Garuda Boss Says Bankruptcy Off Table Despite Covid Strains

(Bloomberg) -- The head of Indonesia’s flag carrier said better terms on aircraft loans will help it avoid falling into bankruptcy as the nation grapples with surging coronavirus cases.

“We discussed the risks, the benefits, the pluses and minuses and the company’s leadership decided against it,” PT Garuda Indonesia President Director Irfan Setiaputra said when asked in a Sept. 18 interview about considering bankruptcy proceedings.

Garuda is expecting a 8.5 trillion rupiah ($580 million) bridging loan from the government to come through this year, according to Setiaputra, an industry outsider who joined the airline in January just before the Covid-19 outbreak began. The injection would help after the airline suffered a $713 million net loss in the six months through June, though it is taking longer than initially hoped, Setiaputra said.

Airlines worldwide are under immense pressure as the pandemic and tight restrictions on movement decimated demand for travel. Several have collapsed, filed for bankruptcy protection or are restructuring, including Thai Airways International Pcl, which this month got court approval to proceed with a business reorganization plan.

Setiaputra said he’d reassured lessors that the company wouldn’t enter bankruptcy. “I think that has given them a lot of confidence and now they see Garuda as one of the airlines in this region with good prospects for recovery.”

Yet the backdrop is worsening in Indonesia, which has nearly a quarter of a million virus cases. There were 4,176 confirmed infections on Monday alone, a daily record, and an official from the taskforce handling the pandemic response warned that Jakarta’s health system is overwhelmed.

Latest data show air travel around the vast Indonesian archipelago picked up in July from deep lows. A total of 1.46 million people flew domestically that month, compared with just 87,000 in May, according to the country’s central statistics bureau. The numbers were still a long way below the early months of the year before the virus spread through the Southeast Asian nation.

Declining traffic squeezed Garuda to such a degree that it extended the repayment of a $500 million sukuk, an Islamic bond, by three years. The airline also missed a payment on an asset-backed security and is facing a lawsuit in London over aircraft rental fees. Garuda’s Z-score, a model used to predict bankruptcies, is stuck at its lowest in at least a decade.

The company’s shares fell 3.5% Tuesday in Jakarta. They’ve dropped 55% this year.

Setiaputra took the helm of the company in January after the previous boss was dismissed for allegedly smuggling a classic Harley-Davidson motorcycle and two Brompton folding bicycles into Indonesia on a Garuda flight from Toulouse. The pandemic was a baptism of fire for an executive with a background in technology and mining.

“This was really tough for me, I had no prior knowledge about the industry,” Setiaputra, 55, said.

Garuda has renegotiated with some aircraft lessors to get lower rates and longer terms, and it also cut salaries, freeing up some much-needed cash. Many other airlines have taken similar steps, with the industry not expected to fully recover before 2024, according to International Air Transport Association estimates.

Indonesia has closed its borders to most foreign visitors, leaving Garuda’s hopes pinned to domestic travelers and other revenue streams such as cargo. This week, it is starting direct flights to transport fresh tuna direct from Manado, the capital of North Sulawesi province, to Tokyo.

Setiaputra said Garuda’s passenger numbers could return to about 50% of pre-coronavirus levels by the end of this year.

“It is going to get better,” Setiaputra said. “The problem for us is how to speed things up.”

©2020 Bloomberg L.P.