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Saving Garuda from a crash
Negotiating collectively with the creditors under a commercial-court supervised PKPU would be more efficient and more promising. The key is that the restructuring plan is based on a credible and feasible business proposal strongly backed by the government.
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New face: Garuda Indonesia unveils its new mask livery for its B737-800 NG fleet. The COVID-19 pandemic has hit the company hard. (Courtesy of/Garuda Indonesia)
E
ven though the national flag carrier Garuda Indonesia is considered technically bankrupt with US$2.8 billion in negative shareholder equity as of September, the state-owned airline is still reluctant to file a petition for debt restructuring (PKPU) under the 2004 Bankruptcy Law.
Deputy State-Owned Enterprises Minister Kartika Wirjoatmodjo revealed to the House of Representatives on Wednesday that Garuda was still negotiating individually with foreign aircraft lessors for debt restructuring as well as with other state-owned enterprise creditors such as oil company Pertamina and Airnav for debt suspension and conversion into zero-coupon bonds. The airline is also reducing the number of leased aircraft in its fleet from 202 to 134 and to reduce the number of aircraft types from 13 to seven to improve operating efficiency.
Petitioning for legal protection under the PKPU scheme certainly carries its own risks. If the restructuring proposal cannot gain the approval of a majority of creditors, the airline could be put into bankruptcy and eventually liquidated.
But the loss and debt time bomb is ticking faster as Garuda is still severely bleeding due to the mobility restrictions. Its debts, according to government estimates, are increasing by $100-150 million a month, while negotiating separately with more than 30 lessors, who account for $6.3 billion of Garuda’s $9.75 billion debts, is complex and time consuming.
Negotiating collectively with the creditors under a commercial-court supervised PKPU would be more efficient and more promising. The key is that the restructuring plan is based on a credible and feasible business proposal strongly backed by the government.
Another supporting factor is the government’s willingness to allow for the entry of new strategic investors into Garuda even to the point of diluting the government’s 60.54 percent stake, Trans Airways’ 28.27 percent and the public’s 11.19 percent shareholding. Kartika has started lobbying the House for approval of a much smaller government shareholding in Garuda and has promised $518 million in aid to support Garuda’s restructuring plan.
Negotiating under a court-supervised PKPU scheme would also be a good opportunity for the current Garuda management to reveal the nature of the airline’s $6.3 billion debts to lessors, which could partly be blamed on lease deals that were concluded in bad faith and involving corrupt practices.
Government audits have found that despite the good prospect of air travel within Indonesia, Garuda pays the highest aircraft rentals in the world, accounting for almost 25 percent of its total revenues, compared with the global average of 6.1 percent. Revealing the corruption within the leasing deals would strengthen Garuda’s argument for debt haircuts from the lessors.
Had the aircraft lease deals been concluded in good faith and in accordance with the highest standards of business integrity, Garuda would have been able to get more competitive rental rates, taking into account the good outlook for air travel across Indonesia.
With a population of over 270 million, a steadily rising middle class, excellent tourism potential and strategic location amid the trade flow between Europe and Australia, Indonesia offers great prospects for air transportation for both passengers and cargo, especially after the pandemic ends, which is expected later next year.
