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Batavia Air bankrupt

Batavia Air bankrupt

31 Jan 2013 10:36:00

Batavia Air was a pioneer in the Indonesian air travel market, operating for over 10 years. Early 2013 Batavia Air had a domestic market share of 11% making it the shared third carrier together with Sriwijaya Air. With the demise of Batavia Air one of the largest Indonesian carriers cease to operate. The bankruptcy is a significant disruption of the market with major consequences for Batavia agents, employees and passengers as well as for airline safety, competition and prices.

Many questions need answering at the moment, most urgently what happens with the deposits of travel agents at Batavia and with the tickets for Batavia flights people have? Is their money gone and their ticket worthless now? The answers depend on what will happen in the next few weeks: can a buyer be found or not and what should the role of the government be? We at Utiket.com will provide you with an analysis of the situation.

Inefficient fuel-guzzling airplanes

The airline went down due to cut-throat competition in combination with a huge dept pile and old, fuel-guzzling planes. But Batavia also has a nationwide coverage with several international flights and it has an extensive network of 5000 travel agents, both making it very interesting for outsiders who want to enter the Indonesian air travel market. Its 11% market share makes it also interesting for existing operators, like for example Sriwijaya Air which is struggling to keep its current market share of around 11%. A takeover would give the combined Sriwijaya/Batavia group a share of 22% although it is doubtful Sriwijaya is financially strong enough. Tiger Airways (which bought a stake in Mandala last year) would also be interested. And AirAsia may also reconsider taking over Batavia Air after the debt-restructuring.

Restructure and finding a buyer

The new curators of Batavia will focus first on trying to restructure the debt and find a buyer for the whole company which, if successful, could recommence flights in maybe one or two weeks. Although there are many potential buyers, they face two, related problems.

First problem is of course financial. Even after debt restructuring there will still be a significant amount of debt to be served, the company needs a short-term injection of fresh capital and most importantly it is in dire need of new, very expensive but fuel-efficient airplanes. All this requires an investment of at least $100 million which may be difficult for an Indonesian company alone.

The second problem came into focus after Malaysia based AirAsia announced the Batavia take-over bid last year, not long after Singapore based Tiger Airways took over Mandala. There was a strong negative public opinion about foreign companies buying up Indonesian airlines. Although already a foreign company is not allowed to hold a majority share in an Indonesian airline, constructions exist where this is indirectly still possible. Legislators were considering changing the law and blocking the take-over of Batavia. The bankruptcy changes things now and would make legislators more lenient but any foreign investor still faces meddling of Indonesian legislators and it will start with a huge image problem as it will be seen by the public as a vulture.

The above scenario of a quick debt restructuring, take-over and recommencing flights within few weeks is optimistic though. The Mandala bankruptcy in 2011 took almost 1.5 year before it was resolved and caused the airline to have to start from scratch again.

It would be in the best interest of everybody, not alone the passengers, if the Batavia bankruptcy was solved quickly. The fast growing domestic market already faces equipment shortages and the airlines are trying to get new planes as quickly as possible just to keep up with demand. The demise of Batavia means suddenly 34 airplanes are out of service and not being used. This cut in supply of airplanes in a time of growing demand for air travel will surely cause flight prices to rise. It will also deepen the pressure on the airlines possibly with slipping safety standards as a result.

The role of the Indonesian government

Considering the problems with a speedy take-over it seems unlikely people with Batavia tickets will get their money back. Here is an obvious role for the Indonesian government: the government could arrange with other airlines they allow someone with a valid Batavia Air ticket to rebook it for free so the passengers can at least get to their destination without any extra costs. That is being paid by the government. .

But there is another way in which the government could help: by taking over Batavia. The Indonesian government already owns struggling Merpati Nusantara, which survives only by huge cash injections by the government. The Batavia take-over would allow it to merge their operations, restructure it and then privatize it by an IPO (Initial Public Offering) in a few years. This would be costly, but it is an opportunity as Merpati is becoming an evergrowing headache for the Indonesian government: it is too weak to survive but it provides a vital public function in serving remote locations. Batavia on the other hand flies mostly on popular routes. The combination is viable as it would allow Merpati to serve as a feeder for the main Batavia routes, similarly as Wings Air is a feeder for the Lion Air routes.

A government take-over would also stabilize the market directly, it would keep prices low and guarantees safety at other airlines. Just as during the financial crisis banks were saved by governments all over the world because they were considered “too big too fail&rdquo ;, which meant that bankruptcy of the bank would cause a cascade of events bringing significant damage to the economy. Batavia Air is not a bank but it could be considered “too big too fail” as well.

A complete takeover by a local company, the government or even a foreign investor would be the best solution but it would need to happen fast. If you still have tickets for Batavia flights do not throw them away… yet.

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