Introduction

The interest of two United Arab Emirates’ air carriers – namely Etihad and Emirates Airways – to invest in Garuda Indonesia was announced by the Minister of State-Owned Enterprises Erick Thohir in mid-2022. According to his statement, one of the two airlines will later become the largest airline investor to the struggling Indonesian air carrier.

Before this issue emerged in the public, Erick Thohir and the Indonesian Investment Authority (INA) had held separate meetings with the chairmen of both companies to explore cooperation opportunities.

Garuda Indonesia has been incessantly seeking strategic partners to boost its air logistics ecosystem system after years of financial woes. As an effort to alleviate its troubles, the Ministry of State-Owned Enterprise plans to increase capital without pre-emptive rights, otherwise known as a private placement. The future investment by either one of the two companies would be realized through this channel.

The Etihad-Garuda Cooperation

Etihad arguably has an advantage to be Garuda’s investor owing to its past engagement with the latter.

Previously, Etihad and Garuda have fostered a codeshare since 2012, a cooperation that was further strengthened through the signing of a Memorandum of Understanding (MoU) regarding commercial agreements in the United Arab Emirates-Indonesia Business Investment and Networking B20 forum that preceded last year’s G20 meeting in Bali.

This collaboration is expected to be able to support the strengthening of the national tourism ecosystem in a sustainable manner, especially as both countries continue to boost post-pandemic tourism to support economic recovery. Through this arrangement, passengers from Etihad can enjoy seamless connectivity services provided by Garuda to access various tourist destinations in Indonesia.

Apart from that, Garuda and Etihad have also collaborated in frequent flyer program, which allows passengers from both airlines to earn or exchange their loyalty points and reward tickets when using codeshare flights. In addition, Etihad and Garuda Indonesia have a plan to develop cooperation into cargo business lines, maintenance-repair-overhaul (MRO) services and air training programs.

Why the UAE?

Etihad and Emirates’ plan to invest in Garuda cannot be separated from the flourishing diplomatic relations between Indonesia and the UAE in recent years, which is also marked by increase in trade and investments figures. The economic ties have further evolved into the Indonesia-United Arab Emirates Comprehensive Economic Partnership Agreement (IUAE-CEPA), signed in mid-2022, which is expected to triple today’s bilateral trade figures.

An investment by either Etihad or Emirates in Garuda in the future will add to the growing list of the UAE’s investment in Indonesia. For Indonesia, this can be seen as an effort to diversify its investment partners beyond the traditional players, such as Singapore and China. If such a plan is realized, it would also be another manifestation of the UAE’s “Look East Policy” which has been intensively carried out in the last decade.

Curiously, it should be noted that Etihad has been deliberately investing in airlines that are on the verge of collapse. This could be seen as Etihad’s strategy to compete against its more established rivals such as Emirates and Qatar Airways, though its success rate has been rather checkered. Etihad has purchased a portion of shares in a number of other airlines such as Air Berlin (29.2%), Niki (49.8%), Air Serbia (49%), Alitalia (49%), Jet Airways (24%), Virgin Australia (21.8%) and Air Seychelles (40%).

Whether an investment by either Etihad or Emirates gets realized, the government must take note of one critical issue. In its past investments in other companies, Etihad has restructured its partners aggressively, making significant changes to flight routes and schedules. This has been met with resistance, such as from Jet Airways, Air Berlin and Alitalia, the last two of which went bankrupt in 2017.

Nonetheless, not all investments have failed, for example, Etihad’s investments in Virgin Australia and Air Seychelles have been considered quite successful. However, this condition should be a cautionary tale to Garuda and the Indonesian government.

Garuda’s Broken Wings

Garuda might seem like one of the latest nearly-bankrupt airlines that Etihad could play a savior to, though Emirates is also in the picture.

Garuda Indonesia has been on the brink of bankruptcy since September 2021. The company’s equity is in the negative at US$2.8 billion (Rp.40 trillion) with its debt stands at US$9.8 billion, while its assets only amounts US$6.9 billion.

Garuda owes US$6.35 billion to its lessors, making up the majority of its liabilities. Furthermore, its debt to banks amounts to US$967 million in addition to the US$630 million in debt in the form of mandatory convertible bonds, sukuk and Asset Backed Securities Collective Investment Contract.

To illustrate this, Garuda owes Bank Negara Indonesia (BNI) the amount of Rp5.2 trillion. This figure consists of Rp2.3 trillion of debt by Garuda’s main company and more than Rp 2.8 trillion owed by its subsidiaries, specializing in aircraft maintenance as well as food and beverage.

Apart from BNI, Garuda also has a debt to Bank Rakyat Indonesia (BRI), which disbursed Rp3.97 trillion Garuda and Rp2 trillion to the Garuda Maintenance Facility Aero Asia.

