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Saved from bankruptcy
The option of bankruptcy would kill any chance of the creditors recouping their loans because any revenues obtained from asset liquidation would first be allocated to tax payments and severance allowances to employees.
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Representatives from creditors and lessors cast their vote on Garuda Indonesia's restructuring proposal in Central Jakarta District Court, on June 17 2022. (Garuda Indonesia/Public Relation team)
T
he government should expedite the disbursement of its commitment of Rp 7.5 trillion (US$500 million) in additional equity capital to Garuda Indonesia despite a court decision on Monday to postpone to next week its ratification of the debt-restructuring agreement between the airline company and its creditors.
The national flag carrier urgently needs additional working capital to immediately expand its passenger and cargo services and strengthen its credibility in leasing more airplanes to boost revenues in order to meet debt-repayment schedules, which start next April.
The latest hiccup at the court session on Monday, which arose from the objection of two creditors, will no longer affect the debt-restructuring plan that was approved by more than 95 percent of Garuda’s creditors last week. Strong government support also will make Garuda more attractive to new investors and strengthen its competitiveness.
We should commend the Garuda management for its success in reaching an agreement last week to restructure its $9.5 billion in debt to so many foreign creditors consisting of aircraft manufacturers, lessors, maintenance providers and Islamic bond investors, which hold the biggest chunk of liabilities.
These foreign creditors have agreed to take a large debt write-down (known as a haircut), restructure $5.5 billion to $6 billion of debts and exchange the remaining amount with $825 million of nine-year bonds and $300 million in equity. But debts to domestic banks and state companies will be extended for 22 years without a cut.
The foreign creditors, we think, made the right decision in view of the great prospect of air travel within the world’s largest archipelago and the Indonesian economy. The option of bankruptcy would kill any chance of the creditors recouping their loans because any revenues obtained from asset liquidation would first be allocated to tax payments and severance allowances to employees.
The debt-restructuring agreement is timely for the state airline to tap the strong recovery in the air travel business. With a population of over 270 million and a steadily rising middle class, the country certainly needs air transportation. Its strategic location amid the trade flow between Europe and Australia presents Garuda with a huge opportunity for expansion.
An airline, and national flag carrier for that matter, is a critical development entity in a vast archipelagic country as Indonesia but the company should be anchored on good governance and operational excellence. And we strongly believe in the competence and integrity of the present management, which took over from the previously corrupt board in January, 2020.
Now that foreign creditors themselves have demonstrated confidence in Garuda’s business plans, the government should focus on the state airline and its low-cost carrier subsidiary Citilink to present a stronger competitor to the Lion Air Group with its three airline units that now dominate the provision of domestic flights. And for the sake of efficient resource allocation, Pelita Air, a subsidiary of state-owned Pertamina, should postpone its plan to expand its scheduled services.
Efficient air travel stimulates growth as travelers spend money with tourism service providers, such as hotels, restaurants and land transportation firms, thereby generating business throughout their own diverse supply chains. Moreover, an active and efficient aviation industry boosts business competition and trade, and facilitates business interactions.
