House approves Merpati's $26.47 debt swap

Tony Hotland, Jakarta

The House of Representatives has approved the conversion of Rp 225 billion (US$26.47 million) debt owed by state-owned PT Merpati Nusantara Airlines to the government into equity, paving the way for the company's plan to privatize.

However, House Commission IV overseeing transportation and communications insists that the privatization be executed after the company restructures its business and debts to assure its soundness.

"Restructuring the company and its debts is essential in such a huge move like privatization so that Merpati's shares are not acquired under their real value," commission member Enggartiasto Lukito said during a hearing with the airline's management on Tuesday.

Merpati's president director Hotasi Nababan said that his management had been taking restructuring steps since last year by offering more flights and restructuring its human resources.

"However, we'll discuss further actions with a special team formed by Commission IV. We'll also discuss the method for recapitalization; whether through a rights issue or injecting government funds," he said.

With a rights issue, Merpati expects to secure at least Rp 1 trillion. This fund, said Hotasi, could help the airline recover financially and allow a profitable initial public offering.

"The funds will be used to finance new aircraft and to improve our service and productivity," he said.

Hotasi said the conversion of the debts into equity could hopefully trigger other creditors to do the same thing and would accelerate the company's debt restructuring.

He said that the privatization was actually crucial for Merpati considering the company's worsening financial state and tougher competition in the airline industry with the emergence of companies offering much lower fares.

"Privatization is important for us to get fresh funds in order to tackle current deficiencies we're having that are hampering us from expanding," he said.

By the end of 2003, Merpati incurred about Rp 1.3 trillion in debts, with assets standing at a mere Rp 800 billion. Its market share dipped to 18 percent from 41 percent in 1993.

Although the House has yet to give the green light for privatization, Hotasi expects the whole process of recapitalization to be completed before the end of the year to benefit from the rising airline industry.

The number of plane passengers surged to 17.5 million last year from 12.3 million in 2002, and is projected to reach 20.5 million in 2004.

The commission also asked the company's management to submit the amount of funds it needs for restructuring to the government and to report the progress to the commission.