Do or die debt plan for Indonesia's Garuda Airlines

(MENAFN- Asia Times) JAKARTA – The fate of pandemic-hit Garuda airlines appears to be hanging by the proverbial thread as Indonesia's iconic national carrier seeks to fashion a complex restructuring plan aimed at stopping it from hemorrhaging more than US$100 million per month.

Garuda's president-director, Irfan Setiaputra, the latest high-profile figure to be infected by the coronavirus, told a recent parliamentary hearing that the airline was $4.8 billion in debt – and burdened by unusually high leasing charges.

Devastated by the fallout from Covid-19, Garuda has already been forced to reduce its fleet from 142 to 70 planes, slash the majority of its international and domestic flights and lay off half of its 20,000-strong workforce.

Cuts have also had to be made in the 62-strong fleet and services of well-regarded budget carrier Citilink, which commenced operations in 2001 and normally flies to 34 destinations around an archipelago spanning three time zones.

Analysts say downsizing was a necessary step to stem some of the bleeding and ensure the airline survives. Grounding the entire fleet, they say, was never an option if subsequent debt negotiations are to have a chance of success.

Despite its perilous state, Garuda has one thing going for it. Boosted by an increasingly mobile middle class, the International Air Transport Association (IATA) estimates Indonesia will become the world's fourth-largest air passenger market over the next two decades.

That, and the fact that the airline continues to fly, are factors the management hopes will encourage its biggest creditors to agree to a pain-sharing rescue scheme.“The key is the creditors' support and cooperation,” says one insider.“It's critical to everything.”

The government has a 60.5% interest in the world's 32nd biggest airline, with another 28% share held by the CT Group, a diversified banking, property and media company owned by former economic coordinating minister Chairul Tanjung, who fills place on Forbes Top 50 rich list.

Officials argue the airline would have been on a sounder financial footing if it didn't have to pay what State Enterprise Minister Erick Thohir calls the world's highest leasing rates, which eat up as much as 24% of revenues.

That is allegedly due to 20% price mark-ups on 55 Airbus aircraft acquired by Garuda and Citilink between 2009 and 2015 that led to lengthy jail terms for former president-director Satar Emirsyah, technical director Hadinoto Soedigno and project manager Agus Wahjudo.

Following the cost-cutting practice of many airlines, Garuda negotiates the price of new planes, which are then purchased by a leasing company and leased back in monthly installments calculated as a percentage of the value of the plane.

For a new A320, that leasing fee would be $250,000 a month with the aircraft staying with the lessor on the completion of the lease, according to one aviation expert. That figure rises to $400,000 for a wide-body A330. 

Analysts agree that Garuda can't be allowed to fail, not only because it would be a national embarrassment, but because the carrier fulfills the duty of linking some of the more remote islands that may not be money-makers for private airlines.

While Garuda is expected to be profitable, such state obligations are not unusual in Indonesia, which explains why strategic companies like power utility PT Perusahaan Listrik Negara (PLN) still benefit from government subsidies.

The airline's financial difficulties were exacerbated this year by Saudi Arabia's decision to cancel the haj pilgrimage in May and June and by efforts to postpone the post-Ramadhan holiday – both major money-spinners for Garuda in any normal year.

Informed sources say the airline's debt is likely to grow to an estimated $5 billion by the end of 2021 when it hopes to conclude the restructuring plan with a range of creditors including 34 lessors, some of whom are domiciled in Dublin, Ireland, for tax reasons.

Analysts say 135 of Garuda's planes are leased, which means that without it holding any substantial assets all of its creditors are unsecured – even if the carrier does have to keep the lessors satisfied and also meet a significant challenge in managing its operating revenue.

Other Garuda creditors are the holders of $500 million in five-year Islamic sukuk bonds, taken up by mainly Asian and Middle East investors in 2015, a slew of state and private banks and a long list of international vendors.

The sukuk offering was floated without any government guarantee, making it the first Asia-Pacific national flag carrier to successfully issue a US dollar benchmark bond on a stand-alone basis.

Earlier this month, Garuda deferred payment on the bonds as the new surge in Covid-19 promised a further period of uncertainty for Asian airlines which were looking forward to the re-opening of Bali and other travel destinations.

Under Indonesia's Suspension of Debt Payment Obligation (PKPU), the rescue plan will involve an immediate cash injection from the airline's shareholders and a deal in which creditors agree to a haircut in exchange for a favorable renegotiation of their debt.

The PKPU stipulates that at least 50% of and one of the creditors, representing a minimum 67% of the value of the total debt, must agree to the restructuring plan. If that is achieved – and the signs are reportedly hopeful – then it is binding on the remaining creditors as well. 

For now, questions over the corruption case have been pushed to a back burner while Garuda's senior management concentrates on the airline's survival.

Analysts suspect Satar and Hadinoto were part of a wider conspiracy, given the fact that senior officials and members of Parliament's state enterprise commission would have had to sign off on the purchase price of the 55 new planes.

Thohir, appointed to his current post in 2019, hinted at that last February.“We shouldn't act like before when there were grey areas for collusion,” he told reporters.“What we should be doing is developing a transparent leasing model that will be mutually beneficial in the future.”

Some observers recall the $170 million electronic identity card scam, engineered by senior Golkar Party politician Setya Novanto in 2009, which saw the proceeds shared among fellow parliamentarians in Indonesia's most blatant upended corruption case. 

Britain's Serious Fraud Office (SFO) signed a court-approved Deferred Prosecution Agreement (DPA) with Airbus in early 2020 obliging the firm to accept fines of 984 million euros over tainted transactions with Indonesia, Sri Lanka, Taiwan, Malaysia and Ghana.

Indonesia's Anti-Corruption Commission (KPK) has received no response from the SFO to a letter requesting a share of the penalties. Nor has Airbus answered claims from Garuda's lawyers seeking unspecified damages, which the manufacturer disputes.

Satar, who had presided over a period of substantial growth and vastly improved cabin service during his five years as Garuda chief executive, was jailed for eight years and fined $1.4 million in May last year for bribery and money laundering.

Apart from the A320s and A330s for Garuda and Citilink, the case also included mark-ups in the purchase of Trent 700 engines from Rolls Royce, which in 2017 agreed to pay $800 million to settle charges brought by investigators. 

Satar received $3.4 million in bribes, including a single payment of $1.3 million he received in February 2012, which went to a company he and his late wife owned in the British Virgin Islands.

Another $2.8 million went to Soedigno, who last month was jailed for 12 years in a bribery case that involved Airbus, Rolls Royce and also Bombardier Canada and Avions de Transport Regional (ATR).

Another $5 million in bribe money is believed to be unaccounted for.

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