Merpati Flights Grounded as Airline Struggles to Take Off Under Weight of Debt

Passengers board a Merpati Nusantara Airlines flight at Nabire, Papua, in this file photo. (SP Photo/Luther Ulag)

Passengers board a Merpati Nusantara Airlines flight at Nabire, Papua, in this file photo. (SP Photo/Luther Ulag)

Jakarta. Cash-strapped carrier Merpati Nusantara Airlines has suspended all flights in early February as falling revenue continued to push the struggling state-owned airline closer to bankruptcy.

The airline, which offers flights to underserved regions in Indonesia, announced the suspension over the weekend after it grounded all flights, leaving passengers stranded at remote airports across Indonesia and prompting a harsh warning from transportation officials. Service may resume as early as Thursday but officials were mum as to whether any Merpati flights would take off by the week’s end.

“It can be resumed on Feb. 6, but it’s all according to when we’re ready to resume operations,” corporate secretary Riswanto said. “We will analyze our ability while re-managing which routes to serve in the future.”

The airline has one month to recommence operations before the Ministry of Transportation revokes its flight permits, ministry spokesman Bambang Ervan said. The airline, unable to purchase fuel on credit from state-owned energy firm Pertamina, began to scale back its operations in late January, parking all but eight planes in an effort to stave-off a larger shutdown. But the cost of refunding the tickets for cancelled flights, combined with the company’s heavy debt load — Rp 6 trillion [$492 million] by recent estimates — proved too much for the sputtering carrier. 

The airline will start running again as soon as it is able to get its debt under control, explained operational director Daryanto

“Starting with the decreasing daily cash flow, plus the decreasing trust of the people and agents, is how we arrived at a point where we can’t continue operational activities,” Daryanto said. “Under this situation, with all due respect, our flights temporarily stopped until Feb. 5. All MZ [Merpati] route permits have been suspended until the end of February 2014.”

The shutdown is the latest blow to the pioneer airline. The company has struggled to overcome years of mismanagement and corruption, losing as much as Rp 1.5 billion a week to close in the red for five straight years. The Ministry of State-Owned Enterprises has repeatedly tried to save Merpati, streamlining operations, restructuring debt and moving its headquarters all in an effort to lower costs.

Last week State-Owned Enterprises Minister Dahlan Iskan announced the sale of two Merpati subsidiaries — Merpati Maintenance Facilities (MMF) and Merpati Training Center — in a last-ditch effort to keep the airline aloft.

At the time the airline was unable to purchase fuel on credit, having twice exceeded its maximum debt limit with Pertamina. The airlines owed the company some Rp 165 billion by Jan. 29, prompting Pertamina officials to announce they would only accept cash from Merpati for future fuel shipments. The carrier began paying cash for fuel on Jan. 15, according to Pertamina. Less than two weeks later it began to ground flights.

The situation was worse for Merpati employees, who claim they haven’t been paid in more than three months, according to reports in the Indonesian news portal Detik.com. Merpati union chief Sudiyarto pleaded with the government for help, arguing that the company’s board of directors was unable to run the ailing airline.

“Please we’re hungry, for three months we haven’t gotten our salary,” Sudiyarto told Detik.com. “Our directors can’t solve Merpati’s problems. Anyone who has interest in Merpati, please help us.”

The Ministry of State-Owned Enterprises has told all Merpati employees to stay home until the airline can cut monthly paychecks again. According to the union chief, Merpati employees haven’t seen a paycheck since October of last year. There is no indication that the airline will issue a paycheck anytime soon, Sudiyarto said.

Dahlan said he understood the employees’ frustration.

“I’ve met the pilots’ union,” he told Detik.com. “I understand that they were upset, and it’s very normal.”

Customers have also turned on the airline, complaining of last-minute cancellations and refund delays. Jilted passengers protested outside of a regional office in Makassar, South Sulawesi, after the company cancelled all but three flights from the provincial capital. Local representatives allegedly refused to issue refunds to passengers, according to reports in the Indonesian news portal TribunNews.com.

“She said Merpati had no money and refused to return our money,” one passenger told Tribunnews.com.

The company said it would transfer all passengers to competing airlines or refund the ticket price in a month’s time.

“Besides transferring [passengers] to other airlines, the passengers who want a refund can get it 30 days after the flight cancellation,” marketing director Irvan Harijanto said.

