JAKARTA -- Garuda Indonesia's future hangs in the balance with creditors set to vote on Friday over whether to approve its make-or-break restructuring proposal aimed at staving off bankruptcy for the country's oldest airline.
Analysts say that while approval is likely given the alternative of major disruption to the country's airline market that would arise from the flag carrier going bust, Garuda's CEO said sufficient support remains elusive.
The company announced the plan last week -- and revised it on Wednesday -- under a drawn-out court process that began late last year as the airline seeks to emerge from billions of dollars in debt. The procedure was originally to take 45 days but has been repeatedly extended. The latest session started on Friday morning with further discussions between creditors and the airline expected before voting takes place. The results are expected to be announced after the votes are counted.
To be accepted, the airline must receive approval of more than two-thirds of creditors for the deal, which includes issuing $825 million in new bonds as well as raising $330 million by offering equity to non-shareholding creditors.
In announcing the plan at a court session on June 9, Garuda mentioned that some creditors would be required to take a substantial haircut on what they are owed, though state-owned and private banks, including state oil company Pertamina and other entities, would receive full reimbursement under an adjusted repayment schedule.
"We are increasingly confident, although I can't say for sure because there are still ongoing communications," CEO Irfan Setiaputra told reporters on Thursday. He expressed optimism that "more than 50% of lessors and creditors" are in support, but acknowledged holdouts.
"We do not want to deny that there is one group that is quite challenging in this negotiation, and because of that it requires time with a large debt value with rather rigid terms," he said.
The airline's troubles have been long in the making but accelerated as the COVID pandemic hammered the industry by bringing air travel and tourism to a virtual standstill. Trading in Garuda shares has been suspended since June last year after it defaulted on coupon payments for a $500 million Islamic bond.
Garuda has been negotiating with creditors under a debt suspension process known locally as PKPU that was granted in December after an information technology company took it to court over unpaid debts.
Setiaputra said the same month that the company had $9.8 billion in such liabilities owed to some 800 creditors and lenders.
Airline industry expert Ruth Hanna Simatupang, a former investigator on the National Transportation Safety Committee, said approval is essential.
"The deal must be achieved," Simatupang told Nikkei Asia. "And I'm optimistic it can because this is important for the aviation industry recovery in the country." She also said it would be a much-needed shot in the arm for Garuda by giving it capital to increase its fleet and lay the groundwork for a profitable future.
Gatot Rahardjo, an independent aviation analyst, was also optimistic.
"Very rarely would the PKPU process fail," Rahardjo told Nikkei. "It's more common that bankruptcy occurs when the payment scheme failed to be met as previously agreed."
But Rahardjo said the stakes are high because if Garuda fails to get the necessary votes it will go into bankruptcy, with its operations stopped and assets prepared for liquidation. "This will be a big loss for the government as it will lose its 30% share of the aviation market, which will be monopolized by private operator Lion [Air]."
Lion Air, the country's largest budget carrier that launched services in 2000, controlled 30% of the domestic market as of 2019 -- the last year before the pandemic -- and would stand to benefit the most from any hole created by Garuda going out of business. Other smaller airlines such as Sriwijaya Air could also see their market share increase.
Aviation analyst Shukor Yusof of Endau Analytics, however, said that while he expects the deal to pass as "creditors have little appetite to drag on," he also sees officials ensuring that Garuda's planes keep crisscrossing the skies even if it doesn't.
"Failure means going back to the drawing board," said Shukor. "Indonesia may be bankrupt of ideas on how to revive Garuda, but it won't allow the airline to go bust. So Garuda will still fly as long as the government supports it."
Garuda began operations in 1949. In September 2019, before the pandemic, it flew to 23 countries and connected 65 cities domestically. But under the impact of the pandemic, it currently flies to nine countries and only nine domestic destinations.
The challenge for Garuda if it wins approval "will be to execute [the proposal] and ensure the restructuring of human capital and management," said Simatupang.
"Everything happening [with Garuda] is due to prolonged mismanagement," she said, citing excessive pay for a management class that has taken "decisions that caused a lot of trouble."