On the Brink of Bankruptcy: Part 2

Summerfield (2022) states that Garuda’s financial difficulties have been significant, in large part due to the impact of the Coronavirus (COVID-19) pandemic. However, it was known that Garuda Indonesia has already been in financial distress since the beginning of 2018, and the impact of COVID-19 worsens their financial condition (Abdullah et. al., 2020). They continue to argue that the airline has been predicted to go bankrupt for many years but it was only declared now. This is because Garuda Indonesia is a state owned company, the Indonesian government will rather continue to maintain its national pride, with the help of considerable funds to prevent the company from going bankrupt. To strengthen their argument, Garuda Indonesia’s modified Altman’s Z-Score was calculated according to reported numbers from their annual report throughout the years and it was compared to other airlines that survived the pandemic. These numbers are presented in the table below.

The Altman Z-Score model is a metric used to assess a company’s financial health. In the beginning, it was developed for manufacturing companies, but it was later modified for non-manufacturing companies. The formula for the modified Altman Z-Score is as follows:
Z score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = Working Capital Assets/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest and Taxes/Total Assets
D = Market Value Of Equity/Book Value Of Total Debt
E = Sales/Total Assets

The scale for the modified Altman Z-Score are broken down into these 5 ranges:
1.81 and below: High risk of bankruptcy
1.81 to 2.99: Moderate risk of bankruptcy
3.00 to 3.25: Healthy
3.25 to 4.00: Very healthy
4.00 and above: Excellent

When we compare the scale with the numbers in the table, Garuda Indonesia is already at a concerning level even before the pandemic started with an Altman Z-Score of -1.14 in the first quarter of 2018. A negative Altman Z-Score indicates an extremely concerning financial health with a very high risk of bankruptcy in the next two years. This further justifies that the COVID-19 pandemic wasn’t the main reason as to why Garuda Indonesia was unable to meet financial obligations of up to $9.8 billion to its banks, vendors and aircraft lessors in the first nine months of 2021.

As pointed out earlier, maintaining the airline’s successful image and pride was the main motive to this long overdue bankruptcy reveal (Abdullah et. al., 2020). Based on the data presented in Garuda Indonesia annual report in 2017, Garuda Indonesia hides a substantial net loss in 2017 (Schofield, 2018). According to Majid et. al., (2016), companies’ financial conditions that are not transparent are presumed to contribute to the bankruptcy of a number of airlines. Despite the growth of the aviation industry and Indonesia’s economic condition during those years, Garuda Indonesia continues to experience losses during the past years which makes the economic condition not the problem for their financial struggles. This raised concerns in the government for the overall performance of Indonesia’s biggest airline. With multiple support of funds and loans provided by the government, the airline is expected to pay its debts and eventually be in a healthy financial position but this is not the case. One of the main reasons is the corruption happening in the company. With an investigation in June 2022, it is said that former Garuda Chief Executive Officer Emirsyah Satar was involved in corruption activities during his tenure. The estimated amount of losses is at IDR 8.8 trillion ($586 million USD).

Furthermore, in the beginning of 2020 before Garuda Indonesia admitted to any bankruptcy risks, the airline faced a legal dispute with Irish lessor Aercap and several aviation firms in a UK court over missed rental payments. According to Airfinance Journal (2020), Aercap is seeking outstanding rent for 10 aircraft, including nine Boeing 737-800s and a single Airbus A320 leased to Garuda and its group affiliates. However, this was resolved with a $580 million bridge loan from the government - a solution the airline resorted to multiple times. Missed payments of leased aircrafts and maintenance services have happened before to Garuda Indonesia over the years. This includes the Allianz Aerospace lawsuit (2021) and the Greylag Goose Leasing lawsuit (2022). This further emphasizes their lack of strong financial stability.

Overwhelming levels of overdue rent payments over the years are eventually inevitable for Garuda because the airline operates mainly on rented aircrafts, which is at 60% of its fleet. The problem with renting or leasing aircrafts is that the prices fluctuate which makes airlines with a lot of rented aircraft, like Garuda Indonesia, more vulnerable to changes in the market and economic conditions. Strategic decisions cannot be made only based on its own needs and goals but terms of the agreements should be considered. This is especially true in terms of route restrictions and other operational aspects which can limit an airline’s ability to expand or adapt to changing market conditions.

In terms of aircrafts, Garuda Indonesia is also known for its lack of optimization on its available aircrafts. The airline is reported to have multiple broken aircrafts sitting in hangars and getting repaired with no profit margins. This would lead to high opportunity cost and high levels of overhead which would further contribute to its high levels of liability. Another example of this occurrence would be the Greylag Goose Leasing lawsuit mentioned earlier which was about the late leasing payments of two aircrafts A330-300s PK-GPQ (msn 1410) and PK-GPR (msn 1446). It was later discovered that these planes were just stored at the Soekarno-Hatta Airport.