But much of the small airline’s routes service remote airports with a limited number competing flights. Although it has 52 routes in Indonesia, servicing airports from Sinabang, Aceh, to Merauke, Papua, much of the carrier’s competition is with niche airlines like Susi Air — another pioneer carrier with a marred safety record. Merpati has struggled with a less-than-sterling history — booking at least five serious accidents since 2009 — and a reportedly dodgy deal for 15 MA60s from Chinese plane maker Xian.

Merpati purchased the turboprop planes for $14.1 million in 2008 — some $3 million more than similar purchases in Philippines, Ghana and Nepal. Company officials at the time reportedly had questions about the aircraft’s safety after finding cracks in one of the craft’s vertical stabilizers and threatened to cancel the order. When the Chinese government responded with a threat of its own — halting a loan for a needed electricity development project — then-Trade Minister Mari Elka Pangestu flew to China to renegotiate the deal.

The resulting purchase — made possible with a 15-year loan from China Export-Import Bank at 2.5 percent interest — is under investigation by the Attorney General’s Office (AGO). But after several crashes in Indonesia and abroad, including a 2011 Merpati crash in West Papua that left 25 dead, the government was forced to conduct an audit on the seemingly troubled aircraft. The government grounded all MA60s owned by Merpati in June of last year as it conducted an audit. The company once owned 15 MA60s, but it wrote off two after serious accidents. Five others were undergoing maintenance at the time of the audit.

Crashes, cancelled flights and corruption allegations have hurt consumer confidence in Merpati at a time when competition in the nation’s growing aviation industry is stiff. The industry already claimed one victim — the permanently grounded Batavia Air — despite the domestic market growing some 20 percent in 2012, according to analysis by the Centre for Aviation. The domestic market doubled in four years’ time, growing to become the fifth largest aviation market in the world, the report read. Much of the growth has been pushed by private firms like AirAsia and Lion Air, as well as Citilink, the low-cost arm of state-run airline Garuda Indonesia.

The central government attempted to sell-off its stake in Merpati last year with limited success. If the airline survives this recent shutdown it likely faces serious competition from both Lion Air and Sriwijaya Air in the near future. The private airlines expressed interest in ordering small, domestically built aircraft for pioneer routes in East Indonesia — putting the airlines in direct competition with Merpati. Lion Air, which runs the small-craft subsidiary Wings Air, inked a deal to purchase 100 19-passenger planes from local manufacturer Dirgantara Indonesia. The small N-219 passenger planes is the first manufactured by an Indonesian company since the N-250 took to the skies in the 1990s.

Lion Air has made a significant play for a share in one of Asia’s fastest-growing aviation markets. In 2011 it booked a record $22 billion order with Boeing for 230 planes. Last year the carrier inked an even larger deal, $24 billion for 234 planes with manufacturer Airbus.

Merpati is unlikely to survive without further government intervention, industry analyst Gerry Sudjatman said.

“It depends on how far the government wants to step in,” Gerry said. “If Merpati wants to declare bankruptcy it will need the government’s approval. But if Merpati wants to carry on, it will need fresh cash. What is happening now is Merpati is having a rough time and they don’t know which way to go, especially with the new players in the market.

“Merpati won’t survive if the government doesn’t step in and make a firm decision about Merpati’s future.”

  • billy

    let it die, better for us that want to fly , that its privately owned!!!!
    no more government corruption in the airline…
    Sell it for what can be got for whats left…

  • Lots of “Mismanagement”

    Actually Dirgantara had also an order for twenty of its N-219 planes by Merpati – one can just guess that this deal is a goner now!

    I regards of the three-months NOT paid salary for staff – one wonders if all those directors and big-shots of Merpati who ran the company, once again, into the ground and showed their inability to actually do what they are supposed to do also didn’t see any salaries for the last three months or if that issue is just for those “lowly” workers a problem……

  • LUWANTO

    Sir,
    Is there a very, very good reason why the Govt. holds on to a sick patient (Merpati) which is cancer stricken? Any help extended is a waste of tax payers’ money but remember your onerous duty is to pay the wages of the employees (since Oct 2013) first and then consider the other outstandings.
    The airline had a good name all along but corruption clawed its way into the kitty.
    LUWANTO
    3 Feb 2014

  • Tony

    Lion Air next please. Probably better to let the Malaysians run the show in Indonesia with Air Asia. For safety’s sake.