There is a limit to how far the nation will go to sustain its aviation pride. That limit may be at hand.
aruda Indonesia’s recent loss in international arbitration to two lessors has dealt a severe blow to the flag carrier as it struggles to stay aloft amid mounting debts. The publicly listed company has only a few, unattractive options left, and bankruptcy or liquidation can no longer be ruled out.
The airline’s financial woes will likely grow as it has been ordered by the London Court of International Arbitration to pay all rent and leasing fees, back payments plus interest and court fees to lessors Helice SAS and Atterrissage SAS. Garuda CEO Irfan Setiaputra said the company respected the ruling and was in talks with the lessors on restructuring the payments.
With both domestic and international travel severely curtailed by the COVID-19 pandemic and the attending lockdowns, Garuda has suffered huge financial losses since 2020, while gross mismanagement and graft by previous directors have compounded its problems. After massively cutting back flights and staff, the airline is still struggling to pay its debts of about US$1.8 billion.
Garuda’s troubles are not unique; airlines around the world are facing bankruptcy. The Italian flag-carrier Alitalia, for one, has announced it will stop flying in October.
Garuda has the advantage of access to a huge domestic market. Irfan plans to bring the airline’s fleet down from 142 to 70 planes and to refocus operations on domestic flights. But this plan depends on the company’s financial situation, which continues to impair its ability to operate.
Beyond the recently decided London arbitration, Garuda is dealing with no less than 34 lessors as it tries to return planes and restructure payments.
The airline has had one or two successes, but they do not guarantee similar outcomes in the other negotiations. In fact, the loss at the London court could encourage other lessors to follow suit to recoup their money. And if Garuda fails to make payments as mandated by the ruling, it may have its planes impounded when flying abroad.
Where does this end, and how far must the government go to bail out the national carrier?
It is time to look more seriously at the other options for Garuda, which State-Owned Enterprises Minister Erick Thohir discussed in May. While money injections and debt restructuring would be preferred, Erick said Garuda could also consider paths taken by other distressed airlines.
One of these would be to file for bankruptcy, which could allow the airline to restructure its debts. It is not clear, however, whether Indonesian bankruptcy law actually allows for restructuring. A second option would be for the government to establish a new company that would gradually take over Garuda’s assets and staff as it restructured its debts. A third option would be for Garuda to be liquidated and to allow private investors to set up a new carrier to provide domestic services.
Some of these options would mean the end of Garuda Indonesia, which has long been a source of national pride. But there is a limit to how far the nation will go to sustain its pride. That limit may be at hand.
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