Indonesia's Merpati Flies Into Trouble

It seemed like a coup for both China and Indonesia when in 2006 Indonesia’s domestic state-owned airline Merpati Nusantara agreed to pay US$225 million for 15 Xinzhou-60 passenger planes, the proudest product of the mainland’s nascent aircraft industry and China’s shot across the bow of the world’s airline industry.

But now the hapless Merpati finds itself the subject of an international dispute with China over the fact that it took delivery of only two of the aircraft and apparently has never taken any of a US$60 million soft loan it agreed with the Chinese government’s Exim Bank to buy them. Merpati did take delivery on the two, the airline said, but only to try them out. Xi’an is now charging that Merpati has been using them for free for the last two years.

Muhammad Said Didu, the secretary of the Ministry for State Enterprises, Merpati’s parent, says he didn’t know the airline had bought the planes. “I did not realize [Merpati had signed the agreement] until I became the chief commissioner of Merpati,” Didu told local reporters, although Xi’an, in a response made available to Asia Sentinel, said the Indonesian Commercial Counselor to China and the Chinese Minister Counselor to Indonesia also signed the contract.

The former Merpati chairman who signed the contract appears not to have had authorization to do so. The first inkling Jakarta had of the deal, apparently, was when the Chinese Ambassador, Zhang Qiuyue, registered a complaint with officials at Indonesia’s Ministry of Transport. Finance Ministry officials reportedly registered shock at discovering they were on the hook for US$223 million in airplanes.

Now, Didu says, the government is being forced to try to renegotiate the deal, with President Susilo Bambang Yudhoyono becoming involved personally. Chinese and Indonesian government delegations today are seeking ways to salvage the stalled deal, which was supposed to have been completed in August.

Merpati’s refusal to sign off is turning into a dispute that could threaten bilateral trade between the two countries. Beijing and the aircraft company are threatening to take the case to an international arbitration panel. Merpati's president director, Bambang Bhakti, said a government-appointed team established to restructure the airline would travel to China on Dec. 9-12 to try to resolve the deadlock.

Designed and built by the state-owned China Aviation Industry Corp, the Xinzhou, a 60-passenger turboprop, is the latest example of how China’s rapidly evolving economy is moving up the technology scale. At US$14 million per copy, the MA-60, as it is known, far undersold the Canadian planemaker Bombardier’s US$26.5 million per unit. Bombardier and Brazil’s Embraer dominate the world turboprop market. The MA-60s were to replace Merpati’s aging fleet of German Fokker 27s and CASA-235s, manufactured in Spain by EADS.

Xi’an is threatening lawsuits. "We will give them one more chance to discuss the means, in consideration of bilateral relations between the two countries," said Jack Liu, contractual and legal affairs manager at Xi'an Aircraft, in an email made available to Asia Sentinel. “But I don't think we can lower the price."

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The Chinese company has already has trained pilots, ground maintenance engineers, dispatchers and even the flight attendants to operate the MA60. The other 13, painted with the Merpati livery and ready for delivery, have been sitting in China for four months, according to a spokesman for Xi’an.

Purwatmo, Merpati’s corporate secretary, said Merpati would like Xi’an to reduce the $14 million price tag for each plane although, given the drastic downturn in air travel, it is difficult to say what price Merpati would find acceptable. Earlier this year, the airline had to return seven Boeing 737-200s because they were contributing to operational losses.

“At this current time of economic crisis, who would want to renegotiate? But we’re hoping the government will be able to do something,” Purwatmo told reporters, adding that the two aircraft Merpati did took delivery on were only because the company wanted to try them out. The company, he added, also wants to clarify some clauses in the contract related to pricing and technical issues.

Merpati is hardly alone in wanting to defer orders. Airlines across the world for most of the year have coped with record high jet fuel prices, combined with declining passenger loads as the global economic crisis deepened. The International Air Transport Association said in September that passenger traffic had fallen by 2.9 percent over September of 2007, the first such decline since the SARS crisis of 2003. Across Asia, passenger traffic has fallen by 6.8 percent over the same period. At least seven airlines have stopped flying so far in 2008 across the world, and those that remain in the skies are cancelling or deferring aircraft new orders, including Air France-KLM and even Hong Kong’s patrician Cathay Pacific, which is in talks with Boeing to delay some deliveries.

But Merpati is in a class of its own. It has operated in the black only two years in the 17 years since 1991. In August, Sofyan Djalil, the minister of Indonesia’s state-owned companies said that if the airline wasn’t in the black in just three months, the government would shut it down – although it’s still flying. In a drastic reshaping, the airline was forced to move its headquarters out of Jakarta to Makassar in South Sulawesi and cut its workforce in half in September, sacking 1,300 employees and leaving it with only about 200 flight crew and roughly 850 ground staff. Previously it might have been one of the world’s most overstaffed air carriers, with 600 pilots and 4,300 staff to operate only 35 airplanes. At the time, Merpati had assets of only Rp 952 billion, compared with debts of Rp 2.3 trillion.

Sofyan Djalil said Merpati actually could be profitable by concentrating on the eastern region, using only propeller-driven and small jets, giving it a clear market, low competition protected by local governments, hopefully enabling it to turn a profit.

Merpati is Indonesia’s domestic flag carrier, with Garuda International operating on international routes. Before the August cutback, Merpati was operating flights to 25 destinations across Indonesia plus flights to Malaysia and East Timor.