SOEs Minister Erick Thohir said on Feb. 10 that Garuda was negotiating with the aircraft's lessor, Denmark’s Nordic Aviation Capital (NAC), on early termination of its contract, slated to end in 2027.

Erick said the 12 leased CRJ1000s represented a major cost-cutting opportunity because Garuda found the aircraft especially unprofitable during the COVID-19 pandemic and because of the ongoing bribery investigation into the aircraft's procurement.

“There are two issues. First is the legal case. That is clear. Then there is the force majeur. This COVID-19 situation is force majeure. So it's fair for us to stand up straight,” Erick told a virtual press conference last Wednesday.

In May 2020, the Jakarta Corruption Court found former Garuda Indonesia president director Emirsyah Satar guilty of accepting Rp 49.3 billion (US$3.5 million) in bribes and laundering Rp 87.5 billion to procure 50 aircraft between 2005 and 2014, including the Bombardier aircraft.

Six months later in November 2020, the United Kingdom’s Serious Fraud Office (SFO) announced it was investigating Bombardier over suspected bribery and corruption related to the Garuda lease.

While the SFO did not provide further details, Bombardier’s third-quarter financial report said the investigation concerned Garuda’s acquisition and lease of the CRJ1000 in 2011-2012.

Read also: UK probes Bombardier over Garuda deal

In a company statement published on Feb. 10, the NAC denied any involvement in the Garuda corruption case: “NAC is not party to any investigation into the selection of the aircraft by Garuda in 2012 and there has been no allegation of any wrongdoing on the part of NAC in relation to the placement of the aircraft.”

Apart from a bailout amounting to trillions of rupiah and laying off 880 employees, renegotiating its aircraft leases are among the strategies Garuda is pursuing to survive the falling international and domestic travel demand due to COVID-19 pandemic.

Read also: Garuda terminates contracts of 700 workers amid low demand

The publicly listed SOE booked losses of $1.07 billion in the first nine months of 2020 in stark contrast to the $122.42 million profit it booked in the same period in 2019, according to its latest financial report dated September 2020. Garuda also saw its revenue plummet 67.8 percent year-on-year (yoy) to $1.14 billion in January-September 2020.

The flag carrier, which is more than 60 percent government-owned, operates 18 Bombardier CRJ1000 aircraft. Of these, it purchased six aircraft in 2012 through a financing facility from Export Development Canada (EDC) and leased the remaining 12 through agreements with NAC that commenced in the four years from 2012 to 2015. The NAC valued the 12 leases at $600 million.

Erick said Garuda was also negotiating an early settlement with EDC on the lease financing for the six CRJ1000, which ran to 2024. He added that the ministry was mapping other potential efficiency measures for the company, saying that air freight services was a lucrative alternative revenue stream for the carrier.

At the Feb. 10 press conference, Garuda Indonesia president director Irfan Setiaputra said the Bombardier aircraft had been loss makers because of the NAC’s high lease price of $27 million per year for all 12 CRJ1000s. The carrier had averaged $30 million in losses per annum over the past seven years from the 12 aircraft.

Garuda’s operating expenses were already down 31.7 percent yoy from $3.28 billion in September 2019 to $2.24 billion in September 2020.

“We are still waiting for the [SFO’s] investigation results. We will use those results as a legal basis to show the NAC that this is not an emotional decision, but a commercial decision. There will be a legal basis,” said Irfan.

He explained that Garuda would be contractually obligated to compensate NAC for potential lost revenue through the original contractual term to 2027 for breaking the lease agreement. The carrier was, however, trying to minimize the compensation amount by citing the pandemic and the corruption investigation.

Garuda planned to replace the 12 Bombardiers, which were currently grounded at Soekarno-Hatta International Airport, with aircraft from its 73-strong Boeing 737-800NG fleet.

Irfan said the six CRJ1000s that Garuda owned would remain operational unless they could be replaced with the Boeing aircraft.

The Bombardier aircraft primarily operated short domestic routes from Makassar to destinations in eastern Indonesia, and current Flightradar24 data show that two CRJ1000s operating Garuda routes are still flying.

Irfan told lawmakers last July that the Bombardier CRJ1000 was not suitable for the Indonesian market, citing the aircraft’s limited baggage capacity as well as the small domestic commuter market for routes other than the Jakarta-Bandung route.

An NAC spokesperson confirmed independently with The Jakarta Post by email that the company had been in active discussions with Garuda over the 12 aircraft since mid-2020 due to the carrier’s cash flow problems.

“But no agreement has been reached between the parties at this stage regarding the return of all or part of the corresponding fleet. And the lease is and remains in full force and binding upon both parties,” said the spokesman.

EDC has thus far declined to comment on the possibility of an early settlement with Garuda, citing commercial confidentiality. The Canadian export credit agency has also denied any involvement in the Garuda case and said it had conducted a compliance and ethics review with Bombardier in 2019.

“EDC takes this matter seriously and will be following developments closely,” said EDC spokesman Anil Handa.