JAKARTA – Indonesia’s financially crippled national carrier Garuda Airlines has taken the first step towards addressing its mountain of debt by paring down management and roping in a high-powered lawyer who specializes in business restructuring and arbitration as its new chief commissioner.
“This is the moment for Garuda to clean up its financial problems, improve its operational performance and get back to its fundamental business,” said State Enterprise Minister Erick Thohir following the airline’s annual shareholders meeting on August 13.
Thohir says Garuda’s revamped management is tasked with “tidying up its negotiations with lessors” and producing a business plan that prioritizes profitable domestic services and strengthens its domestic and international cargo business, which has been least affected by Covid-19.
Battered by the pandemic and some of the world’s highest leasing charges, the state-owned company has seen its total debt swell from US$1.3 billion to $4.8 billion over the past two years and is still bleeding an estimated $100 million a month.
Under what the State Enterprise Ministry says is standard accounting procedure, an additional $1 billion the airline owes leasing companies is listed as an operating cost and not part of total debt. Lessors own much of Garuda’s current fleet, which has been cut from 142 to 70 aircraft since early last year.
Facing its worst crisis since it was founded by the Dutch colonial government in 1947, Garuda is currently considering a debt moratorium as part of a Suspension of Debt Payment Obligation (PKPU) process, where the entire stock of debt will be subject to negotiation.
It isn’t new territory for Indonesia. Experts say the devastating 1997-98 Asian financial crisis has produced a core of bankers, some of them former employees of the Indonesia Bank Restructuring Agency (IBRA), with a sophisticated knowledge of what needs to be done.
Still, skepticism lingers. “Looking at the figures, I think it would be much better to start a new airline than to save Garuda,” says aviation analyst Alvin Lie. “There should be smaller capital involved and the focus should be on the domestic market.”
Garuda has already laid off about 50% of its 20,000-strong workforce since the pandemic hit, but in reducing the directors from eight to six and the commissioners from five to three, last week’s meeting also cut their salaries by half, in addition to imposing 30% to 50% cuts in staff pay.
The management drawdown saw the departure of deputy president Dony Oskaria and cargo and commerce director Mohammad Pahlevi, along with chief commissioner Triawan Munaf, and fellow commissioners Peter Gontha, Yenny Wahid and Elisa Lumbantorium.
Munaf was replaced by Timur Sukirino, 62, the founder of the Indonesian Receivers and Administrators Association and senior partner at Hadi Putranto Hadinoto & Partners, which has a long record of working with lenders and companies in out-of-court settlements and bankruptcy proceedings.
The government has a 60.54% interest in the world’s 32nd biggest airline, with a 25.81% stake held by the CT Group, a diversified banking, property and media company owned by former chief economic minister Chairul Tanjung, one of Garuda’s three remaining commissioners. The public owns 13.65%.
Gontha, a prominent 72-year-old businessman who represented CT Group’s PT Trans Airways on the board, sparked controversy last month when he sent an open letter to his fellow commissioners saying the airline was not doing enough to reduce operational costs.
CT Group paid $350 million for a 28% stake in Garuda nine years ago when the share price was at 620 rupiah, but the devaluation of the rupiah and the decline in the carrier’s equity value is estimated to have cost Tanjung as much as 7.4 trillion rupiah ($515.2 million).
Gontha claimed the airline was still flying unprofitable routes, but analysts say more should be done to shed some of its non-core businesses, including an air catering service and a string of hotels.
It is generally acknowledged the carrier would have been on a sounder financial footing if it had not had to pay unusually high leasing charges that are estimated to eat up as much as 24% of its revenues.
That’s partly due to 20% price mark-ups on 55 A320 and A330 aircraft acquired by Garuda and budget subsidiary Citilink between 2009 and 2015 which led to lengthy jail terms for former president-director Satar Emirsyah and two other top executives, but left other conspirators untouched.
Following the cost-cutting practice of many airlines, Garuda negotiates the price of new planes, which are then purchased by a leasing firm and leased back in monthly installments calculated as a percentage of the value of the plane.
Aviation experts say the rent for a new A320 is normally about $250,000 a month, rising to $400,000 for a wide-body A330. The aircraft stay with the lessor on the completion of the lease.
In proceeding with the PKPU process, Garuda is expected to propose a debt reduction scheme that has to be approved by 50% plus one of its creditors and must represent at least 67% of the total outstanding amount.
Once it receives court approval, it has a 45-day standstill period to file the plan and another 270 days to have it approved by mostly Indonesian creditors, among them two of the biggest state-owned institutions, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI).
Garuda is believed to be planning similar bankruptcy protection proceedings under Part IX of England’s 1986 Insolvency Act, which requires the number of creditors to represent 75% of the total debt. Britain and Ireland are home to many of the leasing companies, including top-ranked Aercap Holdings N.V.
Mandiri Securities, a subsidiary of state-owned Mandiri Bank, has been appointed the lead adviser, but it has already farmed out most of those responsibilities to New York-based Guggenheim Securities (finance), Cleary Gottlieb Steen & Hamilton (legal) and the Singapore office of McKinsey (business).
Guggenheim has $325 billion in assets under management, and Cleary Gottlieb Steen & Hamilton is listed as the 20th largest law firm in the United States with revenues in 2017 of $1.2 billion. Each conservatively charge $100,000 a month for their advisory services.
Preoccupied with its rescue operation, it isn’t clear whether Garuda will follow the lead of SriLankan Airlines, which has sued Airbus for $1 billion over bribery allegations involving an order for 14 A330s and A350s, four of which have yet to be delivered.
That stems from Britain’s Serious Fraud Office (SFO) signing a court-approved Deferred Prosecution Agreement (DPA) with Airbus last year obliging it to accept fines of 984 million euros over tainted transactions with Sri Lanka, Indonesia, Taiwan, Malaysia and Ghana.
The plane manufacturer has so far failed to answer claims from Garuda’s lawyers seeking unspecified damages. Nor has Indonesia’s Anti-Corruption Commission (KPK) received a response from the SFO to request a share of the penalties, which as a bribery “victim” the airline feels it is entitled to.
Garuda may have taken some heart from this week’s decision by Rolls Royce to settle out of court a $44.5 million suit brought by the airline for the British engine-maker committing “fraudulent acts” in the sale of Trent 700 engines for A330-300 aircraft.