The Fall of Icarus
In Greek mythology, Icarus was the son of the master craftsman Daedalus, the architect of the labyrinth of Crete. Daedalus built a labyrinth for King Minos of Crete near his palace at Knossos to imprison the Minotaur, a half-man, half-bull monster born of his wife and the Cretan bull. Minos imprisoned Daedalus himself in the labyrinth because he gave Minos’s daughter, Ariadne, a ball of string in order to help Theseus escape the labyrinth and defeat the Minotaur.
Daedalus fashioned two pairs of wings out of beeswax and feathers for himself and his son. Before trying to escape the island, he warned his son not to fly too close to the sun, nor too close to the sea, but to follow his path of flight. Overcome by giddiness while flying, Icarus disobeyed his father and soared into the sky. He came too close to the sun, and the heat melted the beeswax holding his feathers together. One by one, Icarus’s feathers fell like snowflakes. Icarus was flapping his “wings”. But he realized that he had no feathers left and that he was flapping his bare arms. Then he fell into the sea and drowned.
The story of Icarus reminds me of an airline company in Indonesia; Garuda Indonesia; which share similar fate to Icarus.
Garuda Indonesia (IDX: GIAA)
Garuda Indonesia is the flag carrier of Indonesia, headquartered at Soekarno–Hatta International Airport, Indonesia. It is a member of SkyTeam and the second-largest airline of Indonesia after Lion Air, operating scheduled flights to a number of destinations across Asia, Europe, and Australia from its hubs, focus cities, as well as other cities for Hadj (Majority of Indonesians are Moslems, which Hadj is a mandatory religious duty for Muslims that must be carried out at least once in their lifetime). It is the only Indonesian airline that flies to the European airspace.
The airline also operated a low-cost-carrier (LCC) subsidiary, Citilink, which provided low-cost flights to multiple Indonesian destinations and was spun-off in 2012.
Here’s an image to show the competition of domestic airlines in Indonesia:
Garuda has a long history since 1949 and currently one of the leading airlines in Indonesia. No doubt Garuda has lots of experience in the business and investors might be interested in putting their money in Garuda’s stock. The reasons?
- Garuda is a huge company.
- It’s backed up by the government.
- Lots of passengers used Garuda and offers good services.
Honestly, I was saddened to hear those statements from investors. You asked why?
Let me give you one of the underrated stories in the stock market:
Isaac Newton.
The South Sea Trap
The story of Newton’s losses in the South Sea Bubble has become one of the most famous in popular finance literature; surveying his losses, Newton allegedly said that he could “calculate the motions of the heavenly bodies, but not the madness of people.”
But for a long time, only a few pieces of reliable information were available about Newton’s investments. The recent discovery of extensive additional documents, many of them in the archives of the Bank of England, provides considerably more detail about Newton’s financial travails.
Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in today’s valuation). For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”
Now you tell me, Isaac Newton may be smart in Calculus and Physics but can’t help himself to survive in the stock market, let alone someone decides to put their money in certain companies just because of
“The Company is big and supported by Government?”.
Sometimes people love to learn the hard way…
The Case of the Garuda
Now back to the topic again.
Garuda is a slow growth which is shown in the growth of revenue. This shows why the net income was stagnant over the years. Some investors like Slow Growths to aim for dividends, but somehow Garuda has never shared any dividends since IPO.
Now look at the stock price.
Garuda’s price reaches Rp. 564 in March 2019 and slumped at the end of 2019 until the Covid-19 strikes. Garuda suffers from huge debts which in total of Rp. 128 trillion and technically bankrupt. The stock has been ‘freezing’ for 1.5 years and keeps on declining after the unfreeze, which is currently at level Rp. 64 (Assuming someone purchased the stock in March 2019, that resulted in staggering 89% loss!).
Lots of Investors trapped including one of the richest conglomerates in Indonesia; Chairul Tanjung or CT (Founder of CT Corp).
Back in 2011, Garuda was officially IPO with ticker code GIAA.
Do you know that GIAA almost failed in IPO due to undersubscribed?
