President-director Abdulgani does not mince his words about Garuda Indonesia's troubles over the past few years. "If changes had not happened, Garuda may have collapsed - it really was that serious. Garuda has had deep financial and big cashflow problems. Liquidation was considered," he says.
The carrier was battered for two years from mid-1997, after Thailand devalued its currency and the regional economies fell like dominoes. The Indonesian economy was arguably the hardest hit in South-East Asia and, with it, state-owned Garuda.
With liabilities now far exceeding assets, and creditors still to reach formal agreement on restructuring the debt, Garuda is not yet out of the woods. Abdulgani believes, however, that the worst is behind the airline and that it is time to start talking of an upturn.
The company's drive towards recovery began in earnest in mid-1998, after then president-director Soepandi and several board members were ousted in a bid to bring "fresh life" into its management. Soepandi's replacement was senior banker Robby Djohan, who headed state-owned Bank Negara.
Djohan wasted little time. Within days of his appointment on 15 June, 1998, he severed Garuda's contracts with the family and friends of ousted Indonesian president Suharto, ordered loss-making routes to be cut, renegotiated costly aircraft leases, returned surplus aircraft to lessors and cut staff numbers.
He hired Lufthansa Consulting to provide operational advice on a two-year contract and Deutsche Bank to help draw up a financial restructuring plan.
Djohan's work as president-director of Garuda was cut short, however. Just under five months after his appointment, he was called back by the government to head newly formed Bank Mandiri, established from the merger of five struggling state banks.
Although Djohan remains president-commissioner of Garuda's supervisory board, he was succeeded as president-director in November 1998 by Abdulgani, then president-director of local Bank Duta. At the time, Abdulgani was also an assistant to Indonesia's state enterprises minister, Tanri Abeng, who was responsible for overseeing the national carrier.
Eighteen months after taking over, Abdulgani credits his predecessor Djohan with the positive changes that he carried out at Garuda. He sees his own work as continuing on the same recovery path.
Stop the bleeding
"The new management came in at the right time to avoid the worst for Garuda," Abdulgani says. "What Robby Djohan did was to take the initiative at an emergency stage. He stopped the bleeding. Cashflow is the life-blood of the corporation and, by stopping the bleeding, the management was given room to organise the company in such a way that allowed it to resume normal operations. The next step is what we are doing now, which is the stabilisation phase. We are trying to reorganise and improve the operation."
It has been a major struggle to get to this stabilisation phase, however. Ongoing political turmoil in Indonesia continues to threaten the airline's recovery and has forced the management to take drastic action. Seventeen international routes have been scrapped and frequencies on many other international and domestic routes reduced. Aircraft orders have been cancelled, and the operational fleet has been cut from 58 to 42 aircraft through the early return of leased aircraft and the sale of others. In addition, the carrier has slashed its workforce by more than 3,500 employees, to around 10,000.
These efforts have been made to help lay a foundation for recovery. Garuda managers and Deutsche Bank, meanwhile, have been working to convince creditors that they should agree to a radical easing of the carrier's debt burden.
Abdulgani says that Garuda is close to reaching final agreement with European creditors on the restructuring that will allow for quarterly loan payments to be resumed. He says the Export Credit Agencies (ECAs) of France, Germany and the UK have given "general" approval for the proposed restructuring. A final agreement is imminent.
The carrier has not made its quarterly principal payments since June 1998 on the $610 million it owes to the ECAs, although it has been paying interest. These principal payments amount to $9 million a quarter and cover the financing of the acquisition of Airbus A330-300s. Abdulgani says that the debt restructuring proposed by Deutsche Bank will stretch remaining principal and interest payments over 16 years, rather than 10, as prescribed by the current agreement.
Garuda is holding separate talks with the holders of promissory notes, he adds, and hopes that new deals with all creditors will be finalised within the next month. "We have almost reached understanding with the ECAs about how we proceed with the debt restructuring," says Abdulgani. "We are now trying to meet the requirements administratively in order to be able to finalise the agreement. But, since the general consensus has been achieved already, the following meetings are much more between our financial adviser and the ECAs," he adds.
The discussions centre on some hefty financial obligations. As of the second half of last year, Garuda's total liabilities on and off balance sheet stood at $1.81 billion, while total assets stood at a mere $758 million. The debt total includes $293 million owed for issued promissory notes; $100 million in working capital; $69 million in long-term debt; $610 million for the financing of the A330s; $57 million for terminated aircraft leases; $140 million in overdue accounts payable; and $58 million in contingent liabilities. Garuda also owes the Indonesian Government $422 million for Boeing 737 purchases made on its behalf, another $9 million in other debt and $52 million in tax.
Abdulgani says that the debt restructuring is vital for Garuda's short and long term survival. He adds that that it will also allow management to set realistic targets for cashflow and profitability in the coming years.
"By completing the debt restructuring, Garuda will have some certainty about its obligations and how to fulfil them. If this is finalised and signed, it gives the management the fixed commitment on how they proceed with meeting the obligations to pay the creditors," he says.
And if the creditors do not agree to restructure the carrier's debt? "This is the frank discussion we have had with them already," Abdulgani says. "In this debt restructuring, there is the problem of whether to continue or discontinue. It might be, if all creditors don't agree, that maybe we can't continue the enterprise. If we discontinue, we have to return the aircraft."
