Revisiting the options available for Garuda
The government has already outlined 4 options. Option 1 is to endure continuing cash injections, as we try to ride this crisis out. Option 2 is to use legal protection against bankruptcy to allow for restructuring, much like U.S. Chapter 11. Option 3 is to set up a new company to take over Garuda’s routes and become the de facto national carrier. Option 4, the last option for the government, is to liquidate Garuda and let the private sector fill the void in the market.
It is no surprise that Option 1 was initially favored by many within Garuda; in fact, to go down this avenue without any restructuring will be an injustice to Garuda’s domestic competitors – not to mention the long-suffering taxpayers. Remember, Garuda is not a stateowned company in an industry that is a natural monopoly. A “natural monopoly” would include a company like PLN (state electricity company) or Pertamina (state oil company). Those are natural monopolies. The good news on this is that most within the government and the legislature have now shunned this option.
Option 4 will be the easy way out, and is the only option that will not require any restructuring of the Company. The good news is that this not what the people, the government, nor the creditors want. At least this is
now clear.
Option 2 will be a hard nut to crack unless restructuring is undertaken in all aspects, not simply financial wizardry. One case study of this is Malaysia
Airlines, where attempts at restructuring have been made in the past. Failing this, in the end they resorted to closing the old company down, transferring all the staff, operations, etc., to a new company, and continuing to operate under the same name. While this is theoretically possible, many within the government and outside fear that this option will not resolve the
root causes of Garuda’s predicament.
Fortunately, Option 2 has developed quite substantially over the past few months, in that its proponents now see that restructuring and a sensible business plan are necessary requisites. Much talk and discussion about PKPU (Bankruptcy Protection similar to US Chapter 11), have made strides, and this has become a priority option for the government and Garuda. Unfortunately, PKPU is largely misunderstood as something bad, should Garuda undergo it.
Option 3 is what was done with Sabena of Belgium and Swissair. In Swissair’s case, they restructured through a forced cessation of the old brand, and set up a replacement, either through the subsidiary taking
over operations, or a new company being put in place. Please note that this is literally what Malaysia Airlines ended up doing. Given the success of Swiss International Airlines (which replaced Swissair), and SN Brussels Airlines (which replaced Sabena), this is likely to be the most realistic option. In Garuda’s case, this can be done by Citilink taking over operations as Garuda is restructured or liquidated, with rebranding of the new operations following later on.
Previously, Option 3 was only an “additional alternative”, but it is in fact the only really quick solution to the whole problem. For the government, the brand image of Garuda is very strong, and Garuda has successfully campaigned through various means, pointing out what Garuda means for the nation, although we can all agree that converting this communications and branding success into profits would have been a more practical option.
While option 3 was put forth as an alternative. As the scale and vastness of the challenges Garuda faces become apparent, the government too realizes that should Garuda be successful in restructuring its debts and leases through Option 2, a lot of the debt is likely to end up with a “debt to equity swap” option attached to it, which if exercised, signifes that the government
may no longer hold a direct majority stake in the airline. Most of the debt to equity swap would be with state-owned banks as the creditors; this adds a strong layer between Garuda and the government upon the option exercise. Should this come to pass, Citilink would be bigger and stronger than Garuda in the market. Again, further barriers against direct government control of Garuda and its bulk of capacity through Citilink.
To mitigate loss of direct control of an airline, the government has put forward Pelita as the designated carrier, should Option 3 be selected. While Pelita is wholly-owned by Pertamina, this means that there is only 1 layer and a single entity between it and the airline, whereas Option 2 could result in a layer consisting of many SOEs and non-SOE shareholders between the government and Garuda.
The SOEs of the skies: Garuda, Merpati, Pelita
Garuda does not in fact have much choice in going forward, that is, “restructure or die.” While that view is now more or less accepted by all sides in Indonesia, it appears that there is still some resistance from within, and from the lessors. The much-anticipated “simple bail out” urged by those who want to keep it “business as usual” isn’t in the cards, for certain. The government’s decision to turn Pelita into a scheduled carrier is now a real-and-credible threat to those who oppose restructuring at Garuda.
