Indonesia’s Garuda airline enters restructuring to avoid bankruptcy

February 2022 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

February 2022 Issue

Garuda International, the flag carrier of Indonesia, has entered a court-supervised restructuring process as the debt-ridden airline tries to rescue itself from bankruptcy.

The airline’s restructuring attempt began after a Jakarta court granted a debt petition filed against the company by one of its creditors on 9 December. Under the terms of the ruling, Garuda and its creditors have 45 days to submit a debt restructuring proposal. The period can be extended by up to 270 days.

In November, the company had submitted a restructuring proposal to its creditors and lessors, which was “part of Garuda’s commitment to upholding the principles of transparency and fairness, to create constructive communication with all creditors,” according to Irfan Setiaputra, chief executive of Garuda. “Submission of this restructuring proposal scheme is the first step of the entire restructuring process and is an important [sign of] momentum in our efforts to transform into a more adaptive, efficient and profitable business entity,” he added.

The restructuring proposal was filed following a court decision on a debt petition filed by its information technology partner. The Central Jakarta District Court accepted a petition for suspension of debt payment obligations (PKPU) filed by information technology company PT Mitra Buana Koorporindo against the flag carrier.

Garuda’s financial difficulties have been significant, in large part due to the impact of the coronavirus (COVID-19) pandemic. For the nine months ended 30 September 2021, the company reported a net loss of $1.7bn, up from a net loss of $1.1bn in 2020. The airline’s operating loss plunged to $1.3bn against $1bn in 2020. The company was unable to meet financial obligations to its banks, vendors and aircraft lessors in the first nine months of 2021, which resulted in the grounding of certain leased aircraft.

In June, Gardua announced it had grounded two-thirds of its fleet of 142 jets, due to travel restrictions and declining demand. In October 2020, the company announced it would lay off 700 employees, about 10 percent of its workforce, while many others were placed on unpaid leave.

The company finalised a restructuring proposal in November 2021 and has been in discussions with creditors and lessors to reduce its liabilities to $3.7bn from $9.8bn.

In November, Garuda Indonesia announced plans to close a number of flight routes, bringing its total number of routes served down to 140 from 237. The airline’s management also mapped out routes to less-lucrative destinations. Garuda further announced plans to reduce the number of flights it offered to international routes. In early 2020, it closed routes to Amsterdam, London and Nagoya.

The Indonesian government, which is the largest shareholder in Garuda, has announced plans to bolster Pelita Air, a charter service owned by a state-owned enterprise, enabling it to run a full passenger service on Garuda’s many domestic routes. But some industry experts believe that Garuda subsidiary Citilink, run independently of Garuda, may be better placed to run the scores of flights that connect Indonesia.

Every airline in the world has suffered huge hits to revenue and profits during the pandemic, and several flag carriers, including Italy’s Alitalia, have not survived the crisis. However, Garuda’s financial difficulties extend beyond the current crisis. Prior to the pandemic, the Indonesian government described Garuda’s high leasing costs as “beyond reasonable”. The airline’s fleet includes a range of models from different suppliers, including many that are not cleared to fly. Among others, the Garuda fleet includes Boeing 737, Boeing 777, Airbus A320, Airbus A330, ATR and Bombardier. This results in inefficiencies in maintenance, flight operational management and cabin crew training.

In October, the Ministry of State-Owned Enterprises (BUMN) in Indonesia officially formed a state-owned holding company for aviation and tourism-related enterprises, in a bid to revive those sectors ravaged by the pandemic. Garuda is expected to join that holding company in 2023, pending the restructuring process.

Richard Summerfield