Lastly in terms of employees, Garuda Indonesia has 21,773 employees as of 2019 yet only $6 million USD in net profit. This indicates that Garuda cannot manage their employees to work efficiently and effectively which has led to high cost per unit output leading to the low levels of profitability. When compared with Singapore Airlines, with a net profit of $558 million USD, they only have half the number of employees of Garuda. This further emphasizes the poor management decisions of the airline.

Strategies to face and prevent bankruptcy: comparison and suggestions

Like other airlines, Garuda Indonesia switched to cargo operations during the pandemic. In April 2020, Garuda Indonesia launched a dedicated cargo subsidiary called “Garuda Indonesia Cargo” to further expand their cargo operations and improve its efficiency in handling cargo shipments. In the third quarter of 2020, the airline’s cargo revenue increased by 67% compared to the same period in the previous year. Their $970,000 USD net profit is largely due to the success of its cargo operations. Though it is a great effort made by Garuda Indonesia, further optimisation of available capital can be done. In comparison to Singapore Airlines Cargo, who reached SGD$2.1 billion in revenue, Garuda Indonesia has a lot of room to grow.

One expenditure that could have led to significant losses is fuel. With the fluctuating prices of fuel over the years, a strategy that has been done by numerous airlines is fuel hedging which is a strategy that involves purchasing jet fuel futures contracts and other financial derivatives to manage exposure to fuel price fluctuations. This strategy has led to favorable results including Singapore Airlines. Through fuel hedging contracts, in 2015, SIA reported a net gain of SGD$ 365 million ($267 million USD) from it. For Garuda Indonesia, its fuel hedging contracts had led to mixed results. Though there was a reported net gain of $20 million USD in 2014 due to it, it had also experienced a net loss of $190 million USD too. Better decision-making in purchasing the most beneficial contracts would help improve their profitability in the future.

Furthermore, in terms of optimisation Garuda Indonesia had grounded two-thirds of its fleet and ended up with half of its original number. This is a decision necessary for Garuda Indonesia to stay competitive. With airlines like Citilink who have almost all of its planes in the air, Garuda Indonesia could implement this cost-efficient strategy to keep costs low. This management strategy should also include reducing turnaround times to further optimize its available aircrafts. Moreover, making most of its workers redundant would help the airline increase its low productivity levels. Laying off 700 employees would not be enough to give a boost to profitability because, taking Singapore Airlines and Citilink for example, their employee levels are all below 15,000. However, Garuda offering early retirement for some pilots is a good first step to this process.

Most importantly, a pattern can be noticed that Garuda Indonesia depended a lot on government funds to solve its financial problems. This was proven in the continuous increase in the proportion of the company owned by the government – from 60% to 64% in 2022 due to the state funds received. Though the support offered is great, it created a tendency in the directors to not have the profit-driven mindset most private owned companies do. The idea of having a "safety net" has led to various negative behaviors such as corruption and the accumulation of inefficient employees. Multiple successful airlines are partially owned by the government yet a mindset or regulation is necessary to ensure that the company is not really dependent on the government’s assistance. Therefore, Garuda Indonesia management should conduct a revenue management strategy and scenario planning to compete in the airline industry and overcome bankruptcy without getting the Indonesian government's bailout fund (Abdullah et. al., 2020).

Conclusion

The reason for Garuda Indonesia’s bankruptcy cannot be solely blamed on one single reason. It is true that the pandemic had significant effects on the number of passengers and airlines’ revenue levels all around the world. At the same time, many airlines, especially large ones, were able to continue striving without making bankruptcy statements. So, focusing on Garuda Indonesia, if that is the case, they should have been able to prevent bankruptcy like other airlines despite a drop in revenue.

However, its performance prior to the pandemic is already at the verge of bankruptcy. With a negative Altman Z-Score, missing rental payments, low optimization levels and corruption cases, it is undeniable that Garuda Indonesia has been in high risk of bankruptcy for a long time. This was supported by multiple business analysts who called it a delayed declaration of bankruptcy. This comparison has allowed me to answer my research question on whether the pandemic was the main reason for Garuda Indonesia’s bankruptcy.

The strongest argument supporting the pandemic as the main reason is that due to the drop in income levels, revenue levels drop which affected profitability severely. Yet, this argument is completely debunked when airlines, which had healthy financial conditions prior to the pandemic, were able to survive. Missed opportunities not taken by Garuda Indonesia include focusing on domestic routes, better fuel hedging contracts, shifting more to cargo operations, reducing employee numbers and airplane optimisation like short turnaround times.

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