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Garuda - Losing Feathers?

Indonesia’s flag carrier have weathered through storms before. Despite SARS and the Iraq crisis, the airline managed to post a profit in the first half of 2003. However, the optimism could be unfounded as the airline downgraded it’s profit estimates for the full year of 2003, grounded their 747-200s and many are now asking if Garuda’s high margin domestic operations are suffering from the domestic competition, primarily from Lion Airlines.

Last month, news came to surface that leading creditors to Garuda Indonesia said they were still waiting for the national flag carrier to present a revised business plan. The airline had promised the creditors the business plan would be ready in late July or early August.

Early last month, the UK Export Guarantee Dept, one of the three export credit agencies that are creditors to Garuda, requested the airline explain why the report was late, said creditors. The reports are important because they want to see the financial status of Garuda after 2005 and 2006 when the big repayments are due.

The creditors note that the promise to deliver the report was made by Garuda's board of directors and commissioners in late May in a meeting with lenders and the airline's failure to deliver the report has aroused some suspicions about Garuda's and/or the Indonesian government's intentions, though few creditors were able to speculate what the flag carrier's game plan might be.

Since that meeting, Garuda’s executives were replaced. The event raised grave concerns to the creditors that the new management will not meet the company’s obligations and promises made by the previous management. One creditor said that the delay in delivering the business plan could be due to the need for Garuda to translate it into English. Other creditors don’t buy into this excuse.

Garuda was open about its debt problems this year and said that SARS was the major cause in the company’s troubles making this year’s principal payments difficult to service. But creditors are unwilling to consider a restructuring of Garuda's debts unless the airline can produce a financial report outlining its expected cashflows.

Garuda needs to repay about US$50m in December 2003 in addition to the US$3m per month for the A330 to the European Export Credit Agencies.

Fortunately, the European ECAs are backed up by a US$100m irrevocable facility from Bank Mandiri until November 2004. Garuda would try and do everything to avoid drawing down from the facility, and Bank Mandiri would rather not see the facility being used. The facility’s terms state specifically that a drawdown from the facility would not be an event of default, and that debts from the loan are to be repaid only after all senior creditors' claims have been completely repaid.

The use of the facility would make Robby Djohan (Garuda’s Chairman and Bank Mandiri CEO) very uncomfortable and it is only logical that some ECAs are nervous that Bank Mandiri will somehow try to wriggle out of its obligation to allow drawdown from the SBLC - something that might be easier to do once the bank is more fully privatized.

In late 2001, Garuda concluded negotiations to restructure US$2.406bn and Rp543bn of its US dollar and Rupiah currency debt, the largest ever workout in Indonesia, and one of the biggest in Southeast Asia. However, whether the company can meet the principal repayments beginning at the end of this year is another story.

Garuda have already grounded their remaining 4 747-200s and have put them out for sale. This could be seen as a desperate measure since the market value of the aircraft is only US$1.25m – 3m each, and the airline have failed to sell them so far. The choice of aircraft for disposal raises questions too because the DC-10s are still flying despite being the oldest aircraft in Garuda’s mainline fleet. This is added to the fact that Garuda requires 2 of the DC-10s of the 5 as back up.

Since SARS, Garuda have scaled back their European operations. Only Amsterdam remains served on its own right and utilizing their codeshare with Malaysia Airlines for the rest of Europe.

On the domestic front, Garuda is suffering from falling yields due to competition. Garuda managed to fend off competition without adjusting prices until this year, when Lion underwent a massive expansion. For the first time, Garuda slashed their ticket prices to compete with Lion in the low season.

With Lion’s expansion to a fleet of 14 MD82s (and still growing) while sharing the same terminal as Garuda in Jakarta (with convenient proximity to the international terminal), it appears that Garuda is squeezed both on domestic and international markets. Despite the resilient profitability, the poor cashflow could result in bankruptcy.

Gerry Soejatman is a leading member of the Indonesian aviation community. He runs his own website called CGKFlyer

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