Garuda Indonesia Airlines: TOO BIG TO FAIL?

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Garuda Indonesia Airlines: TOO BIG TO FAIL?
Illustration

IO – The global scene
Fighting for survival, while many are relying on government bailouts: not every country is willing to dig deeper into debt to relieve its perpetually ailing companies.

Tourism covers 10% of the global economy, and is one of if not the hardest hit economic sector during this pandemic, having wiped out over 120 million jobs worldwide; it needs to be restored for the world to fully recover. Any recovery depends on more travelling and opening of borders, which in turn relies on a massive global vaccination drive: unfortunately, with the lack of vaccines for poorer countries, global tourism and travel recovery will not be seen until well into 2022.

With 2020 being the worst year on record for airlines, 2021 will still foresee industry losses of some $52 billion worldwide. 2022 is still expected to be better but will still suffer a $12 billion dollar loss. Tourists travelling by air are expected to spend $354 billion this year, which is around 40% of pre- pandemic numbers. For this reason, airlines are still receiving government assistance, with estimates at around $243 billion dollars since the start of the pandemic.

While many are fortunate to have billion-dollar assistance from the authorities, not all have that luxury, and now questions are arising as to whether certain airlines even deserve such assistance. Some state-owned airlines (such as Thai Airways) are struggling to survive through a long restructuring program, thus far resetting $12.9 billion in debt; indeed, serious problems with the airline were evident long before the pandemic. And then, Garuda Indonesia (GA), a state airline on the brink of bankruptcy; there have been numerous plans put forward on what to do if GA proves helpless in its struggle to renegotiate leases and debt.

Garuda Indonesia Airlines: TOO BIG TO FAIL?
Photo: GARUDA-KUNCORO WIDYO RUMPOKO

Garuda’s Plight
Passenger traffic is on a rise, thanks to domestic tourism recovery, as the number of new Covid-19 cases subsides. Changing government travel restrictions within Indonesia have made it difficult for airlines to manage the crisis, with Garuda drowning in record debt as the company continues to slide towards bankruptcy. Domestically, the pandemic has been a huge blow for the airline, with passenger numbers plummeting at the beginning
of the pandemic, recovering to only 55% of pre-pandemic levels by the end of 2020. Hopes for recovery in 2021 were quickly slashed, with disappointing Q1 passenger numbers, as pent-up demand failed to materialize, as the maze of travel restrictions continue to change. With travel during the Eid holidays being effectively closed off, the airline industry lost one of its peak periods. To top it off, a Delta Wave
quickly ensued after Eid, and ate into the mid-year school holiday peak period. With 2 out of the 3 yearly peak periods gone, snuffed out by travel restrictions, the year-end holidays are being haunted by the government’s
endless warnings on an “impending deadly 3rd wave.”

This paints a very grim picture of Garuda’s attempts to recover. Throughout the community activity restrictions (PPKM), Garuda’s passenger numbers
have fallen by 90%, and fight frequency is at a mere 25% of pre-PPKM levels. The current recovery has also been marred by recently-imposed PCR requirements for all domestic numbers, which has only just been revoked. While any hope of recovery fading away, one thing is for sure: market uncertainties and changing government travel requirements are not helping Garuda deal with its $4.9 billion debt, along with other liabilities that run into the multiples of that.

Resistance to change
The debt overhang for Garuda is significant, and government assistance must be aimed to reduce that and more, in exchange for a significant reduction in headcount, to adjust to a signifcant reduction in future feet.

The voluntary early-retirement scheme needs to continue, to enable Garuda to downsize, without enduring the typical long-drawn-out battles that usually accompany state-owned airlines downsizing or restructuring. The Company is in no shape to assume an aggressive stance in facing a two-front battle on negotiations (one on aircraft leasing, the other on workforce resizing).

Restructuring should not be seen as a band-aid solution, and therefore should not be limited to aircraft leases and financial debt for Garuda. Restructuring needs to cover a wide enough aspect so that Garuda not simply survives the pandemic, but is actually revived.

Garuda’s chance of survival depends on how the Government of Indonesia appraises its post-pandemic role to be. If the government accepts the fact that Garuda will have to compete with other carriers, and thus gives Garuda a more realistic task, allowing the Company to focus on proftability, it has a good chance of survival, following a thorough restructuring. If not, then whatever assistance is given to Garuda will merely be buying time: eventually, we will return to the same (if not bigger) problem later.

While it is very difficult to envision our nation without Garuda Indonesia, there has to be a point where someone has to bring down the hammer: “Enough is enough! Now clean up, or you’re gone!”