The situation seems to get bleaker over time. The latest Garuda Indonesia situation, in which it holds a temporary suspension of debt payment (PKPU), has led to an arduous contract renegotiation process with foreign lessors. The current status quo will not change without substantial restructuring and negotiations.

A pivotal step is needed to raise Garuda Indonesia back from the ashes, which at this point seems to be unavoidable.

Garuda Indonesia is currently boosting up its cargo operations. Similar efforts include cooperating with logistic businesses such as KirimAja and PesanAja. Many airlines around the globe have also implemented such a strategy to survive. At the very least, it keeps the business afloat and generates revenues and cash. However, this is not sufficient to cover the costs. Considering that most leased aircraft are bound to the “hell or high water” clause, the latter is essential. Rental fees still must be paid no matter what. 

The company needs a reset more than just a quick and temporary fix. One of the choices is relaying the baton of the national carrier to a standby company option. Pelita Air Service, state-owned Pertamina’s charter airline company with more than 40 years of experience, has been set as a standby airline to replace Garuda. However, the airline's nature – which is performing non-scheduled flights with a fleet consisting of ATR propeller series and helicopters – does not seem adequate to replace Garuda Indonesia in its entirety.

Citilink appears to be the most realistic option for the flag carrier replacement, way better than the Pelita Air Service option. As Garuda’s subsidiary, it is experienced in operating jet aircraft, namely the Airbus A320 fleet. Citilink's airport slots in several ASEAN countries would be of tremendous additional value.

Furthermore, Indonesian law stipulates that if a company is declared bankrupt, its subsidiaries will not automatically be declared bankrupt as well. Citilink holds the necessary assets and operating licenses and might become the key to determining Garuda Indonesia's restructuring process.

The Citilink option has not just come out of nowhere. Previously, Swissair (IATA code SR) and Sabena (SN) successfully transformed from their bankruptcy into two successful airlines, namely Swiss (LX) and Brussels Airlines (SN). Both bankrupt airlines rose like a Phoenix from their ashes shortly after the 2001 bankruptcy of their mother companies. They used a similar “reset method” to get rid of the past liabilities and get off to a new flying start – leaner, meaner and more agile with their respective daughter companies.

The result was in both cases identical. However, how these airlines did their resets was different. Swissair sold its regional airline subsidiary Crossair to a consortium of banks, which took over some assets and key staff from Swissair. Crossair was transformed into a new international airline, Swiss, which is now the successful premium carrier of the Lufthansa Group.

The Sabena case was somewhat different. Before the bankruptcy, some valuable slots and assets were transferred to its subsidiary company DAT. After the bankruptcy, the regional airline DAT was sold to a consortium of government and industry shareholders who transformed the airline into SN Brussels Airlines, which changed its name to Brussels Airlines after a merger with Virgin Express some years later.

These operations prove that the fastest and most reliable way to relaunch an airline is to use the daughter airline company as a shell to restart operations. The bankruptcy of the respective mother companies will allow the new airline to get rid of the historical liabilities and its high-cost structure. It also gets rid of liabilities toward foreign lease companies. Hence, it can reset its operations as an agile and cost-effective airline.

These lessons learned could be applied to the Garuda Indonesia situation. Let the mother company transfer slots and crucial assets like IT systems and the Garuda Indonesia name to Citilink. An orderly bankruptcy of the mother company could then be used to remove historical liabilities. Lease companies are likely to be more flexible to renegotiate lease rates when some Garuda Indonesia aircraft are transferred to Citilink. In the current depressed market, there are not many options to place lease-based aircraft with other carriers. Key staff could be employed with new contracts in the new airline.

The low-cost model of Citilink could be integrated into the new Garuda Indonesia business model. Similar to successful hybrid airlines like jetBlue and Virgin Australia, premium and low-cost traffic could be combined in one single hybrid business model, offering both low-cost seats at the back and premium service in the front. Applying a hybrid business model would be a first in Asia and would facilitate the financial viability of both a solid domestic backbone network combined with a long-haul network.

Connectivity in Indonesia as an archipelagic state relies on air transportation. Passengers should be protected by having an option to travel at a reasonable price, now and post-pandemic. Success in maintaining healthy competition among Indonesian airlines will lead to innovation and avoid the 2019 airline fares hike in the domestic market due to limited competition.

The survival of Garuda Indonesia is vital for the country's connectivity, and a reset through Citilink is one of the best options. This scheme could maintain the flag carrier “GA” IATA code and the famous Garuda Indonesia brand to facilitate marketing, distribution and brand recognition.

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Ridha Aditya Nugraha teaches Air and Space Law Studies at the International Business Law Program, Prasetiya Mulya University. Wouter Dewulf is professor of Air Transport Economics at the University of Antwerp. The views expressed are their own.