Ailing Merpati puts government in a fix

Ailing Merpati puts government in a fix

Urip Hudiono, The Jakarta Post, Jakarta

Ailing state-owned domestic airline Merpati Nusantara has left
only two options for the cash-strapped government: restructure it
or dissolve it, both of which could mean thousands of layoffs.

State Minister of State Enterprises Sugiharto said during
Wednesday's hearing with the House of Representatives' Commission
V overseeing telecommunications, transportation and public works
that each option was equally difficult.

If the government chooses to restructure Merpati, he said, it
would need up to Rp 450 billion (US$46.63 million) in fresh funds
to bring Merpati back to a healthier financial condition.

"But now the government has no money in the state budget for
that purpose," he said.

The funds are needed to reschedule Merpati's whopping Rp 1.6
trillion worth of outstanding debts to creditors and business
partners, as well as to implement a debt-to-equity swap of its
obligations to the government, state banks and state-owned
enterprises. Among Merpati's major creditors are Bank Mandiri (Rp
164 billion), Bank Danamon (Rp 95 billion) and the government (Rp
92 billion).

Merpati's restructuring could also include a possible layoff
of some 2,500 employees, in order to reach an ideal ratio with
the number of its airplanes. At present, Merpati has 3,468
employees and a fleet of 42 planes, serving 250 destinations
through 250 daily flights.

"The focus of the restructuring would be to transform Merpati
into a low-cost carrier," Sugiharto said.

"It will also come in tandem with the government's current
restructuring of national flag carrier Garuda Indonesia, so that
the two did not end up disrupting each other's businesses."

Merpati has also been tasked by the government to serve the
country's remote areas -- which other airlines have been
reluctant to take on due to the low profitability -- but it is
granted a monopoly to serve remote-but-financially-feasible
tourist routes such as Denpasar (Bali) - Mataram (Lombok).

Lack of working capital amid soaring debts has put Merpati in
financial difficulties to expand its fleet using its own funds, a
condition that has put the airline on the verge of bankruptcy.
Apart from the Rp 1.6 trillion debt, Merpati currently has a
cash flow deficit of some Rp 40 billion a month and a negative
equity position of Rp 871.3 billion.

Dissolving the company, Sugiharto said, would cost the
government a whopping Rp 2 trillion in layoff compensation for
the airline's employees, apart from having to face social and
political impacts of the decision.

Considering such options, Minister of Transportation Hatta
Radjasa, who also attended the hearing, said the government would
likely finance Merpati's restructuring by offering it to
investors through a strategic sale.

"I think finding a strategic partner for Merpati would be the
most viable option, considering the government still has no money
to rescue it from bankruptcy," he said.

Hatta explained that several investors had submitted their
offers for Merpati and were currently undergoing a due-diligence
process. But he declined to name the prospective investors, as
they were still in negotiations.