Obviously, the Covid-19 pandemic is a factor severely impacting Garuda’s performance in the past few years, debilitating its performance and image as Indonesia’s best airlines.

This financial problem ultimately led to significant reductions in flight routes and the number of aircraft as an effort to restore the financial health of the state-owned enterprise. This has affected both domestic and international flight routes, such as Amsterdam, London and South Korea. The number of Garuda’s flight routes have declined from 237 in 2019 to 140 by 2022 to reflect this.

With reduced routes comes the cut on the aircraft numbers, with only 134 vessels were in use in 2022. This has also affected the types of aircrafts in operation, which are down to six from the initial 13.

However, despite facing financial problems, the Indonesian government is still trying to help Garuda’s declining finances. The government, for example, has injected State Equity Participation funds worth Rp7.5 trillion to Garuda, drawn from the 2022 State Budget.

There are at least two reasons why the government is keen to keep Garuda in the air. First, it is to prevent a monopoly in the domestic aviation industry. For state-owned enterprises such as Garuda, one of their duties is to contain the unhealthy market competition ecosystem in the industry. Second, Garuda remains, to this day, the pride of the country that in its heyday consistently ranked among the world’s best airlines and was often written on the same lines as Singapore Airlines and Qatar Airways.

There are thus the economic and nationalistic rationales for the government to save Garuda from its likely fall. It should be noted that the UAE is not the only players on the table as Garuda has also approached other investors to help its financial condition. Unfortunately, Garuda and the two airlines from the UAE have only had one meeting and there has been no further follow-up regarding the investment plan. According to a statement from Deputy Minister Kartika Wirjoatmodjo, currently Garuda’s cash remains sufficient to keep the company afloat, though one begins to wonder as to how long this would last.

Benefits to Both Sides

Regardless of the problems currently being faced by Garuda, the government will still strive for the sustainability of Garuda by inviting national and international investors and this was also conveyed by Erick Thohir’s optimism. If either Etihad or the Emirates gets to invest in Garuda at the end of the day, this could mean a chance of second flight for Garuda.

Either Emirates or Etihad can boost Garuda’s capital to undertake recovery action and detach its dependency on the state’s money. The recovering aviation market is also expected to support such a process, but it will also be tied to the need to increase the number of local and foreign tourists who travel with Garuda. Increased demand would stimulate an increase in supply, in both flight routes, number and types of aircrafts.

Latest number shows promise. During this year’s Idul Fitri period, Garuda saw an increase in the number of flights carrying around 14,000 people a day. This shows that Garuda remains of one of travelling options by a number of Indonesians. Positive figures such as these could convince investors that Garuda is worth their time and money.

For the UAE, an investment by either one of its native airlines could help strengthen its foothold in Indonesia and enable it to compete against Middle Eastern countries, which have been successful in strengthening their presence in Asian countries. As one of Asia’s largest markets, Indonesia is a lucrative investment potential.

Indonesia-United Arab Emirates (UAE) Relations

During President Joko “Jokowi” Widodo’s tenure, bilateral relations between Indonesia and the UAE have not only been bound by diplomatic formalities, but also personal relationship that extends beyond state visits.

The UAE has become the country in the Arabian Peninsula that Jokowi has visited the most as president, especially in his second term. Initially, Jokowi’s friendship with Prince Mohammad bin Zayed (MBZ) began when the latter undertook his maiden visit to Indonesia in 2019. This was the first visit by a UAE leader since 1990. The friendship developed steadily over the years that Jokowi even invited MBZ to attend the G20 Summit in Bali, the meeting of the largest economies in the world held last year.

The personal connection, obviously, coincides with the economic interest of both nations, especially in the post-pandemic dimension. The two countries witnessed an improvement in economic cooperation in 2021 after a slump in the previous year. The economic ties have further evolved into the Indonesia-United Arab Emirates Comprehensive Economic Partnership Agreement (IUAE-CEPA), signed in mid-2022, which is expected to triple today’s bilateral trade figures. It is also hoped that IUAE-CEPA could stimulate further business-to-business collaboration, such as Etihad Airways’ plan to invest in Garuda Indonesia.

The close bilateral relations also translate into the defense sector. Minister of Defense Prabowo Subianto has represented Indonesia in a myriad of engagements with the UAE government over the last few years, such as the signing of a Memorandum of Understanding (MoU) in defense cooperation and a defense industry development cooperation protocol. This year alone, Prabowo led the Indonesian delegation to attend the International Defense Exhibition and Conference (IDEX) 2023, consisting of officials from the Ministry of Defense and eight defense companies such as PT. Dirgantara Indonesia, PT. Pindad, PT. PAL Indonesia and others.

Other collaborations include the health sector, whereby Indonesia received a lot of health assistance from various countries including the UAE as a form of solidarity in fighting the spread of Covid-19. The UAE has provided the Sinopharm vaccine, oxygen cylinders, oxygen concentrators and other medical equipment.

