Challenges to Saving Garuda
Was Garuda the only Indonesian airline that was affected? No! Singapore Airlines Ltd., owned by Temasek Holdings, also booked losses of S$409 million, or US$302 million (Rp 4.35 trillion) in the first half of 2021.
PT Garuda Indonesia Tbk is nosediving with debts totaling US$4.9 billion, or equivalent Rp 70 trillion (at an exchange rate of Rp 14,250 per US dollar), the deadline for which fell in May 2021.
What is the strategy to save Garuda so it can fly high again? Garuda has been in the spotlight since its president director was dismissed in early December 2019 for his involvement in smuggling Harley-Davidson motorcycle components and Brompton bicycles. My goodness!
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Later, the pandemic arrived in Indonesia in March 2020, and Garuda’s income plummeted. Why? This was the result of the policy that restricted the number of passengers and the number of flights, and led to a sharp decline in public enthusiasm for traveling by air. On the other hand, it could be said that operational costs such as for aircraft maintenance and the salaries of thousands of workers were high.
Garuda booked a net loss of $904.9 million, equivalent to Rp 13.1 trillion (at an exchange rate of Rp 14,400 per US dollar) in the first semester of 2021. The loss was an increase from $728.15 million (Rp 10.5 trillion) in the same period in 2020 (Kompas.com, 31/8/2021).
The government’s options
Was Garuda the only Indonesian airline that was affected? No! Singapore Airlines Ltd., owned by Temasek Holdings, also booked losses of S$409 million, or US$302 million (Rp 4.35 trillion) in the first half of 2021 (Kontan.co.id, 29/7/2021).
Meanwhile, Thailand’s flag carrier, Thai Airways International Public Company Limited, was granted court to restructure its debts totaling US$12.9 billion, or Rp 184 trillion (at a rate of Rp 14,268 per US dollar). The court decision also gave the company bankruptcy protection that enabled it to realize a debt restructuring plan. Earlier in 2020, Thai Airways listed losses of US$4.5 billion, or Rp 64.21 trillion (Katadata.co.id, 16/6/2021).
What options are available to the Indonesian government (State-Owned Enterprises/BUMN Ministry)? According to BUMN Minister Erick Thohir, there are four options for saving Garuda.
First, the government continues to support Garuda by providing equity loans. Second, it adopts the legal bankruptcy process for to restructure some of Garuda’s liabilities further. Third, it restructures Garuda and forms a new national airline (flag carrier) to serve domestic routes, with this new company taking over a number of Garuda’s domestic routes. The fourth option is liquidation, which is currently being explored and discussed (Kompas, 3/6/2021).
Alternative solutions
Are there any alternative solutions? Yes! First, propose loan restructuring. This is one alternative worth considering. Garuda’s debts include foreign debts, such as to aircraft lessors, as well debts to domestic banks. This approach is very likely to proceed smoothly because nearly all international airlines are currently experiencing financial shortage.
Several Garuda Indonesia aircraft parked at Soekarno Hatta International Airport, Tangerang.
This way, Garuda’s lessors and creditors are likely to grant its request to restructure debt. Loan restructuring can involve reduced interest rates, extended tenor, reduced interest arrears, reduced principal loan arrears, more loan facilities and loan conversions into provisional capital participation. However, it should not be forgotten that loan restructuring carries the potential risk of nonperforming loans (NPL) for banks.
In banking there exists the term loan quality, which refers to the likelihood of repayment and is based on an evaluation of business prospects, debtors’ performance, and repayment capacity. There are five types of loan quality: performing loans or collectability 1 (with minimum asset reserves of 1 percent), special mention loans or collectability 2 (minimum assets of 5 percent after deducting collateral value).
Collectability 1 (restructuring), collectability 2, and nonperforming loans (NPLs) are all classified as loan at risk (LAR). The rest are substandard loans or collectability 3 (minimum assets of 15 percent after deducting collateral value), doubtful loans or collectability 4 (minimum assets of 50 percent after deducting collateral value) and bad loans or collectability 5 (minimum assets of100 percent after deducting collateral value). Collectabilities 3, 4, and 5 are referred to as NPLs.
