PT GARUDA Indonesia could post an operating profit next year after renegotiating its aircraft leases and focusing more on the domestic market, according to the government official in charge of its restructuring.

By lowering lease rates and optimising routes, “Garuda will have positive operating profits” from January 2023, Deputy Minister for State-Owned Enterprises Kartika Wirjoatmodjo said in an interview on Tuesday with Bloomberg Television’s Haslinda Amin and Rishaad Salamat.

Garuda should have 120 aircraft by end-2022 and 180 by 2026, expanding by buying or leasing used aircraft rather than signing new purchase agreements, Wirjoatmodjo said. “Our preference for the short term is to get more A320s to strengthen the Citilink fleet,” he said, referring to Airbus SE jets.

Garuda’s low-cost unit Citilink has a fleet of 50 A320 aircraft that typically fly to destinations around the Indonesian archipelago, according to its website. However, with Covid-19 decimating air travel, Garuda’s main fleet shrank to just 29 aircraft in operation.

Garuda last posted an operating profit in 2019, prior to the pandemic.

Rebuilding an Airline

Garuda’s creditors earlier this month approved a plan to restructure liabilities worth 142 trillion rupiah (RM42.24 billion). The biggest debt recast in Indonesia’s history gave the carrier more financial headroom as it seeks to capitalise on a rebound in air travel. Wirjoatmodjo said most of the funds from a 7.5 trillion rupiah government injection will be used to reactive grounded jets.

The company has said it will issue roughly US$800 million (RM3.52 billion) of new debt and over US$330 million in new equity. Wirjoatmodjo said the government is in talks with investors including some “hub carriers” about a second rights issue to raise up to US$600 million. He declined to identify potential investors. He also said he hoped Garuda will begin trading again next year. Its shares were suspended in June 2021 when the company defaulted on a debt payment.

Lower Leases

Renegotiations have enabled Garuda to cut lease rates by 30%-40% for its narrowbody fleet and 50%-70% for widebodies, Wirjoatmodjo said. Between 2014 and 2019, Garuda’s ratio of aircraft rental costs to revenue was the highest among global airlines, according to data compiled by Bloomberg. Wirjoatmodjo said new lease rates will lower the ratio to 12%-14% from 24% in 2019.

Boeing Max

Garuda is willing to renegotiate a deal for 49 Boeing Co 737 Max jets that haven’t yet been delivered, by either reducing the order size or pushing back deliveries, Wirjoatmodjo said. The decision to stop receiving the Max started in early 2019 after two crashes – the first of which occurred in Indonesia – that led to a global grounding of the model.

“Boeing wanted us to keep our commitment on the Max purchase,” said Wirjoatmodjo, who met with officials from the US manufacturer earlier this year. “We want them to renegotiate, just like Airbus, by pushing back the deliveries or reducing the orders for 737 Max. They don’t want it. So like it or not, we might have to settle it in American court, we have to do Chapter 15.”

Data from flight-data provider OAG show that Garuda and Citilink’s domestic market share dropped below 17% as of the beginning of 2022 from nearly 31% in January 2019. Lion Air and its units had 64% market share, up from 48%. – Bloomberg