Indonesia to decide whether to shut down or refinance national airline Garuda

Garuda struggled to make profits even before the Covid-19 pandemic hit.
Garuda struggled to make profits even before the Covid-19 pandemic hit.PHOTO: EPA-EFE

JAKARTA - South-east Asia's largest economy is mulling over whether to shut down or refinance its national airline, Garuda Indonesia, amid debates widely seen to represent two camps: those who are sentimental and those who are focused on the bottom line.

Garuda struggled to make profits even before the Covid-19 pandemic hit.

The state-owned enterprise ministry recently came up with four options - the first three keep the 72-year-old airline aloft and the fourth sees it cease operations.

To keep Garuda flying despite a revenue slump and huge maturing debts, the government must either inject cash; announce a debt standstill, followed by a restructuring; or go for a debt revamp while creating an airline that would take over Garuda's routes, according to the first three proposed solutions.

Global travel was devastated by the pandemic, severely affecting even major players such as Singapore Airlines and Emirates, flag carrier of the United Arab Emirates.

Garuda's revenue probably shrank to US$1.67 billion (S$2.24 billion) last year, from US$4.57 billion in the previous year, according to a research note by Jakarta-based equity brokerage Ciptadana Sekuritas Asia.

The airline is yet to release its full 2020 financial results. On Thursday (June 17), it missed a repayment on a US$500 million Islamic debt.

A recent viral recording of Garuda chief executive officer Irfan Setiaputra's address to staff, whose content was later confirmed by management, revealed that it planned to cut its fleet by 50 per cent, retrench staff and sell assets.

"The fact is our debt reached 70 trillion rupiah (S$6.5 billion) and every month it grew by more than a trillion rupiah," he was heard saying in the recording.

In a June 10 filing to the Indonesia Stock Exchange, he reported that Garuda returned two Boeing 737-800NG planes to a lessor and is in discussions with other companies to restructure leasing terms. It currently operates 142 aircraft.

The airline had gone through a debt revamp in 2006 to help it turn profitable. But a mark-up culture in procurement and poor governance, among other factors, continued to plague Garuda even as it battled low-cost rivals.

Last year, former CEO Emirsyah Satar was sentenced to an eight-year jail term for receiving bribes for his support in securing contracts to procure Bombardier, Airbus and ATR aircraft as well as Rolls-Royce engines.

Separately, British fraud investigators were investigating Bombardier over contracts related to Garuda, according to the Serious Fraud Office.

"Frankly, this is a long-term problem and deep-rooted. We could just let the private sector do the flying, or invite foreign operators, say Emirates," said a senior government official during a recent discussion with business editors in Jakarta.

"This way, we wouldn't burden the taxpayers and the flying public," he added.

But MPs from the ruling and opposition parties have other views. They have urged the government to save Garuda, with some including Mr Deddy Yevri Sitorus of the ruling Indonesian Democratic Party of Struggle (PDI-P), calling it the "epicentre of Indonesia's aviation industry".

They noted that the airline not only provided jobs but also generated employment in related sectors such as ground handling at airports and courier.

Mr Herman Khaeron, a member of a parliamentary committee overseeing state-owned enterprises and investments, said the majority in the committee are in favour of keeping Garuda flying since it is an asset which the nation takes pride in.

"We have held a meeting with the state-owned enterprise minister to act fast, allow Garuda to take corporate actions that will lift its operating pressures," Mr Herman, a member of the opposition Democratic party, told The Straits Times on Thursday.

He shares Mr Deddy's call for the government to prepare financial and organisational restructuring for Garuda so that it can emerge stronger after the pandemic.


Other airlines also struggling

Emirates Group, which recently booked its first loss in decades due to border curbs across the globe, received 11.3 billion dirhams (S$4.1 billion) in state support from Dubai this month.

The airline, whose focus has been on inter-continental travel, saw revenue in the financial year that ended March 31 drop more than 60 per cent to 35.6 billion dirhams.

Cathay Pacific Airways suffered a record loss of about HK$21.7 billion (S$3.8 billion) last year, due to the pandemic and social unrest that preceded it in Hong Kong.

Its workforce has declined to about three-quarters of that before the pandemic. Last October, it cut 5,900 staff, 600 of whom were pilots.

The airline has grounded most of its fleet, reduced pay and put many on unpaid leave.

Singapore Airlines (SIA) has raised $15.4 billion, of which $8.8 billion was from selling rights shares, since April last year, and trimmed about a fifth of its employees, according to Bloomberg.

The SIA Group had its worst annual loss - $4.3 billion - in the financial year ended March 31, as Covid-19 decimated global travel.

Latam Airlines Group, the largest carrier in Latin America, filed for bankruptcy protection in May last year because of the pandemic. It is currently evaluating a court-supervised exit plan, which includes proposing acquisition offers to creditors.

The Santiago-based airline reported a US$4.6 billion (S$6.2 billion) loss last year, compared with a profit of US$196 million in 2019.