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.