Garuda & The Ticket to Nowhere
Transportation Minister Hatta Radjasa disclosed government's plan to ask a debt haircut to the creditors of the-loss-making-flag-carrier Garuda Indonesia. The amount of the haircut would be substantial enough to make sure creditors will not approve that. And even if the creditors would be generous enough, such haircut is just a ticket to nowhere. Why?
To be honest, debt haircut is one of the best solutions to keep Garuda flying. The problem is how much haircut would be given. Minister Radjasa said Garuda's sustainable debt is US$270 million. That would translate to a demand of debt haircut up to US$520 million of its outstanding US$794.6 million. European Credit Agency (ECA) is the biggest creditor at US$501.6 million, followed by floating rate note (FRN) holders of US$130.6 million, a mandatory convertible bond (MCB) of US$136.8 million, and some banks.
In March, SOE Minister Sugiharto told parliament members that government need to inject US$250 million (from the state budget) to refinance Garuda's debt and establish a special purpose vehicle to buyback the debts. So it looks like Soeharto administration's bailout of aircraft manufacturer (IPTN) in 1990s. Billions of US dollar invested in IPTN (renamed Dirgantara Indonesia) only to end up as dishes manufacturer and the state still had to takeover its bad debt at IBRA few years ago.
I'm sure MOF Sri Mulyani, a fiscal conservative, would not give the money to Sugiharto. Even Prime Minister Abdullah Ahmad Badawi rejected to bailout Malaysia's flag carrier Malaysia Airlines.
Sugiharto then opened the new option, divestment of up to 49% shares of Garuda. Several big names in the airline business were tipped as parties that had expressed interest to be government's new partner in Garuda. But resistance quickly emerged, as always, in the name of nationalism. Parliament member Drajad Wibowo (a former economist)rejected the divestment to foreign parties, but it's ok through IPO or to local investors. Hatta, meanwhile, asked his colleague in cabinet to give priority to debt restructuring than the divestment.
Nationalism have prolonged the endgame of many flag carriers, including those in Europe. Europe's airlines long were considered extensions of foreign ministries, responsible for flying the flag, not running a business. During the first half of the 1990s, European governments handed out $9 billion to prop up money-losing carriers from Air France to Greece's Olympic Airways. Even private companies have not escaped political complications. BA's attempt to buy KLM Royal Dutch Airlines collapsed partly because of fear that if the Dutch airline came under British ownership, it would lose international treaty rights to fly to places outside of Europe such as Japan and the U.S. And European Union rules prohibited Swiss-air, based outside of the EU, from taking over Belgium's landing rights within the EU if it bought a controlling stake in Sabena. So Swissair settled on a 49.5% stake.
In that sense, nothing particularly wrong on nationalism over Garuda. But VP Jusuf Kalla actually had more liberal views on flag carriers. In December last year, Kalla was quoted by Tempointeraktif.com saying Garuda is no longer the flag carrier and that he welcome investors to buy the airline.
At the time all these leaders bussy to talk about how to save Garuda, for whatever reasons, Garuda defaulted MCB payment to a bank syndication led by Bank Mandiri as Garuda keep mounting losses. The airline booked net loss of Rp672 billion last year, reduced from net loss of Rp811 billion in 2004. Stiff competition pushed down Garuda's occupancy rate to 67% in 2005 with half million less passengers than the previous year. Garuda's market share has dropped from 70% (prior to the liberalization of airline industry) to the recent 30% (some says 25%). Garuda apparently had failed to cope with the changing environment.
I agree with Lin Che Wei (Danareksa's president director) who wrote in Kompas newspaper few months ago that Garuda need to seriously overhaul its operation, streamlining, downsizing etc.
I believe that people support the basic idea of keep the company alive because thousands of jobs are at stake. But people have different views on how to help the company improve. I prefer the company raise equity, either through capital market or private placement (I have no problem with domestic or foreign investors) than using state funds to inject new loans-to-equity type of bailout simply because it's a kind of return ticket to nowhere! Garuda will return to the same place, parliament and government for help, at the expense of ordinary people who deserved more the state funds for better education or healthcare infrastructures.
