Another week reveals another chapter of the Garuda Indonesia saga. Indonesia's Deputy State-Owned Enterprises Minister told parliament last week the airline was technically bankrupt as debt keeps rising by US$100 - $150 million per month, and questions get asked about over-the-top lease payments.

Garuda creditors asked to wipe debt or take zero-coupon bonds

Last week, the Minister, Kartika Wirkoatmodjo, told a House of Representatives public hearing about the airline's latest scheme to cut its $9.75 billion debt. That scheme includes asking creditors to wipe debt or swap debt for equity.

The Indonesian Government has a 60.54% stake in the beleaguered flag carrier. Of its total debt, Garuda Indonesia owes US$6.3 billion to 30 aircraft lessors, all of whom must be negotiated with individually.

“If there is no debt reduction on its balance sheet, Garuda will not be able to survive.” Mr Wirkoatmodjo told the hearing. The current plan is to reduce the fleet from 202 aircraft to 134. In addition to offering aircraft lessors zero-coupon bonds or a debt for equity swap, Mr Wirkoatmodjo wants to transfer leases from a fixed monthly rate to power by the hour leasing.

In addition to lessors, Garuda Indonesia owes monies to airports, oil companies, air navigation providers, ground handling companies, and banks. Mr Wirkoatmodjo also wants to offer them zero-coupon bonds.

Garuda Indonesia faces some radical surgery. Kartika Wirkoatmodjo said almost 100 routes face the chop. The airline would become a domestic airline primarily and, even then, would focus on profitable routes only.

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Garuda's aircraft lease costs four times the industry norm

Kartika Wirkoatmodjo like the Citilink model. CitiLink is Garuda's low-cost subsidiary. But the Indonesian Government has cooled on preparing state-owned Pelita Air Services to step into the breach should Garuda collapse. The Government has decided that is not a viable short-term proposal. Instead, the pendulum has swung back to saving Garuda.

Meanwhile, people are asking why Garuda is paying such high leasing aircraft costs. Aircraft leases account for 25% of Garuda's overall revenues. The global average is 6.1%. Garuda leases 119 planes, including 57 Booeing 737-800s, 11 Airbus A330-300s, and 10 Boeing 777-300s.

Garuda says its lease costs are high because they signed them when the going market rate was higher than today. In addition, lease terms, year of manufacture, and aircraft configuration also contributed to the cost.

Left unsaid is the premium charged by lessors because of Garuda's well-founded risk profile. But none of these factors fully explains why Garuda's leasing costs are so high.

A depressed leasing environment hands Garuda a bargaining chip

While the Indonesian Government now wants to save Garuda Indonesia, it is not prepared to pick up the cost of doing so. Kartika Wirkoatmodjo says the airline is too much of a mess for it to warrant doing so. It's not just a financial mess; there is also the logistical, operational, and network mess.

Instead, Wirkoatmodjo wants creditors to bear the burden of saving Garuda. If Garuda can persuade lessors to accept the deal - and there is no guarantee this will occur, debt will reduce by around two-thirds.

Garuda and the Indonesian Government know if the airline collapses, creditors will get nothing. In a depressed leasing environment, Wirkoatmodjo has this bargaining chip up his sleeve. Zero-coupon bonds aren't much of a deal for lessors, but right now, they are better than no deal.