While the government’s move through Pelita might alarm and inspire confusion among many, especially the media and the public, it is a necessary (if brutal) move. On one hand, the government needs to send a strong signal that unless all parties agree on restructuring Garuda’s debts
and lease payments, the government will choose to close Garuda; the other side of this argument is that Garuda also needs to face competition from another staterun carrier.
As for the banking sector, if state-owned banks can operate competitively and proftably, why can’t the same happen with the airline industry? The reason is competition, or lack thereof. The banking sector sees privately-owned banks and the stateowned banks competing vigorously, and the sector also sees competition among state-owned banks. This ensures that stateowned banks will continue to compete to provide products customers seek, while also ensuring that they also compete for business from government projects – which usually goes to stateowned enterprises and banks.
Since the collapse of Merpati, Garuda has been the only stateowned airline in the country. The disparity between Merpati and Garuda prior to the former’s collapse also shows that for a long time, Merpati had not been able
to compete against private airlines, or against Garuda. Pelita’s re-entry into the scheduled airline scene isn’t just a back-up plan for the government if Garuda fails: it is also intended to reintroduce competition among two state-owned carriers within the overall competitive airline scene. This forces Garuda face the inevitable: to shape up or ship out.
Signs of this are apparent when we look at the choice of CEO for Pelita, a former CEO of Garuda’s successful subsidiary, Citilink. The ideal SOE is one that is competitive in the market even if it is an SOE. Citilink is more or less that: a subsidiary of Garuda that has proven to be competitive within the market. Many will ask why Citilink’s success has not been able to be used to transform Garuda; the answer is that because Citilink is its subsidiary, there is no real-and-credible threat to how Garuda operates as a state-owned airline. If we have Pelita moving forward as a full-service carrier but with the cost competitiveness of a Low-Cost Carrier, we will have a competitive full service carrier which, like Batik, will eat away at Garuda’s market share and niche unless Garuda changes the way it does business.
Restructuring, Pelita and PKPU
The message sent out by Garuda’s CEO has been relatively consistent, focusing on its needs to restructure its debts, rationalize the workforce, and
renegotiate expensive leases. Without Pelita, the constant debate thrown around the media space results in a multiplayer version game of chicken between the government, Garuda management, lessors, creditors and Garuda’s workforce. Without Pelita, lessors can insist on no changes as it sees the government will pay at the end, the workforce will feel that the
government will be forced to bail them out at the end, and the debtors will just wait for the inevitable result.
This vicious circle has to end, and another way to stop the endless merry-go-round is to bite the bullet and head through PKPU or bankruptcy protection proceedings. The game of chicken mentioned previously has a
high risk of Garuda becoming bankrupt, as a result of such brinkmanship, and that will be extremely painful and frustrating for all sides, as well as tragic for Garuda’s workforce. Unfortunately, many appear to be scared
of Garuda entering bankruptcy protection through PKPU. The previous petition by My Indo Airlines to declare Garuda in need of bankruptcy protection in order to save they money it claims it is owed by Garuda, was rejected. Ironically, many saw the court’s decision to reject the PKPU petition as a good sign. It is not. The misunderstanding of many on what bankruptcy protection proceedings mean is a stumbling block for Garuda’s survival.
While numbers vary, the number of creditors and other parties Garuda owes money to is claimed to be between 400 and 800 entities, depending on who one Gerry Soejatman is an expert in aviation safety, fight operations, aviation business and public policy. He is currently the secretary of Indonesian Aviation Network (JAPRI), an aviation NGO based in Jakarta. Educated in the United Kingdom and Australia, Gerry obtained his Bachelor’s Degree in Finance at the University of Technology Sydney (2001). A serious aviation enthusiast since childhood, he started his aviation career by setting up an airborne remote survey company and then moved onto aviation consultancy with professional stints related to aviation at a satellite communications company DNK, Whitesky Aviation, the Indonesian National Air Carriers Association, and served as an expert panel member for Ministry of Transport’s PPP auction for Labuan Bajo airport. Gerry remains active in various aviation communities and organizations in Indonesia and abroad talks to. Without PKPU, Garuda would have to individually negotiate with each and every one of those 400 to 800 entities, with each agreement risk being nullifed by another creditor’s resolution thereafter. Have a few of these and it could (and probably will) end up as a mess, and the whole process would stagnate.
