SINGAPORE: COVID-19 has wreaked havoc on Indonesian flag carrier Garuda’s revenue and earnings, forcing the airline’s stock to be stopped lately due to a bond default. The airline’s entire debt, according to CEO Irfan Setiaputra, is Rp 70 trillion (US$4.9 billion). This prompted a meeting with the Ministry of Public-Owned Enterprises, which proposed a variety of options, including state capital infusions, privatization, or bankruptcy procedures while the company restructured some of its debt.
Irfan did not go into much detail about the Rp 70 trillion figure, however Garuda’s most recent financial declaration from September 2020 provides some insight.
By late 2020, the company’s total liabilities had ballooned to US$10.36 billion, compared to US$9.9 billion in assets, resulting in a net loss of US$455 million to its stockholders.
READ: Bugs and Bird Nests: What You Need to Know Airlines are dusting off planes that have been grounded because to COVID-19. READ: COVID-19 is a nightmare for airlines, but it’s even worse for airports.
Financial insolvency is a serious possibility when liabilities outweigh assets. This is especially true for Garuda, whose operations have been halted due to pandemic-related travel restrictions. International passengers decreased from 193,380 in February 2020 to just 8,967 a year later, according to business operating statistics. This raises the question of whether Garuda’s financial woes are a referendum on Indonesia’s state capitalism or the result of a huge and unforeseeable foreign demand shock. While Garuda’s corporate management is not without culpability, the second rationale is more compelling.STATE-OWNED LIABILITIES?
No airline in the world has enough cash on hand to deal with a decline in international passenger traffic of nearly 100 percent.
Even Singapore Airlines, one of the region’s better-run carriers, needed a lifeline from Temasek, its main shareholder, and had to earn cash through the sale and leaseback of some of its jets recently.
The Rp 70 trillion debt has been singled out by critics as proof of corporate mismanagement and an alleged tendency of Indonesian state-owned firms to borrow money recklessly. However, this is not the case in this instance. Garuda’s debts include a $500 million sukuk bond (an Islamic finance instrument comparable to a bond), US$922.6 million in bank debt, and a mounting backlog of trade payables that surpassed US$1.4 billion last year. READ: Southeast Asia is at risk of lagging behind other regions in terms of regaining its aviation and tourism industries.
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However, rather than a rise in unsustainable debt, the company’s balance sheet difficulties are primarily the result of an accounting rule change.
Finance leasing commitments account for the majority of Garuda’s new liabilities. Lease liabilities increased from US$52.6 million in September 2019 to US$5.1 billion in September 2020, according to the financial statement. Garuda, like many other airlines, leases the majority of its aircraft. Instead, the majority of its aircraft are leased from third parties. Prior to 2020, the company’s accounting rules required it to report the minimum lease payments as operating expenses only when they were made. The full value of the outstanding leasing contracts was not shown as a liability on the balance sheet. The full value of ongoing leases now appears on the balance sheet, thanks to new accounting principles enacted in 2020. And this would probably not be a problem under regular business conditions, with a strong cashflow. For example, Garuda’s activities earned nearly US$600 million in net cash in 2019. It is, nevertheless, a concern when cashflow is strained. THE THREATENING OF BANKRUPTCY As they initiate restructuring negotiations with the lessors, Garuda’s business leadership and the government are likely to use the possibility of bankruptcy as leverage.
On July 6, 2021, passengers at Soekarno-Hatta International Airport in Tangerang, Indonesia, wear safety masks. (Photo by Ajeng Dinar Ulfiana for REUTERS)
Malaysia Aviation Group, Malaysia Airlines’ parent business, employed a similar strategy in early 2021, and it worked for them. After threatening bankruptcy, a British court approved a deal to restructure roughly $4 billion in debts owing mostly to airplane lessors. READ: Commentary: Airlines have no choice except to cease operations for a period of time. The airline’s balance sheet was bolstered by a US$890 million injection from Khazanah Nasional Berhad, the group’s sole shareholder, once the purchase was finalized. We’ll most likely see something similar with Garuda. However, in order to persuade the creditors to cooperate, a genuine threat of bankruptcy must first be established. The logic of Indonesian state capitalism is revealed at this point. The state will not readily give up its national airline, either through privatization or bankruptcy liquidation. This is a result of economic nationalism as well as a desire to keep direct control over a critical market. While Garuda’s stock is publicly traded, the government and Chairul Tanjung, one of Indonesia’s wealthiest persons, own 86 percent of the company. This protects the airline from the market’s more unpredictable whims since, even though they are losing money, they have time to negotiate and examine their choices without being pressured by shareholders. This is significant because shareholder interests may not always coincide with the state’s economic or political goals. READ: Commentary: Why Singapore’s airlines and aviation sector must be saved READ: Commentary: Targeted travel restrictions are required, however caution must be used to avoid jeopardizing Changi Airport’s connection. A strategic asset such as a national airline, it is arguable, should not be exposed to market pressures where deep-pocketed investors might swoop in and buy it or shareholders can try to force a sale in order to salvage some value. Instead, the government can ensure that the airline survives until demand improves, using the threat of bankruptcy to wheedle more lenient terms from its creditors. It’s possible that the way Indonesian state-owned companies, including as Garuda, manage their debt isn’t sustainable in the long run. However, the financial difficulties of a state-owned airline amid a global pandemic don’t tell us anything either way. James Guild is an Adjunct Fellow at Nanyang Technological University’s S Rajaratnam School of International Studies. This piece first appeared on East Asia Forum./n
