On the Brink of Bankruptcy: Part 1

All businesses want to succeed but the odds of surviving are much slimmer than failing. It is said that 90% of all businesses fail in their first year. These statistics apply to new businesses. But what about large multinational ones? We believe that they will definitely survive through the unpredictable changes in the market. However that is not the case for Garuda Indonesia, one of the largest airlines from Indonesia and a part of SkyTeam, which is one of the world's three major airline alliances. Even in Indonesian culture, Garuda Indonesia has always been the people’s first choice due to its brilliant reputation. This is supported by their continuous increase in revenue every year, with 4.57 billion USD in 2019. Especially during the pandemic, flights were feared by locals as they should travel in a closed space for long hours. However, they continued to live up to the public’s standard by receiving the highest 5-star COVID-19 airline safety rating from Skytrax. The company’s announcement about their bankruptcy truly shocked the people. What happened?

According to David Silverman from the Harvard Business Review, while the failure was, theoretically, avoidable – since the cause always came from an unexpected direction – it wasn’t really preventable. Was Garuda Indonesia's bankruptcy completely unforeseen or the result of long-standing issues? This research paper aims to uncover the true reason behind the crisis of Indonesia's top airline. While it has regained its investors and recovered from its slump, the crisis it faced between 2020 and 2022 was highly unexpected by the public and an important case to be studied by all interested parties. Therefore, I have conducted this research to reach an accurate conclusion on the real cause that led to this downfall.

I came across this issue as I was watching the daily news. It caught my attention instantly. As an Indonesian citizen, Garuda Indonesia was also my family’s number one choice when choosing a flight for our vacation. This became my motivation to write this report. Throughout this paper I have used desk research and literature review as my research method because most information is available online and news articles as well as research papers are a key source to my research. Primary research may be done to record the public’s opinion or reaction towards the news but due to the limited exposure available to me, surveys published online would be used instead since it provides more accurate data from a wider respondent demographic. Specific data on the company, which is the main focus of this report, are taken from reliable sources on the internet or articles.

I believe my research question would help me understand decision-making analysis and techniques, which are crucial to all businesses. As I did my initial reading, I realized that the bankruptcy of Garuda Indonesia involved intertwining people and events. I am inclined to believe that the main reason for this bankruptcy was poor profit-driven wills and personal greed - not the pandemic. However, it is important to carefully consider the effects of the 2020 economic slump on the airline industry.

This report starts with a brief overview of multiple international and Indonesian airlines’ performances and their strategies during the pandemic. Then, a situation analysis of Garuda Indonesia’s bankruptcy filing would be presented - including reported incidents, interviews and credible data relevant to its downfall. Furthermore, Garuda Indonesia’s strategic approaches would be listed, analyzed and compared with cases of other airlines. This comparison between Garuda Indonesia and other successfully surviving airlines would eventually show the determining factor or the main reason for its capital shortage. Lastly, suggestions on better approaches would be made considering business bankruptcy prediction techniques and Garuda’s reported solutions displayed in court.

Strategies of airlines during the pandemic
According to the ICAO, the total number of passengers globally dropped by 60% in 2020 with only 1.8 billion passengers on flights than 4.5 billion in 2019. This global event affected all airlines but only a few announced bankruptcy. So, how did other airlines survive the pandemic?

Relatively smaller Indonesian airlines like Citilink experienced a net loss of $49 million in the first half of 2020 and continue to experience further losses later that year. However, they were able to avoid bankruptcy. Similar cases can be found in airlines like Lion Air. It can be seen that they all abide by a set of similar strategies. This includes focusing on the domestic market and maintaining low debt load. Firstly, with few international routes prior to the pandemic, both airlines switched to prioritizing domestic routes and operated with smaller aircrafts like Airbus A320s to reduce the capital allocated on fuel which experienced fluctuating prices with a decrease of 7.2% in the year 2020. With the lower fuel price and lower consumption of fuel overall, these airlines were able to mitigate the reduced demand for air travel. This domestic market has less competition compared to the international market which allows airlines like Lion Air and Citilink to have larger pricing power, maintain low salaries for staff and a chance to establish stronger brand recognition and brand loyalty.

Secondly, maintaining low debt load played a significant role in these airlines having a positive net cash flow. By purchasing similar spare parts in bulk and benefiting from economies of scale, airlines could pay lower costs per unit. In regards to cheaper staff training cost, airlines only need to train staff with a fewer number of skills leading to less time needed on training. In addition to that, these airlines also have short turnaround times and keep their planes on the ground for the shortest time possible for maximum utilization. They would closely monitor flight schedules and minimize the time between flights to reduce costs and increase productivity. Furthermore, a strategy that can be noticed by passengers, airlines like Lion Air and Citilink have no-frills service and only provide a seat and a small amount of carry-on luggage - meals and seat selections are available on a fee.

With all of these methods and strategies done to focus on low cost operations, these airlines were able to provide one of the cheapest airplane tickets in Indonesia, leading to another competitive advantage in a not so competitive market. As locals shifted to these cheaper airlines during the pandemic due to limited sources of income, more exclusive airlines lost their demand.

