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Bailing out Garuda
Garuda Indonesia deserves not only government but also lender support because it is a state-owned company and Indonesia’s largest carrier. It is encouraging that the new management installed earlier this year was doing a demonstrably good job before the pandemic hit the country in March.
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A Garuda Indonesia aircraft is seen at Soekarno-Hatta International Airport in Tangerang, Banten, on Jan.7, 2018 (Courtesy of/Garuda Indonesia)
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ith demand collapsing and carriers cutting flight capacity to a mere 10 percent of normal volume, the International Air Transport Association has estimated that most airlines worldwide will go bankrupt later this year without government and lender intervention, as the pandemic-induced crisis has virtually shut down air travel globally.
State-owned national flag carrier Garuda Indonesia is no exception. Air travel has indeed been one of the
industries hit hardest by government-imposed travel restrictions. Most people, afraid of catching COVID-19, are avoiding air travel, virtually shutting down passenger service globally.
Read also: Flag carrier Garuda Indonesia cuts employee salaries by up to 50% Garuda itself, which was in the process of recovering from a tarnished reputation caused by scandal-tainted management last year, is now facing severe liquidity problems as domestic air travel has been virtually grounded for two weeks. Yet more worrisome is the fact that the company is due to repay the equivalent of US$500 million in rupiah and dollar-denominated debt to domestic and foreign banks in May and June.
We have not yet heard about any government plan to bail out companies, even though the regulation in lieu of law (Perppu) on fiscal and monetary measures to cope with the damage caused by the pandemic authorizes the government to inject additional capital or give emergency loans to state companies to support economic recovery.
The airline industry deserves government support, given its role in enhancing connectivity across the world’s largest archipelagic country. A similar line of thought prompted United States President Donald Trump to sign a $58 billion stimulus for airlines in March.
Garuda deserves not only government but also lender support because it is a state-owned company and Indonesia’s largest carrier. It is encouraging that the new management installed earlier this year was doing a demonstrably good job before the pandemic hit the country in March.
Airlines need highly competent management, as the complex business is simultaneously capital- and labor-intensive and extremely competitive with very thin margins. Significant unpredictability exists in major factors of the business, and the damage of the COVID-19 pandemic is simply beyond the control of management.
Read also: Garuda switches focus to cargo, chartered flight businesses amid ‘mudik’ ban We cannot allow such vital transportation infrastructure – which flies Indonesia’s flag internationally – to collapse. Transportation analysts have concluded that Garuda is competitive in operating costs compared to its peers in Asia because of lower personnel costs. The company’s profit margin is also better than several Asian airlines.
The liquidity pressures Garuda is now encountering have been caused not by bad corporate governance but mostly by the devastating impact of the pandemic, which has virtually stopped air travel. The financial impact of the current crisis is unlike anything we have ever seen.
Another reason to throw Garuda a lifeline is the consensus of airline analysts regarding good prospects for air transportation across the archipelago. With a population of over 265 million and a steadily rising middle class, the country certainly needs air transportation. Moreover, its untapped tourism potential and its strategic location amid the trade flow between Europe and Australia present Garuda with huge opportunities for expansion.