That’s when CT was ‘asked’ to help because the underwriters failed to store the required USD 250 million or around Rp. 2 trillion. His entry price was Rp. 625 and currently (2023) GIAA is traded around Rp. 64. Feel free to count his unrealized loss.
Now investors are complaining; why do stocks seem like scam? We never know if certain company is doing shady stuff or shenanigans.
This is the reason why Financial Statements are important. If investors look closely, they can spot 2 main symptoms of Garuda. In my opinion, investors might have avoided it in the first place.
Symptom 1: Annual Report 2018
If you have entered the stock market before 2018, you might notice news talking about GIAA. But what if you don’t? Well, it’s our homework as an Investor to dig up everything related to the company.
So, what happened?
The 2018 Annual Report was published around April 2019. The net income in 2018 is USD 5 million, which surprisingly high compared to 2017 (USD 213.4 million loss). The interesting part is:
- Q1 and Q2 2018 recorded negative profit (around USD 114 million loss in total)
- Staggering Profit just in a quarter during Q4 2018, around USD 115 million.
Let’s check the cause of the skyrocketing number in Q4:
This image shows 9M 2018 performance:
And now look at Q4 2018:
Do you notice the cause?
If you don’t, check the Other Income — net accounts. Suddenly a whooping USD 269.3 million is recorded in Q4 2018! Now let’s investigate more…
The post refers to Appendix 42 of the report. Here’s the explanation:
So, it says there’s USD 239.9 million recorded from “Income from compensation for the installation of in-flight connectivity services and entertainment and content management”. Let’s further check Appendix 47.
On note 47, This following paragraph shows the reason behind the number:
This may look like a normal agreement, which basically Mahata will pay ‘royalty’ to GIAA while the operation costs incurred for in-flight Wi-Fi connection is fully obliged to Mahata!
What a crazy deal GIAA has done!
Basically they don’t incur any risks from this agreement, and they even paid with royalties! If you wonder what Mahata will gain in this contract, the agreement is profit-sharing scheme from GIAA’s advertisement revenue stream.
Here’s the thing, there is more on the contract description:
Reading this part, we know that this agreement is a long-term contract. But here’s where the weirdness come to the surface:
“Therefore, substantially the compensation received for the transfer of the installation rights and management rights as mentioned above represents a fixed benefit or non-refundable guarantee in an irrevocable contract that allows the right holder to exploit that right freely and the right provider does not have the remaining obligations to carry out, income from the compensation for rights of installation in-flight connectivity service equipment and the compensation for rights of in-flight entertainment services and content management amounting to USD 211,940,000 are recognized when the rights are handed over to Mahata in 2018 (Note 42).”
For you who are rarely involved in reading the pact in contract, it’s understandable that you don’t understand the importance of those words. I will list down things that don’t make sense at all:
- The Contract signed on 26 December 2018, means Mahata should have paid Garuda the compensation. Look at following image:
- Turns out Mahata paid only USD (239.9–233) = 6.9 million USD!
- There’s no description of Mahata’s responsibilities. What if Mahata fails or is late to pay the compensation?
- During the public expose on April 2019, the transaction value between GIAA and Mahata is valued at USD 172.94 million, which previously USD 239.94 million. Abracadabra!
- The new contract value changed due to the formal appraisal by an independent evaluator. How come a contract be signed before the valuation process of the contract?
Recording the contract value as receivable is accepted in the IFRS. Let me give an example:
- John purchased a car from Jack ($20000)
- John promised to pay Jack in 2 weeks.
- During H+0, Jack can record $20000 as receivables. Because He has right to collect payment from John.
The complexity in Mahata-GIAA agreement is, there’s no clear state where Garuda has the right to collect payment! While the description of the agreement is unclear and ambiguous.
This ‘magic’ case later peaked in May 2019 where 2 of the Commissioners refused to sign the 2018 Financial Reports. Instead, they wrote a letter to management which shows their disagreement on recording the Mahata contract as profits.
Symptom 2: The Case of ATR 72–600
In 2013, GIAA purchased 35 units of ATR 72–600 to support close-range flight for regions in Indonesia.
