Merpati may become budget airline: Govt

Urip Hudiono and Rendi A. Witular, The Jakarta Post, Jakarta

The government is mulling to transform ailing state carrier PT Merpati Nusantara Airlines into a budget airline to make it more competitive with other local and international airlines and to avoid bankruptcy, a minister said.

State Minister of State Enterprises Sugiharto said the government had prepared several life-saving options to put Merpati in the red in the future, one of which was to transform it into a low budget airline.

"Competition in the airline industry is getting stiffer with numerous new players. To be able to cope with that, we have stressed the importance for Merpati to become a budget airline," said Sugiharto after a seminar on Thursday.

At present, aside from running its business like other non- budget airlines, the government has also assigned Merpati to serve remote areas in the country, which are typically shunned by private airlines due to their low profitability.

Merpati is also tasked, with a monopoly facility, to serve a number of routes that are considered remote but financially feasible, such as routes from Denpasar to Dili in East Timor and from Denpasar to Lombok.

However, due to the lack of working capital amid soaring debts, the airline is currently having difficulties expanding its fleet using its own funds, a condition that has put the airline on the verge of bankruptcy.

At present, Merpati has Rp 1.3 trillion (US$144 million) in debts and assets worth about Rp 775 billion. Its major creditors include the government (Rp 225 billion), Bank Mandiri (Rp 230 billion) and Garuda (Rp 246 billion).

The previous government and lawmakers had been considering several life-saving options for Merpati, including strategic sales of assets, an initial public offering and a debt-to-equity conversion.

However, strategic sales appear unlikely to happen as the policy of President Susilo Bambang Yudhoyono in general is to avoid strategic sales of state assets, especially those of strategic value, such as Merpati.

Sugiharto said that his ministry was still looking at the best option to save Merpati by negotiating with the airline's creditors for a conversion of their debts into equity in the airline, and to a number of financial institutions to gain fresh funds to help the airline expand.

"Merpati financial condition is poorer than its brother (national flag carrier) Garuda Indonesia. We are still negotiating with several financial institutions to help save the airline," he said.

Sugiharto dismissed reports by several local media that Merpati was unlikely to continue its operation starting next month due to financial difficulties amid the government's lackluster efforts in restructuring the airline.

A source at the Office of State Ministry of State Enterprises said that a team set up by Sugiharto to restructure Merpati had failed more than four times to choose the most feasible life- saving options for Merpati.

The source said the failure was because Merpati's financial condition was so deep, and that the available options to save the airline, as provided by the team, were likely ineffective.