Radical surgery is planned at Garuda Indonesia as the beleaguered airline flags entering into a formal restructuring process and slashing its fleet by more than half. The news is the latest chapter in a long-running saga that has seen Indonesia's flag carrier spend years lurching from crisis to crisis.

A report by FlightGlobal cites a presentation by Garuda Indonesia management earlier this month. That presentation contained details about a plan to enter into a UK scheme of arrangement as part of a formal restructuring process that includes a big cut in the number of planes Garuda Indonesia flies.

FlightGlobal refers to a slide shown at a September 7 meeting between Garuda Indonesia and its lessors. The slide said;

"To implement the restructuring of the group’s aircraft lease arrangements and potentially its other debts, the company expects to launch a UK scheme of arrangement.”

The FlightGlobal report also contains detailed information on what planes would go and what planes would stay.

Airline database ch-aviation reports Garuda Indonesia has 122 aircraft in its fleet. Of this number, 86 are inactive. FlightGlobal says the airline wants to reduce the existing fleet size by approximately 77 aircraft and "renegotiate or cancel" existing orders for a further 92 planes.

If correct, this would entail a dramatic downsizing of Garuda Indonesia with significant long-term network and capacity ramifications.

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Garuda Indonesia is planning to cut its fleet by more than half. Photo: Airbus

A decade of poor administration set Garuda Indonesia up to fail

It is easy to attribute Garuda's present problems to the ongoing travel downturn. While the downturn had the effect of pushing the airline to the precipice, Garuda's financial problems predate the downturn by years. The airline has also been plagued by scandals and safety issues.

In 2009, after the EU lifted an all-encompassing flight ban on Indonesian airlines, Garuda launched a transformation program that included more than doubling the size of its fleet. The period coincided with Garuda Indonesia's partial privatization on the Indonesian Stock Exchange.

By the middle of last decade, despite the airline already embarking on a cost-cutting drive under a new CEO, the lure of long-haul flying saw it commit to US$20 billion worth of new planes at the 2015 Paris Air Show.

For much of the first half of the last decade, Garuda Indonesia was a chronic big-spender at the annual French aviation shindig. The aircraft orders, combined with chronic structural inefficiencies, management and governance issues, scandals, and a sustained poor financial performance, became a perfect aviation storm by the time early 2020 rolled around.

Garuda Indonesia experienced a net loss of US$2.4 billion across calendar year 2020. Even more damningly, the airline's auditors, PwC, would not confirm Garuda's financial accounts were up to scratch.

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Garuda Indonesia is now trying to unwind a series of aircraft acquisitions. Photo: Airbus

Garuda Indonesia plans to run concurrent restructuring schemes

Since the travel crunch in March 2020, there has been consistent speculation about Garuda's future. In May this year, Simple Flying reported Garuda's total debt was US$4.9 billion and growing by $70 million a month

We have to go through a comprehensive restructuring, a total one,” CEO Irfan Setiaputra told his employees that month. “Failure to carry out the restructuring program could result in the company being terminated suddenly.”

FlightGlobal notes two months later, Indonesia cargo carrier My Indo Airlines applied for Garuda to go into an Indonesian restructuring scheme due to unpaid bills. The Indonesian restructuing process is known as Penundaan Kewajiban Pembayaran Utang (PKPU). A decision on that application is due any day.

Speculation then went into overdrive when the airline retained a US legal team with expertise in the Chapter 11 process. However, it now appears Garuda's preference is to turn to the UK courts.

If the local restructuring application is accepted, creditors will have 45 days to lodge claims. But by then, FlightGlobal says Garuda plans to have begun proceedings in the UK and will run both court-managed restructuring processes simultaneously.

“The terms of the scheme of arrangement and PKPU restructuring plan in respect of the aircraft lease arrangements are expected to be identical,” Garuda told lessors at the September 7 meeting.

“The plan for the international lessors is whatever is agreed in the UK scheme would be how they are treated under PKPU. So the PKPU would just mirror whatever the scheme result is.”

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Garuda Indonesia President and CEO .Photo: Getty Images

Radical fleet surgery proposed at Garuda Indonesia

Because so many of Garuda's planes are leased, the airline needs to shelter under formal restructuring provisions in jurisdictions outside Indonesia to stop creditors and lessors from simply seizing planes. That explains why an Indonesian airline is turning to a UK court.

On the cards is a radical shakeout of Garuda's fleet. According to data obtained from the September 7 meeting, orders for 92 aircraft will be renegotiated or canceled, and 77 planes from the existing fleet will go.

An on again off again order for 49 Boeing 737 MAXs is off again, with Garuda planning to renegotiate or cancel. To date, Garuda has only received one MAX. That will go.

Also up for cancelation or renegotiation are orders for 13 Airbus A330-900/800s, 25 Airbus A320s?A320neos, and five ATR72-600s.

From the existing fleet, all ten Boeing 777-300ERs are destined to go. Ten Airbus A330-300s will also go, but Garuda will retain eight. All seven leased A330-200s are also expected to go back to their lessors.

If all goes to plan, that will leave Garuda Indonesia with just 13 widebody aircraft - five Airbus A330-900/800s and eight A330-300s. It is a big downwards slide from flying Boeing 747s not so long ago.

Seven older leased Boeing 737s will go while 53 Boeing 737-800s will constitute the entirety of Garuda's future narrowbody fleet.

Fifty-six narrowbody Airbus aircraft will be retained to fly under Citilink colors, as will an orphan Boeing 737 and 11 ATR72-600s. Arguably, Garuda's low-cost subsidiary Citilink is a better fit for flying around the Indonesian archipelago than a full-service legacy airline.

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Garuda Indonesia has financial problems. Photo: Getty Images

Creditors have yet to okay any proposed plan

At least that's the plan. Creditors, including Garuda's many lessors, have to approve any restructuring plan that involves the return of planes. But it looks like Garuda is busy laying the groundwork.

Garuda has a swag of high profile advisors onboard as well as broad Indonesian Government support. The airline wants its lessors and other creditors working on a unity ticket and sharing common restructuring goals.

This is a rare burst of focused determination from Garuda Indonesia. If they can sustain it, the airline's management might just be able to set Garuda Indonesia up for success down the track.