has too many problems arising at the same time. What they need is integrated solutions.

If the decision is to be acquired by one major airline and through private placement, I think this would be the worst solution that GIA may have in the future. I remembered last few months, when ASIANA Airlines of South Korea and ANA (All Nippon Airways) from Japan announced a cross-shareholding agreement as part of their strategic alliance to strengthen their markets, profit improvement and greater customer satisfaction. Both companies are major airlines in regional market.

What about GIA? Can GIA proposes a cross shareholding to a major airline as a strategic partnership model? The answer is yes, it is possible with some conditions.

First, cross shareholding may work if GIA willing to take relatively small portion compare to its partner’s portion taken from GIA.
Second, cross shareholding has to be done in one package with initial public offering.
Third, cross shareholding has to be with few major airlines, not a single one.

What GIA can offer to them?

First, GIA has a promising domestic market that will grow steadily for the next decades. Second, Indonesia spreads from west part closest to Thailand and Malaysia, wider to east part closest to Australia. Indonesia has the best potential area to become the air transportation hub connecting flights from Europe/Middle East to East Asia/Australia vv and from East Asia to Australia vv. Both for passenger and cargo flights, aiming to increase sales, to reduce operation cost and to improve services.

Nevertheless, this solution will only work if, as is often the case, the government of Indonesia supports the integration between airport and airlines by giving the access to new GIA to take equity portion in major airports in Indonesia. As this would give airline operator a new room to explore best system to reduce costs and improve airport services.

Cross shareholdings will give GIA opportunity to access new market, less marketing cost, joint cost on essential cost accounts, technical support, market protection, new image, additional passenger/cargo and profit. Yes, profit. What GIA needs to do only to share the profit to its partners. GIA would get small portion of profit and automatically increasing value of its stock. It would be no more huge losses and all miserable financial condition inside GIA.

Obviously, this alternative would take longer time to accomplish, however considering GIA current situation, a partial solution emphasizing in capital injection only bring GIA to the new stage of difficulties. It is always easy to create “looks good and looks feasible” strategic partnership proposal, back up with fantastic financial projection, especially for a nation flag carrier with huge but less productive fixed assets and (probably) government guarantee.

At the end of the story, investors always try to maximize their return on investment, if it can’t be done from the profit then it has to be done from selling the scraps.