INDONESIA - CIVAIR UPDATE

UNCLAS SECTION 01 OF 04 JAKARTA 012825

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EB/TRA/AN, EB/TRD, EAP/MTS
SINGAPORE FOR TSA (SAHAGIAN) AND FAA (NESBITT)

E.O. 12958: N/A
TAGS: EAIR ECON ETRD ID
SUBJECT: INDONESIA - CIVAIR UPDATE



1. (SBU) Summary. Indonesian transportation officials are
focusing on aviation and airport security as tens of
millions of Indonesians travel to their home villages and
back during the Idul Fitri holiday break. A record 1.5
million Indonesians will take to the skies during the week-
long celebration. With air travel booming, Government of
Indonesia (GOI) officials are looking at a long-term plan
for airport development across Indonesia including the
eventual tripling of capacity at Jakarta's Soekarno-Hatta
Airport. Boeing continues to dominate the market for large
passenger aircraft in Indonesia with the sale of 60 737-
900NG to launch customer Lion Air in 2005-06, the first
deliveries of which are set for March 2007. Boeing has
provided much-needed safety and maintenance training
instruction for Indonesian airlines, and has defended the
airworthiness of classic Boeing 737-200 aircraft following
several safety incidents in 2006. National carrier Garuda
Indonesia continues to bleed red ink in the face of stiff
competition from low cost carriers. Officials at the Ngurah
Rai International Airport in Bali are making slow progress
improving security, but the Transportation Security
Administration's (TSA) Public Notice issued in December 2005
remains in place. End Summary.

Ramadan Caps Year of Double-Digit Growth in Air Travel
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2. (U) Minister of Transportation Hatta Rajasa announced on
October 18 that 1.5 million Indonesians will travel by air
to destinations across Indonesia during the late October
Idul Fitri holidays, a ten percent increase over last year's
13.6 million air passengers. A total of 14.5 million
Indonesians will be traveling by all modes of transportation
during the week. On October 12, Minister Rajasa and his top
transportation officials toured several airports to examine
safety and security readiness for the holiday celebrations.


3. (U) Overall domestic air travel in 2006 should reach 32
million passengers, an increase from 29 million in 2005, and
23 million in 2004. This compares to just 6 million in
1999, the low point immediately after the financial crisis.
Growth in international travel is more modest, from 13.5
million passengers in 2005 to a projected 14.4 million
passengers in 2006. Officials attribute the slower growth
in part to the tourism slump in Bali following the October
1, 2005 terrorist bombings. Tourist arrivals dropped in
August 2006 to 343,000 compared with 392,000 in August 2005.

Officials Plan Increase in Airport Capacity
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4. (U) In order to handle expected continued passenger
growth, the GOI has a long-range plan to increase airport
capacity nationwide. The plan includes tripling the
capacity of Jakarta's Soekarno-Hatta international airport,
including development of a budget airline terminal.
Soekarno-Hatta was constructed for a capacity of 18 million
when it opened in 1985 but currently serves 29 million
passengers a year. The Ministry of Transportation (MOT) and
airport operator Angkasa Pura II are resurrecting a 21-year
old master plan designed to accommodate 60 million
passengers a year, according to an October 16 announcement
by M. Ikhsan Tatang, Director General for Air Transportation
at the MOT. The national airport infrastructure plan also
includes construction of a new airport in Medan, a new
terminal in Makassar, a new cargo facility at Soekarno-
Hatta, and a rail connection between Soekarno-Hatta and
central Jakarta projected to cost US$75 million.


5. (U) Much of the passenger growth has come from the rise
of low-cost carriers operating out of hubs at Soekarno-
Hatta, most notably Indonesia's Lion Air and Adam Air, and
Malaysia's Air Asia. Another low-cost carrier may be set to
join the fray. On October 2, the U.S. private equity firm
Indigo Partners finalized its purchase of a 49 percent stake
in Mandala Airlines, with Indonesian firm Cardig
International controlling 51 percent. The new investors
together have announced significant expansion plans for
Mandala, including acquisition of an all Airbus A-320
aircraft fleet. Indigo is linked to the U.S. hedge fund
Texas Pacific Group, which has a significant stake in
America West Airlines.

String of Incidents Raise Safety Concerns
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6. (SBU) According to contacts at the MOT, Indonesia's
aviation safety incident rate is 26 times higher than in the
United States, a statistic borne out by a list of safety
incidents over the past year. A Mandala Air crash of a 737-
200 on September 5, 2005 in Medan killed 100 people,
including the Governor of North Sumatra, and led to a MOT
audit of safety operations at all Indonesian carriers in
advance of last year's Ramadan travel season. The GOI has
not released a final investigation report, but preliminary
reports indicate the airplane was not properly configured
for takeoff.


7. (SBU) Other recent incidents include the following:

--On a February 11, 2006 Adam Air flight to Makassar, pilots
claimed to have lost all navigational and radio contact for
several hours. The 737-300 with 145 persons on board
conducted a visual search for an airport for several hours
before landing safely on the remote island of Sumba. The
pilots were ultimately arrested and charged with criminal
breach of safety regulations.

--On May 6, 2006, a Batavia Air 737-200 skidded off a runway
in Jakarta, injuring three persons.

--On October 3, 2006, another Mandala 737-200 skidded off a
runway into a swamp after landing in Tarakan, Kalimantan.
There was poor visibility at the time because of smoke from
brush fires blanketing Kalimantan and parts of Sumatra. MOT
officials closed the airports in Jambi and Pontianak on
October 18, until visibility improved.