This strategy is weird. GIAA isn’t a company that record staggering profit back then, in fact it only records USD 11 million back in 2013. If the company’s goal is to increase profit, they should aim for purchasing long range planes instead of focusing on short range.
I will explain the concept on how Airline companies make profit on another story. But basically, long-haul flights always give the best profit margin compared to short haul. Long-range flights also can help maximize the utilization of the plane, because the aim is to increase the productivity of the plane due to the amount of capital invested (remember planes are capital-intensive).
Now they’re purchasing the ATRs, which totally doesn’t make sense at all. The planes cost lots of funds for GIAA to operate, which some of them are financially leased and the rest are operational leased (at the end both of it still costs a lot).
And here’s the performance from 2013–2017 of GIAA’s operation:
- See? Utilization is declining. Why focus on adding fleets if the utilization isn’t improved?
- ASK (Available Seat Kilometres) and RPK (Revenue Pax Kilometres) increased almost 50% in 5 years, while the total fleets almost increased 100%!
- The imbalance growth of ASK & RPK compared to total fleet and frequencies indicates ineffective strategy.
- Passengers yield is decreasing, indicates flights are more focused on short hauls.
The best part? Turns out the purchasing of ATRs has been marked up which considered as corruption attempt by suspects (which is the management) and caused Government to lose Rp. 8.8 trillion!
The Aftermath
Due to the aggressive purchase and lease of planes with the ‘help’ of Covid-19, Garuda Indonesia experienced problems in operations, management, and funding. Its debt became arisen and unpaid, and the corporation is currently on the verge of bankruptcy in court, and future closure by the government. In the effort to save the airline, Garuda has cut around 30 percent of its workforce, reducing its staff to 5,400 staffs from 7,861 staff. Garuda claimed that its board of directors and its commissioners have taken a pay cut as well.
In June 2022, during Garuda’s attempt to delay payment of its debts, Garuda announced that its debt is $8.3 billion, where its biggest debtors is Airbus SE and Pertamina. If the delay to pay its debts is accepted by its creditors, Garuda promised that it will be profitable in 3 years. Garuda will also seek funding of $1.3 billion through global bonds and issuance of new stocks. On 17 June 2022, Garuda’s creditors voted to accept Garuda’s debt restructuring, saving the company from bankruptcy. Boeing is not joining the debt restructuring process because Garuda stated that its amount of debt to Boeing is not verified yet, and Garuda stated that if Boeing did not confirm its debt to Boeing in 30 days after the debt restructuring, Garuda’s debt to Boeing can be totally removed. On 20 June 2022, Garuda’s debt restructuring is put on hold because two of the lessors did not agree with the debt restructuring, and a new court date is set on 27 June 2022.
In September 2022, Garuda Indonesia filed for bankruptcy protection.
The Conclusion
Well, diseases usually came with signs of symptoms.
If you asked me, “So how about investing in GIAA?”
Well, I think it’s not the best moment.
If you asked again, “So GIAA is a bad investment?”
I believe every company has their own screwed up moment. Like how I have described in “Inside the Mind of Football Manager”, GIAA is on declining and might be a potential turnaround if it succeeds. Let’s just watch for now, after all the best part as an Investor is spectating. Who knows if GIAA will be successfully turned-around.
But what bugged me isn’t the company, but how Investors tend to simplify their analysis and picking stocks like flowers.
Imagine you’re having a wound. You don’t know what to do and just grab anything available on your drawer. Turns out there’s an antibiotic syrup and bluntly poured on it.
If you read that sentence, you might think:
“What kind of dumbsh*t that person is? Why don’t he or she consult with the doctor? Or at least try to find any information about the treatment?”
But unsurprisingly, there are A LOT of people who think like that.
Investors buy stocks without any research just because he/she thinks the company is well known. That’s clearly an example of curing wounds using syrups, right?
With reading financial statements Investors minimized risks in their investments; they know the condition of the company they bought.
The best advice is:
Be like Daedalus, don’t be an Icarus.