This has likely led to the interest of both countries to formalize cooperation in the health sector. For example, last year the Indonesian Minister of Health Budi Gunadi Sadikin held a meeting with UAE’s Deputy Assistant Secretary for Public Health Policy and Licensing Amin Al Ameeri to explore cooperation in the pharmaceutical industry, vaccines, therapy and diagnostic.

Evidence of the Jokowi-MBZ Brotherhood

Interestingly, the link between Jokowi and MBZ materialized in symbolic infrastructure.

For example, in 2020, a main road that was formerly known as Al Ma’arid Street, which separates the Abu Dhabi National Exhibition Center (ADNEC) and the Embassy Area, has been renamed to President Joko Widodo Street by MBZ. Jokowi reciprocated by renaming a 37-kilometre toll road – which connects Jakarta and Cikampek – to Sheikh Mohamed bin Zayed Elevated Toll Road in 2021.

This is not the first time an Indonesian figure has been named after a road outside in Indonesia, as we can also find the names of Soekarno, Muhammad Hatta, Raden Adjeng Kartini and Munir in places like Morocco and Netherlands. Jokowi’s enshrined name in a UAE street testifies to the lasting impression he has left on the Gulf state, especially compared to his relationship with other Arab leaders.

MBZ also awarded a mosque for Jokowi which was built in the latter’s birthplace, Solo, Central Java, where he began his political career. The mosque was designed directly as a replica of the Grand Mosque in Abu Dhabi, costing around Rp300 billion to build on a three-hectares area. Funded entirely by the UAE government, the Sheikh Zahed Al-Nahayan Mosque could accommodate 12,000 worshippers and symbolizes moderation and religious tolerance.

Important events count as well. Jokowi visited the UAE in mid-2022 to offer his condolences on the death of the emir of Abu Dhabi Sheikh Khalifa bin Zayed Al-Nahyan, MBZ’s predecessor. This visit also included a meeting with MBZ who had been appointed as the third president of the UAE and the new ruler of Abu Dhabi. 

In the same year, MBZ sent his youngest son Khalid bin Mohamed bin Zayed to attend the wedding reception of Kaesang Pangarep, Jokowi’s youngest child. Prince Khalid and his entourage were the only state guests present at the wedding.

The Significance of the Brotherhood

It cannot be denied that the UAE has become one of Indonesia’s closest relations since Jokowi took office. Arguably, this is due to (partial, if not whole) alignments in the Muslim worldview, developmental trajectories and geopolitical concerns. The UAE notably plays a role in the spread of Wasatiyyah Islam, or moderate Islam, which is critical for Indonesia’s multicultural setting.

The personal relationship between Jokowi and MBZ also has a significant, positive impact on the Indonesian public. As a foreign leader, MBZ is a trusted figure by the Indonesian public, besides Saudi Arabia’s Mohammed Bin Salman (MBS). Therefore, the image of the UAE, and MBZ in particular, is perceived well in Indonesia, which may have facilitated the building of cooperation between the two countries. In contrast, the close relationship that Indonesia and China has enjoyed in recent times does not align with the China’s declining approval rate in the eyes of the Indonesian public.

It is hoped that the “brotherhood” between Jokowi and MBZ will have a wider and more sustainable impact on both countries in the investment, economic, socio-cultural fields, especially beyond Jokowi’s term as Indonesia’s president, which terminates in 2024.

In the remaining time of Jokowi’s leadership, the new face of Indonesian presidential candidate Anies Baswedan, the former Governor of Jakarta, has invited investors from the UAE to invest in the the Urban Redevelopment Project, which includes Mass Rapid Transit (MRT), Light Rapid Transit (LRT) Jakarta, Transit-Oriented-Development (TOD) and electric buses. This offer was made by Anies during the Dubai Expo performance in March 2022, when he was still in office. This can be seen as Anies’ strategy to capitalize on Jokowi-MBZ brotherhood to ensure that cooperative relations with the UAE after the end of Jokowi’s leadership, should Anies be elected into office next year. In other words, this effort can also be considered to continue Jokowi’s legacy to the UAE in the future.

Other presidential hopefuls such as the aforementioned Prabowo Subianto and Ganjar Pranowo has also had engagements with the UAE and MBZ himself as part of the coattail effect of the Jokowi-MBZ brotherhood. Despite this, it is too early to predict that they can foster as good a friendship as Jokowi did with MBZ this early in the period, especially as their chance at assuming the president’s seat is less than certain. Regardless, it would be logical for the UAE and MBZ to ensure that their influence, built from long years of cultivated interaction with Jokowi and his administration, would remain even after Jokowi leaves office. It is also too soon to say that Jokowi’s influence in the future would vanish completely – signs of Jokowi building his political dynasty have emerged over the years. The UAE and MBZ might also want to capitalize this as well.