Indonesia’s pandemic-crippled Garuda Airlines is struggling to keep its head above water as the government toys with a formula it hopes will save the 74-year-old national carrier from collapse – and the country from losing one of its best-known icons.
The State Enterprise (SOE) Ministry recently unveiled a new rescue plan which involves pushing creditors, including aircraft lessors, banks and air service business partners, to accept either a substantial haircut or a debt-for-equity swap.
The airline’s liabilities have now ballooned to US$9.8 billion as it wracks up $100 million a month in losses. Officials acknowledge it is technically bankrupt, with current assets valued at $6.9 billion, but it must keep operating to fulfill its state-imposed mission obligations.
“What is important is that creditors agree to our rescue plan because without their consent we can do nothing,” said deputy SOE minister Kartika Wirjoatmadjo, underling the gravity of the situation to the parliamentary aviation commission in early November.
“We are just running on hope now,” he told a Bloomberg News interviewer, putting the airline’s problems at 9.5 on a scale of one to 10 and saying it has to slash debt by 70-80% to survive the free-fall.
Garuda is not the only Covid-19 victim in an industry that has been hit harder than most sectors, with the Air Transport Action Group estimating it has resulted in the loss of 46 million aviation-supported jobs and taken a $1.8 trillion bite out of global economic activity.
Up to now, South African Airways, Alitalia and Colombia’s Avianca have ceased operations, and Virgin Australia, Thai Airways and Philippine Airlines are among 20-30 other carriers worldwide which have sought bankruptcy protection or voluntary administration.
Under the rescue plan, Garuda would issue zero coupon bonds to repay its biggest creditors, among them Bank Mandiri and two other banks, BRI and BNI, fuel provider Pertamina, air traffic controller AirNav Indonesia and ground handler Gapura Angkasa, all state-owned companies.
Like US Treasury bills and savings bonds, a zero-coupon bond is a debt security instrument that does not pay interest and whose face value is repaid at the time of maturity.
Apart from offering a debt-for-equity swap to airport managers Angkasa Pura 1 and 2, the government will also seek price reductions in aircraft leases that now range from $952,000 a month for a Boeing 777-300ER to $800,000 for an A330-300 and $284,000 for a Boeing 737-800.
As of September, the airline had 10 long-range 777-300ERs, 21 medium-range A330-200s, 300s and 900s and 44 737-800s in its inventory, though not all are in operation. Budget subsidiary Citilink, launched in 2001, maintains a fleet of 51 A320-200s.
The ministry recently announced it was cutting the combined fleet of Garuda and Citilink from 202 to 134 aircraft, and reducing flight routes from 237 to 140, focused mainly on the domestic market.
The parent airline still has 53 aircraft in service and, apart from 76 domestic routes, remains flying as much as three times a week to Singapore, Melbourne, Perth, Sydney, Kuala Lumpur, Hong Kong, Seoul, Tokyo and Amsterdam.
“We are striving to devise the best formula to rescue the airline by prioritizing business transformation,” said Wirjoatmodjo, blaming inefficient and shoddy corporate governance as one of the underlying causes of the airline’s financial woes.
While that has always been an issue with Indonesia’s state-owned companies, some of its problems also stem from crippling 20% price mark-ups on 55 A-320s and A-330s acquired by Garuda between 2009 and 2015.
That led to hefty jail terms for three top executives, but saddled the company with the world’s highest leasing charges, which are calculated as a percentage of the sale value of a plane.
In an effort to limit heavy capital expenditure, it is common practice for a leasing company to buy an aircraft once the price has been negotiated by the airline, then lease it back in what amounts to a lifetime of monthly installments.
The government owns 60.5% of Garuda’s shares, with 28.2% held by PT Trans Airways, owned by billionaire Chairul Tanjung, and the remainder in public hands. Diluting state ownership now appears almost inevitable.
With debt restructuring, some analysts believe that to lure new investors it would be better to bring Garuda and Citilink under one umbrella and to hive off the airline’s catering, hotel and maintenance arms to concentrate on its core business.
Under normal circumstances and with improved management, the airline would be an attractive target considering that Indonesia is the world’s second-fastest-growing aviation market, with domestic passengers peaking at 101.9 million in 2018.
But effectively privatizing the airline would be fraught with difficulties and obstacles, the least of all being opposition from Indonesian nationalists and those worried it would affect services to loss-making destinations across eastern Indonesia.
Aviation experts have scoffed at a last-ditch plan for tiny Pertamina-run charter airline Pelita Air Service (PAS) to assume the role of national carrier if the government’s restructuring plans fail and the airline is declared bankrupt.
Although there are reportedly 12 A320 aircraft on order, Pelita now has only six prop-driven ATR-72 commuter planes in its inventory and does not have either the branding or the infrastructure and systems to take Garuda’s place.
Garuda may soon be forced to drop international routes altogether, but in an effort to find business that avoids flying with half-empty planes it has opened a new cargo service to Europe in collaboration with a Luxembourg logistics firm.
Other Indonesian airlines are also under pressure. Last July, giant budget carrier Lion Air announced it was putting 8,000 of its 23,000 employees on furlough, after slashing operations to only 10-15% of its normal 1,400 flights a day.
In June, Air Asia Indonesia, the second-largest budget operator, ceased operations for what it said would be two or three months. But that “temporary suspension” continues to be extended as the carrier waits out the pandemic.
The devastation of Indonesia’s aviation sector has also extended to airports. The new Kertajati International Airport, 170 kilometers east of Jakarta, has literally failed to get off the ground since it opened in July 2019.
But the pandemic has only exacerbated complaints about mismanagement, poor access and a related shortage of passengers, causing Citilink to pull out of the new hub in September 2019, long before Covid-19 took hold of the country.
The airport had been expected to handle 2.4 million budget passengers a year, relieving pressure on Jakarta’s main Soekarno-Hatta airport, which up until the pandemic was running at near-capacity with 67 million passengers and more than 955,000 tonnes of cargo a year.