Back in profit
Abdulgani says that Garuda has been demonstrating to creditors that it can restore itself to health, citing unaudited figures showing a net profit for the year ended 31 December, 1999. If this is confirmed after an audit, Abdulgani adds, it will be the airline's first year in the black since 1992.
While the preliminary figures show a negligible 600 million rupiah ($83,000) net gain, Abdulgani points out that this compares with a 1998 net loss of 2 trillion rupiah ($275 million).
Behind the improvement in the airline's financial results is an increase in the average load factor, to 68.4%, last year, compared with 54% in 1998, he says. On-time performance also improved and has been steady at 88% since February last year,. "We have never achieved this before in 52 years," says Abdulgani.
The load-factor increases helped contribute to better cashflow last year, which moved from negative in 1998 to "quite substantially positive" in 1999, he says. Unit revenues have also improved dramatically over the past year. Although full-year figures have yet to be calculated, the average yield in the first half of 1999 rose to 5.1ó per seat kilometre, up from 3.4ó per seat kilometre in 1998.
A more benign external environment has helped produce the rosier financial picture. But so has a recently introduced incentive programme, which rewards staff - from the core operations departments to finance and marketing - for improved performance.
"We put in a benchmark. Let's say we put 85% as the target for on-time performance. We combine that with the load factor - we put the target for the load factor according to the season - and, if we meet that target, all staff will have a 10% increase in their salary for that month." The success of this incentive scheme provides "an indication that we have the capacity to strive for a better performance", says Abdulgani.
The carrier's success in beating internal performance targets has improved the possibilities of a long-planned partial privatisation, proposed by Deutsche Bank in a five-year business plan presented to creditors last year and covering the period 2000 to 2004. It recommends an initial public offering (IPO) in 2003.
Abdulgani says, however, that the IPO could be brought forward by a year if financial restructuring targets - including a large reduction in the $1.81 billion debt mountain - are greatly exceeded and Garuda complies with Indonesia's stock market listing requirements of at least three consecutive years of making a profit. "For me, as a manager, privatisation is a real target. For Garuda, privatisation is a must to solve the equity problem," he says.
He wants Garuda to be a viable standalone business, ending its dependence on the state. Despite Indonesia's dire economic woes, Garuda continues to enjoy state handouts. Last year, the government promised to provide $62 million annually over the succeeding eight years to help cover the purchase of 11 737s. Cash injections will end for the government in 2003 if an IPO is pursued, he says. He also hints that some of the capital raised on the bourse could be used to reduce the company's debt further.
A return to growth
Abdulgani believes that the carrier is now back on a growth footing. The impact of two years of fleet reductions became apparent with the recent return to market health, leaving Garuda with a capacity shortage. A team is searching the market for about six narrowbody and widebody aircraft, which it will take on as operating leases.
The carrier hopes to start taking delivery of additional aircraft from the second half of this year. Narrowbodies will be used for domestic flights and the company may also need "one or two additional widebodies" for the international routes, says Abdulgani,
"We are in the process of growing again," Abdulgani adds. Frequencies that were cut on domestic routes have been "returned to normal", he says. "Internationally, load factors have picked up quite substantially. The market in general is improving. In Asia - intra-Asia - the market is improving. I think that is having a positive impact on Indonesia and Garuda," Abdulgani adds.
Indonesia's political troubles remain a more permanent worry, however. "Indonesia is not in an entirely comfortable situation. There is no doubt. We really need stability," he says.
In this unpredictable environment, Abdulgani is well aware that Garuda must not expand too quickly. He also cautions that it will be necessary to make tough choices in the years ahead. "I'm not the owner, I'm the professional. I am responsible for making the airline carry on and, if I don't see any possibility of carrying it on, we won't," he says.
"So we have to make decisions - everyone involved has to make decisions to enable the airline to see the future," he concludes.
Tracking a crisis
June 1997: Thailand devalues its currency. Indonesia is among the worst hit in ensuring Asia-Pacific economics crisis. Garuda starts cutting international routes. September 1997: Garuda Airbus A300 crashes in Medan, killing all 234 on board. May 1998: Boeing agrees to take back six leased MD-11s early. June 1998: President-director Soepandi orders the return of all other leased aircraft to owners and ends "crony" contracts. Garuda's board shaken up. Banker Robby Djohan replaces Soepandi. Garuda suspends payments to European ECAs for A330 financing. September 1998: Lufthansa Consulting called in to assist operational restructuring. November 1998: Abdulgani appointed president-director of Garuda, replacing Djohan, who has been appointed head of a newly formed state bank. June 1999: Garuda wins long-term loan guarantee from the US Export-import Bank for permanent financing of six Boeing 737-300s and five 737-500s. November 1999: 737 deliveries start after Boeing provides temporary bridge financing. August 1999: Garuda meets creditors for debt-restructuring talks. September 1999: Garuda posts $99 million first-half operating profit. Government offers $62 million annually over eight years to cover payments for 737 financing. November 1999: Garuda announces five-year business plan developed with the assistance of Deutsche Bank. Abdulgani says IPO could be as early as 2003.
Source: Airline Business
