As an airline accustomed to reporting losses, the pressure on Garuda Indonesia to show that it was making money in 2018 must have been huge for it to turn to some creative accounting – a move that has now backfired on it.

It was a surprise when, in April, the Indonesian flag carrier reported an operating profit of $101 million, and a net profit of $809,900 for the year – especially given its revenue of $4.37 billion could not conceivably cover its $4.58 billion in expenses.

The trick lay in the carrier booking an in-flight entertainment and connectivity deal worth $240 million in future revenue with Mahata Aero Teknologi as an operating item for the year.

The creative accounting was shockingly cleared by its auditor and repeatedly defended as allowed under Indonesian accounting standards. But it eventually drew the attention from two of its board commissioners during its annual general meeting held on 24 April, and later the country’s Financial Services Authorities and the Indonesia Stock Exchange.

The financial watchdog forced it to restate its 2018 full-year results, and as expected they painted a grimmer picture than the previous results.

For the full year, the airline made a full year operating loss of $139 million, up from its $76.2 million loss in the previous financial year.

The knock-on effect of that was that Garuda’s equity dropped to $730 million at the end of the year, forcing it to seek a waiver from Export Development Canada for a debt covenant that requires it to maintain its equity above $800 million. The airline has said that other debt covenants were renegotiated but has not detailed which facilities have been affected.

Its equity situation improved at the end of the first quarter, when a $49.5 million operating profit lifted its equity up to $791 million. It carried that momentum into the second quarter, reporting a profit of $82 million, lifting its equity position to $808 million.

The stronger start to the year should not have deterred it from disclosing its loss in 2018. So why did it turn to dodgy accounting in the first place?


While debt covenants may have been one reason to massage the loss to a profit, the April timing of its first results release could be a sign that the bigger driver was political pressure.

Prior to the Indonesian elections in April, Garuda was used by some politicians as an example of management and financial weaknesses in the state-owned companies under the leadership of president Joko Widodo, better known as Jokowi.

The airline may have felt the pressure to appear profitable for once, only for it to receive unfavourable publicity over the tactic after being called out once the election was over.

Sadly, the damage done has reminded many that the airline has to also please its political masters, and not just the investors and creditors.

While Garuda had the right to defend itself and the decision made to treat the future revenue as an operating item, which it said complied with Indonesian accounting standards, the creative accounting does not inspire confidence among its creditors and financiers.


Another issue is the moral hazard that Garuda faces as a state-owned company. Perhaps its status as a high-profile company gave management confidence to try and pull off the risky accounting manoeuvre, knowing that it could rely on the government ordering state-owned banks and financial institutions to bail it out if the proverbial hit the fan.

But that ignores the fact that any responsible bank, even a state-owned one, would demand an honest financial report before extending credit.

And even if Jakarta was to and give the airline all the money and help Garuda wants, it would be exposed to even more political interference that arguably has kept it from becoming a truly world-class airline.

Is that the kind of future that Garuda wants or needs?

On this occasion it has been forced to eat humble pie and tell the truth about its 2018 accounts. The airline needs to now show that it won’t pull off similar manoeuvres in the future if it is to retain the confidence of investors and financiers, lest it be forced to rely on more government funding.

Source: Cirium Dashboard