Garuda seeks debt refinancing to avoid bankruptcy

Rendi A. Witular, The Jakarta Post, Jakarta

Due to the lack of funds for expansion amid a huge debt burden, national flag carrier Garuda Indonesia acknowledged on Monday that it could eventually collapse unless the government takes action in allowing the airline to refinance its debts.

Garuda president director Indra Setiawan said the airline had been left behind by its competitors in the region due to its inability to expand or rejuvenate its fleet because of lack of funds and limited fresh borrowings as set by its creditors.

"An immediate decision should be taken by the government to refinance our debts so that we can reduce our interest burden and become more flexible in seeking more loans for expansion," said Indra during a hearing with lawmakers.

"With current earnings, we are afraid that the airline will face massive financial problems like in 1998, or it may even collapse within years unless the government immediately deals with the debts," he said.

Garuda planning and strategy director Wiradharma B. Oka said the airline had yet to decide whether the refinancing would be in the form of bonds or bank loans.

"We haven't decided the refinancing amount and its form yet. We are still discussing the plan with the government. For sure, the instrument should have longer maturity period and carry lower interest rates," said Wiradharma.

Garuda defaulted on more than US$1.1 billion in debts to its international creditors due to the Asian financial crisis in late 1997. The government and airline creditors agreed to restructure the debts in 2001.

The massive debt accrued from rampant internal corruption during the former New Order regime, when government officials used the company as their personal cash cow.

As of this year, the airline's debts stand at $850 million, of which some $650 million is owed to an international consortium consisting of creditors in the United Kingdom, Germany and France. The debts, which will mature in 2010, carry an interest rate of 50 basis points above the London Interbank Offered Rate, or LIBOR.

The remaining $200 million is in the form of promissory notes, which will mature in 2007.

This year, Garuda is scheduled to pay some $115 million of the debt, including interest.

However, it is unclear how the airline will pay these debts, as its 2004 profit would not likely be sufficient to fully service them, given the fact that the airline had to spend an estimated additional Rp 680 billion on fuel costs.

"We are still optimistic that we can pay our debts this year on schedule despite soaring operational costs due to higher oil prices," said Indra.

Garuda's average price ceiling for fuel is about $35 per barrel, but now the price has risen to more than $40. Fuel accounts for as much as 30 percent of Garuda's operational costs.

Wiradharma said the airline's operational revenue was estimated to reach Rp 10 trillion ($1.1 billion) this year, up from Rp 8.3 trillion last year. The airline's passengers were also projected to rise to about eight million from last year's seven million.

Elsewhere, Wiradharma said that Garuda would lease at least 12 new airplanes next year, comprising Boeing 737 New Generation, Boeing Classic, and Airbus A330, for new regional and domestic routes.