Progressing to multinational airlines, one of the biggest airlines in the Asia-Pacific region is Singapore Airlines. Awarded best airline in the world in 2018, Singapore airlines was known for its steady excellent performance and considered financially healthy as well as safe from bankruptcy (Abdullah et. al., 2020). However, the airline reported a net loss of SGD$4.27 billion (approximately $3.1 billion USD) for its financial year ending on 31 March 2021. Despite its large loss, Singapore Airlines was able to bounce back with innovative strategies during the pandemic. These include: focusing on cargo operations, restructuring the business, embracing new technologies and introduction of Vaccinated Travel Lane (VTL).

Firstly, focusing on cargo operations is a common strategy adapted by other airlines like Emirates and Cathay Pacific. During the pandemic, strict borders were set by governments all over the world which led to the high demand for airfreight. Airlines took full advantage of this and covered their losses in normal passenger travel with cargo operations.

Secondly, Singapore Airlines undertook a major restructuring of its company including transferring some routes to its low-cost subsidiary Scoot. This would benefit them by being able to optimize a fleet of Scoot’s narrow-body aircrafts that are better fitted for routes with fewer numbers of passengers than the wide-body aircrafts owned by Singapore Airlines. This would also reduce its operating costs. Furthermore, they would be able to target a different market segment. While Singapore Airlines is a full service carrier that caters to a higher-end market, Scoot could potentially target a different market segment and capture more market share with its cheaper price.

Thirdly, embracing new technologies helped Singapore Airlines cut the number of staff significantly and operate in a more cost efficient manner. With the advantage of high levels of profits in years prior to the pandemic, they accelerated the adoption of digital technologies such as contactless check-in, automated baggage drop-off, and mobile boarding passes. This had helped with passenger’s fear of coming back to plane travel after the pandemic.

This is related to the fourth strategy which was VTL. Singapore Airlines was the first airline in the world to introduce VTL in October 2021, enabling fully vaccinated passengers to travel to Singapore without quarantine. This boosted passenger numbers for Singapore Airlines which helped them regain their revenue levels.

Garuda Indonesia’s bankruptcy - the chain of events
In November, 2021, Garuda Indonesia submitted a restructuring proposal to its creditors and it was ​​“part of Garuda’s commitment to upholding the principles of transparency and fairness, to create constructive communication with all creditors,” according to Irfan Setiaputra, chief executive of Garuda. This was followed with a court-supervised restructuring process after a petition for suspension of debt payment obligations (PKPU) was accepted. PKPU was accepted considering Garuda’s concerning financial difficulties with official announcements from the airline regarding: $1.3 billion net loss as of 30 September 2021, laying off 700 employees, leaving many on unpaid leaves and grounded two-thirds of its fleet of 142 jets. Brendan Sobie (2022), Indonesian aviation market specialist of Sobie Aviation, says after the restructuring process Garuda Indonesia will end up with 70 aircraft (40 aircraft flying and 30 to be reactivated). As the restructuring proceeds, according to the Jakarta Post (2022), the airline has proposed and been granted two PKPU extensions of 60 days each, one in January and the second in March. It then continued to ask for a third extension which was another 30 days.

On June 27, 2022, Garuda Indonesia finally reached a settlement agreement with its creditor, which was approved by the Commercial Court at the Central Jakarta District Court. This agreement took a significant amount of time because the airline needed to have complex negotiations with 30 odd aircraft lessors, most of whom had substantial skin in the game (meaning they have a significant amount of personal investment, whether it be time, money or reputation in the outcome of the activity) and were likely a little weary of another failed airline trying to dodge its leasing liabilities (Curran, 2022). Along this process, Garuda received State Capital Participation (PMN) funds worth IDR 7.5 trillion ($505 million USD) as a form of support. The whole restructuring process was only fully completed on December 28 and 29, 2022 (VOI, 2022).

Despite the efforts, Garuda Indonesia continues to experience low market share. As of June 2022, Garuda Group, which includes Garuda Indonesia and Citilink, took up to 5% of Indonesia’s international airline market and 18% of Indonesia’s domestic airline market. However, if Citilink was taken out, Garuda Indonesia, Indonesia’s once number one airline, only took up 5% of the domestic market. Curran (2022) commented that Citilink, Garuda group’s low-cost subsidiary, is the future for the company. Moreover, Sobie (2022) expected that Citilink's much larger slice of the domestic market would continue in the coming years. This is based on the fact that Citilink’s fleet is not being reduced, unlike its parent airline, and nearly all of its planes are back in the air.

In September 2022, Garuda Indonesia filed for Chapter 15 bankruptcy protection in New York. This is a common procedure done by non-American companies to ensure that they won’t be sued or have assets seized. This submission was accepted because the airline had completed a court-supervised restructuring in Indonesia and tried to profit from the return of International travel. Filing for Chapter 15 bankruptcy does not relieve the airline from any sort of responsibility towards its creditors. An equitable distribution of the debtor’s assets to all of its creditors will be made regardless of their location. However, the chief executive stressed at a session of the House of Representatives that doing so does not mean the company has declared bankruptcy. Setiaputra assured the House, "So we entered Chapter 15 for recognition. We have completed the PKPU as you know, and my friends in the country's legal sector know that we have done it."