PKPU would put all under the same roof or scheme (if not under one, then under a number), which would be more manageable than undertaking 400-800 individual (and interlinked) negotiations. PKPU would give all creditors a joint chance for a joint resolution on how Garuda is going to pay. PKPU would also give Garuda a chance to put forward a business plan for all the
creditors to see and negotiate changes at the same time, and come out with a court-sanctioned outcome on how to proceed forward.
Some lessors are willing to negotiate with Garuda, and some lessors are quite adamant on their position regarding the leases. Whilst a significant part of the problem in Garuda is attributed to leases, many questions and accusations have been thrown around as to why its leases are so expensive; however, very few solutions are being put forward publicly. Perhaps the lack of solutions being put forward publicly is due to avoiding an embarrassing revelation on how those leases got to be very expensive, or to cover up who is responsible, or worse, due to a lack of possible resolution. Again, PKPU will force a court-sanctioned resolution/negotiations on how to move forward, done in a way that is as fair as possible to all parties.
Stick and Carrot Road to Survival
On one hand, the government wants Garuda to survive, but on the other hand it does not want its financial assistance to go to waste again. Garuda will need additional financing after it completes restructuring, and such financing must be put to good use. It appears that to ensure that, the government will want Garuda to complete its PKPU process in order to obtain funds, reported to be $1 Billion. This stick-and-carrot approach is harsh, but is unfortunately necessary.
Between Bankruptcy, Bankruptcy protection and liquidation.
PKPU has been discussed in this article many times, but the problem with it is a matter of perception. In other countries, PKPU is part of bankruptcy protection, i.e.,: to fnd a way for a bankrupt company to reach an agreement with its creditors on how to defer and ultimately pay for debt, in order to prevent liquidation. Many parties want Garuda to survive, but they want the survivability without undergoing bankruptcy protection.
If we want Garuda to survive without “pailit” (“bankruptcy”), it’s too late: it’s already there because its debts are already bigger than its assets and equity. It’s there because it has defaulted on its debts. But this is not the end.
In Bahasa Indonesia, bankruptcy is “pailit”, but “pailit” is synonymous with cessation of operations and liquidation. What the public needs to understand is that failed companies CAN survive through bankruptcy, through the use of “bankruptcy protection”. Bankruptcy protection protects a company from total failure (requiring cessation and liquidation) by getting the firm and its creditors to agree on a way out. PKPU itself stands
for Penundaan Kewajiban Pembayaran Utang, or “Delay in the obligation to pay debts”. This is a process in court to find ways acceptable to both parties (creditors and debtors) on how debts can be paid.
This is different from simple “pailit” where, after being in such a situation, the debtor fles for bankruptcy (moves to liquidate). A PKPU request can be put forward before or after a bankruptcy request (pailit). If a debtor or creditor puts forward a PKPU, then PKPU should be prioritized. While PKPU for Garuda means accepting that it has defaulted on debts (and is thus technically bankrupt), it provides a way out without liquidation.
If we want Garuda to survive, we must support the hard measures that needs to be taken to get there, and we must support a fair solution (which is why the PKPU process is important). If Garuda can go through all that, and restructure into a lean and profitable business, then it must be given all chances to survive. However, unless those changes and processes take place, any rescue attempt will be futile and a waste of taxpayers’ money.
If we truly want Garuda to survive, then we, as members of the public, must be willing to accept reality. If Garuda is a sick patient and we are its relatives, we must take it to the doctor, and support it throughout its treatment, and be there through its recovery. We cannot insist on Garuda surviving if at the same time we say “it is not our problem”, or we push it a
magical therapy drug for a quick painless recovery. Currently that magic therapy drug is called Pelita. There are no easy solutions, so let’s not push for easy solutions, so Garuda has a chance of survival. (Gerry Soejatman)