Second, the government can disburse state equity participation (PMN). Remember that Garuda is considered a national airline in the eyes of global aviation because Garuda is a flag carrier.
Third, the Indonesia Investment Authority (INA), as established through Government Regulation No. 73/2020, can also help in saving Garuda.
The sovereign wealth fund is expected to have the capacity to support the efforts to overcome Garuda’s predicament.
The INA was formed with an aim to increase and optimize the value of investments over the long term to support sustainable development. The INA is in charge of planning, executing, supervising, controlling and evaluating investments. The sovereign wealth fund is expected to have the capacity to support the efforts to overcome Garuda’s predicament.
Fourth is to issue bonds. This measure is one of the common ways adopted by companies everywhere to raise funds to cover financial debt. Singapore Airlines has undertaken this measure.
Issuing bonds is meant to improve corporate liquidity while refinancing at the same time. Garuda’s strong brand and brighter business prospects for the future are attractive features for both domestic and foreign investors.
Fifth, the government can issue recapitalization bonds to improve Garuda’s finances. Under this solution, Garuda will earn income from coupon interest.
Recapitalization bonds issue is a facility commercial banks enjoyed in 1999. The government issued recapitalization bonds when the capital of national banks was devastated by the 1997-1998 crisis. At that time, the government had to spend an exorbitant amount to rescue the national banking system.
Initially, the government issued recapitalization bonds for 28 commercial banks through Finance Minister and Bank Indonesia Governor Joint Decree No. 53/KMK.017/1999 and No. 31/12/KEP/GBI on the Implementation of the Commercial Bank Recapitalization Program. The policy was issued on 8 Feb. 1999, and was retroactively effective to 9 Dec. 1998.
Sixth, change the business model. Garuda should transform by adapting to the various changes caused by technological disruption and the pandemic. All businesses should be adaptive and agile in seizing business opportunities in the midst of the current tempest.
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Garuda Indonesia aircraft at Ngurah Rai International Airport, Bali, Sunday (21/10/2018).
What is the concrete step? Garuda should be prepared to change its core business by focusing on domestic flights. We should be grateful that Indonesia is composed of around 17,000 islands. This is one of Indonesia’s natural resource assets. Garuda should take advantage of this national resource in its domestic aviation business. Not even Singaporean and Hong Kong airline companies have this advantage. Singapore Airlines and Cathay Pacific only serve international routes.
In this context, the Transportation Ministry can regulate the arrangement of domestic flight routes for Garuda and other airline companies to prevent a monopoly.
This is because they have a command of information technology, are creative and like to travel.
Who is the target market? It is the millennial generation totaling 69.90 million people, or 25.87 percent of Indonesia’s 270.20 million population in 2020 (Statistics Indonesia Population Census, February-September 2020). This is because they have a command of information technology, are creative and like to travel.
Heightened domestic travel will reinvigorate local tourism, even boost the creative economy like travel agencies, hotels, motels and homestays, restaurants, tour guides, fashion and handicraft businesses, to name just a few.
Seventh, although this requires large funds, Garuda actually needs to rebrand. Rebranding is the process of changing the corporate image. The strategy is executed by creating a new name and logo, or by changing their design. This approach aims to generate a new and fresh identity.
Eighth, improve management by appointing executive directors who not only understand aviation, but are also conversant in finance. The state-owned enterprise should be managed professionally so it can respond to the various challenges that are emerging today.
Paul Sutaryono
Ninth, enhance good corporate governance (GCG). GCG covers transparency, independence, accountability, responsibility, and propriety. GCG aims to increase corporate value so the company is hugely competitive, both nationally and internationally. GCG also promotes greater professionalism, efficiency, effectiveness, and profitability.
The accelerated nationwide Covid-19 vaccination program to achieve herd immunity, besides being conducive to economic recovery, will also help Garuda fly high again.
Paul Sutaryono, State-Owned Enterprises Central Expert Staffer; Banking Observer; Former BNI Assistant Vice President
(This article was translated by Aris Prawira).