To be honest, debt haircut is one of the best solutions to keep Garuda flying. The problem is how much haircut would be given. Minister Radjasa said Garuda's sustainable debt is US$270 million. That would translate to a demand of debt haircut up to US$520 million of its outstanding US$794.6 million. European Credit Agency (ECA) is the biggest creditor at US$501.6 million, followed by floating rate note (FRN) holders of US$130.6 million, a mandatory convertible bond (MCB) of US$136.8 million, and some banks.
In March, SOE Minister Sugiharto told parliament members that government need to inject US$250 million (from the state budget) to refinance Garuda's debt and establish a special purpose vehicle to buyback the debts. So it looks like Soeharto administration's bailout of aircraft manufacturer (IPTN) in 1990s. Billions of US dollar invested in IPTN (renamed Dirgantara Indonesia) only to end up as dishes manufacturer and the state still had to takeover its bad debt at IBRA few years ago.
I'm sure MOF Sri Mulyani, a fiscal conservative, would not give the money to Sugiharto. Even Prime Minister Abdullah Ahmad Badawi rejected to bailout Malaysia's flag carrier Malaysia Airlines.
Sugiharto then opened the new option, divestment of up to 49% shares of Garuda. Several big names in the airline business were tipped as parties that had expressed interest to be government's new partner in Garuda. But resistance quickly emerged, as always, in the name of nationalism. Parliament member Drajad Wibowo (a former economist)rejected the divestment to foreign parties, but it's ok through IPO or to local investors. Hatta, meanwhile, asked his colleague in cabinet to give priority to debt restructuring than the divestment.
Nationalism have prolonged the endgame of many flag carriers, including those in Europe. Europe's airlines long were considered extensions of foreign ministries, responsible for flying the flag, not running a business. During the first half of the 1990s, European governments handed out $9 billion to prop up money-losing carriers from Air France to Greece's Olympic Airways. Even private companies have not escaped political complications. BA's attempt to buy KLM Royal Dutch Airlines collapsed partly because of fear that if the Dutch airline came under British ownership, it would lose international treaty rights to fly to places outside of Europe such as Japan and the U.S. And European Union rules prohibited Swiss-air, based outside of the EU, from taking over Belgium's landing rights within the EU if it bought a controlling stake in Sabena. So Swissair settled on a 49.5% stake.
In that sense, nothing particularly wrong on nationalism over Garuda. But VP Jusuf Kalla actually had more liberal views on flag carriers. In December last year, Kalla was quoted by Tempointeraktif.com saying Garuda is no longer the flag carrier and that he welcome investors to buy the airline.
At the time all these leaders bussy to talk about how to save Garuda, for whatever reasons, Garuda defaulted MCB payment to a bank syndication led by Bank Mandiri as Garuda keep mounting losses. The airline booked net loss of Rp672 billion last year, reduced from net loss of Rp811 billion in 2004. Stiff competition pushed down Garuda's occupancy rate to 67% in 2005 with half million less passengers than the previous year. Garuda's market share has dropped from 70% (prior to the liberalization of airline industry) to the recent 30% (some says 25%). Garuda apparently had failed to cope with the changing environment.
I agree with Lin Che Wei (Danareksa's president director) who wrote in Kompas newspaper few months ago that Garuda need to seriously overhaul its operation, streamlining, downsizing etc.
I believe that people support the basic idea of keep the company alive because thousands of jobs are at stake. But people have different views on how to help the company improve. I prefer the company raise equity, either through capital market or private placement (I have no problem with domestic or foreign investors) than using state funds to inject new loans-to-equity type of bailout simply because it's a kind of return ticket to nowhere! Garuda will return to the same place, parliament and government for help, at the expense of ordinary people who deserved more the state funds for better education or healthcare infrastructures.
Labels: Bank Mandiri, Garuda Indonesia, SOEHARTO Inc, Sri Mulyani, Sugiharto
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posted by yosef at 11:13 PM
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