Emma Connors, Singapore/Jakarta – The Indonesian government is getting plans ready to upgrade a charter flight business into a full-service airline as the country's debt-burdened flag carrier Garuda sweats on a court ruling this week.
The Central District Court of Jakarta's commercial division is expected to rule on Thursday on a debt suspension plan filed by Garuda's creditors. The airline's total debt has ballooned out to 70 trillion Indonesian rupiah ($6.6 billion).
If the ruling goes against the airline, it might have to declare bankruptcy, according to the Indonesian government, which is Garuda's largest shareholder. The government's back-up plan is to transform Pelita Air, a charter service owned by a state-owned enterprise, to run a full passenger service on Garuda's many domestic routes
Long-time observers are not sure if this is the best solution, saying a Garuda subsidiary, Citilink, may be better placed to run the scores of flights that connect the archipelago nation. Citilink is run independently of Garuda.
Alvin Lie, a former MP and commissioner of an aviation business, said President Joko Widodo had clearly signalled he was prepared to let the national carrier fail.
Mr Lie said Garuda had not convinced creditors it was capable of settling its financial obligations. The lack of certainty regarding funding support from the government or any other shareholder had thwarted efforts to negotiate a debt restructuring that creditors will accept.
Given the scale of Garuda's debt, it would be cheaper "to build a new airline or develop others that are currently smaller in scale but are financially sound", Mr Lie said.
Even if Garuda can avert bankruptcy, it will not be able to fly international routes for much longer, Indonesia's deputy minister for state-owned enterprises Kartika Wirjoatmodjo told local media this week.
Garuda is still taking bookings for its weekly return service between Jakarta and Sydney, but many believe this route and other international flights will soon be withdrawn. The Garuda service is the sole scheduled passenger service between Indonesia and Australia.
Qantas is taking bookings for flights between the two countries from late December as it reboots its international services.
Garuda chief executive Irfan Setiaputra confirmed the government's plan to upgrade Pelita. However, he remained hopeful of avoiding bankruptcy. In a WhatsApp message, he said it was too early to talk about cutting routes, and that he was focused on rolling out a massive restructuring plan designed to tackle operating losses.
The airline reported a net loss of $US2.4 billion in the 2020 calendar year after its revenue dropped nearly 70 per cent.
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 source of Garuda's financial woes, however, can be traced back to long before COVID-19 surfaced.
The government has 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 essence, [there is] inefficiency and many routes are flown even though they are not profitable," Mr Kartika said
Company insiders say high leasing costs for aircraft date back to when Emirsyah Satar was chief executive from 2005 till 2014.
In May 2020, the Central Jakarta District Court sentenced Emirsyah to eight years in prison after he was found guilty of taking bribes from Rolls-Royce, a prominent manufacturer in the aero-engine market.
Ari Askhara, who took on the CEO role in September 2018, was making headway into tackling some of the airline's inefficiencies until he, too, was charged with criminal offences after Harley-Davidson motorbikes and Brompton foldable bikes were found smuggled aboard a Garuda flight.