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Garuda's Gloomy Start to 2006

Financial Default, Privatization and Foreign Ownership – All Looming on the Horizon for the National Carrier in 2006.

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Once ranking as the largest air carrier in the Southern hemisphere, the fortunes of national air carrier Garuda Indonesia have been in a state of steady decline in recent years. Closing offices and routes to Europe and the United States, Garuda's international reach and fleet have shrunk while the airline's executives have watched its domination of Indonesia's domestic route network evaporate in the face of a whole league of low-cost domestic air competitors.

On the Verge of Financial Default?

Just when it appeared things could not be worse for the Airline, Reuters' New Service broke the story that Garuda will begin 2006 by defaulting on a US$55 million debt payment that fell due at the end of 2005.

As reported on in [ Garuda Delays Debt Repayments to Creditors], the US$55 million repayment is due to the European Credit Agencies (ECA) and forms part of an overall debt of US$150 million and Euro 800 million owed by the Airline to the ECA.

The Airline has been struggling in the face of declining revenues to restructure its debt and rationalize its operations. In an official statement from Garuda on December 29, 2005, Garuda said it "has made significant progress in developing the basis for presenting a restructuring plan" but "additional work is required to reconcile complex inter-creditor and governmental issues."

The decision to default on the debt repayment has been formally reported to the Government who have reportedly endorsed the decision to forgo principal repayments while continuing to pay interest on its loans.

Emirsyah Satar, the President Director of Garuda has blamed rising fuel costs, intense competition, security concerns, a declining Indonesian Rupiah and the October 1, 2005 bombing in Bali as all having an aggregate deleterious effect on his company's financial status.

Garuda – For Sale?

Projected to post a loss for 2005 of US$70 million following a loss of US$81 million in 2004, Garuda's financial options appear to be few with the Minister for State Enterprises, Sugiharto, signaling that plans to take the state-owned airline public in 2009 may now have to be accelerated in order to save the carrier.

No Longer the National Flag Carrier?

Comments by Indonesia's Vice-President Jusuf Kalla suggest that Garuda may be losing its privileged position as the official national airline of Indonesia.

Kalla told the press that Garuda must be viewed as a business and its potential sale – even to foreign interests – can no longer be considered as somehow selling the nation to outsiders. Suggesting that such thinking is outdated, the Vice-President explained how many carriers - including KLM, Malaysia Airlines, New Zealand Airlines, and Qantas – have large shares of foreign ownership and control.

Separately, a spokesman for the Ministry of State Owned Enterprises suggested that there were already three major foreign airlines who have expressed an interest in buying into Garuda. The Government is reportedly in negotiations with the three to determine which among the them is best suited to help Garuda return to profitability while regaining its international reputation and route network.

A Dissenting Voice

Meanwhile, a group, calling itself the People in Support of Indonesia's Commercial Aviation (PAUKI), is opposing plans to sell the Airline to foreign interests, labeling such a move as "selling the Country." An advisor to PAUKI and the former President Director of Garuda, Mohammad Soeparno, has criticized past moves that allowed foreign investors to buy shares in existing domestic carriers as contributing to Garuda's current financial woes. Soeparno called on the Government to give a fresh cash injection to Garuda allowing the Company to return to health and be ready to compete in the increasingly liberalized world of commercial aviation.

Soeparno told the Indonesian-language Bisnis Indonesia that with proper attention from the Government and regulations to protect the State-owned carrier Garuda could return to its "glory days of 1984-1992."

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