Boeing Maintains Firm Grip on Market with Lion Air Deal
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8. (U) Boeing remains the dominant player in Indonesia's
large passenger aircraft market, despite Mandala Air's plans
to operate an all-Airbus fleet. Lion Air's 2005-06 purchase
of 60 737-900NG aircraft valued at US$3.9 billion represents
the largest ever aircraft purchase by an Indonesian carrier
as well as the largest ever commercial sale by a U.S.
company in Indonesia. More than 30 high-ranking Indonesian
officials and parliamentarians attended a July roll-out
ceremony in Seattle that feted Lion Air as the launch
customer. Delivery of the aircraft will average one per
month for five years beginning in March 2007, and should
give Lion the newest and largest fleet by far in Indonesia.
U.S. exports to Indonesia should jump by more than 20
percent once Boeing begins deliveries. The rise of low cost
carriers like Lion Air, Adam Air, and Air Asia has driven
down ticket prices in Indonesia, with Jakarta-Singapore
tickets now costing as little as $100 round trip.

Garuda Strapped by Airbus Debt - Seeks Capital and Partner
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9. (SBU) In contrast to high-flying Lion Air, national flag
carrier Garuda Indonesia continues to bleed red ink.
Although the airline reduced its losses by 17% in 2005 to
$73 million under new President Emirsyah Satar, Garuda still
required a Government bailout. Parliament approved a Rp 1
trillion ($109 million) "capital injection" in early
September. Satar told us later in September that the GOI
"wants to save Garuda", but that "the question is how to do
it?" Satar said that Garuda needs more direction from the
GOI on where the airline can make necessary cuts. He listed
his priorities as raising efficiency of operation in order
to reduce costs by 5-10%, streamlining management, and
locating a strategic partner. Satar noted the unique
constraints Garuda faces as a state-owned enterprise
operating in the competitive and dynamic airline market.
For example, any policy or major operational changes require
consultation with four separate Parliamentary commissions.
Garuda is also a revered national symbol, Satar said, and
"people are very protective of this".


10. (SBU) Garuda's main financial woes are tied to its
US$500 million debt with the European Credit Agency (ECA)
stemming from the purchase of six wide-body Airbus A-300s.
Garuda drastically cut its international routes following
the 1997-98 financial crisis, including flights to Los
Angeles and all flights to Europe except Amsterdam. As a
result, long-haul aircraft are now more burden than benefit
to the airline. Satar said selling a portion of the company
remains a possibility, but may not be politically
acceptable. Garuda has discussed a strategic partnership

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with "several" airlines, Satar said, but wants to find one
willing to use Jakarta as a hub city. A key political
constraint, however, is relinquishing any significant
operational control to the partner airline. Satar also said
that merging with Merpati (Indonesia's other state-owned
airline) "is a possibility" to reduce operational costs,
although he did not elaborate.


11. (SBU) Satar noted that the high maintenance and
operation costs on the Airbus A-300s are a "core issue" for
Garuda, in contrast to the Boeing equipment with GE engines
he described as "comfortable and reliable". Garuda still
hopes to complete a purchase of 18 Boeing 737NGs and six 787
Dreamliners. These purchase orders date back to 1996 and
1998 respectively. They were restructured in 2005 to newer
models, and confirmed by a signing ceremony with President
Yudhoyono in New York in 2005. Garuda has a $20 million
deposit on the order.

Improving Safety Training and Oversight
--------------


12. (SBU) Double digit growth in airline travel and a large
number of new airlines are straining Indonesia's aviation
safety system. The number of MOT aviation safety inspectors
has not increased since 2000, according to Christian Bisara,
Director of Safety and Airworthiness at the Directorate
General for Civil Aviation (DGCA) in the MOT. Bisara told
us in mid-October that the insufficiently trained inspectors
remain a problem, especially in the face of competition for
engineers from higher-paying airlines.


13. (SBU) DGCA and airline officials have attended a series
of Boeing-sponsored safety seminars in 2006 on topics
ranging from crisis management to improving maintenance and
safety for 737-200s. The most recent 2 day seminar in
Jakarta involved 17 trainers from Boeing, and attracted over
170 Indonesian participants. Boeing and the Federal
Aviation Administration, together with one or more key
airlines, plan to offer additional Safety Management
Seminars in 2007 for airline officials and aircraft
inspection personnel. The seminars will encourage a
heightened commitment to investing in safety, and will also
train working level mechanics and personnel on improved
safety management process.

Bali Airport Security
--------------


14. (SBU) Ngurah Rai International Airport in Bali remains
subject to a TSA Public Notice issued in December 2005 for
failure to meet standards under the International Civil
Aviation Organization (ICAO). Singapore-based TSA
representatives have made several trips to Bali in the past
three months to assess progress at the airport. During the
most recent consultations on October 10-12, TSA officials
commended airport officials for improving outdoor setback
areas for passenger drop-off, perimeter fencing, and entry
control. However, they noted continued deficiencies in
cargo screening, as well as inadequate staffing and
supervision of passenger and baggage screening points,
particularly at peak periods of passenger demand. In their
outbrief with representatives from the DGAC and airport
operator Angkasa Pura I (API),the TSA representatives
discussed in detail the July 2006 revisions to ICAO security
standards. The revised standards require more comprehensive
screening of all hold baggage and other more stringent
security measures. Airport officials said they would
consider a variety of strategies for meeting these
standards, including the purchase of additional baggage
screening equipment.


15. (SBU) Director General Tatang noted that one of the main
challenges for improving screening is the airport's reliance
on temporary staff from the Indonesian Air Force, often
assigned for only three month periods. He also expressed
some indirect frustration that API has not yet solved this
issue. On a positive note, API has now scheduled training
for 35 passenger and baggage screening supervisors in early
November. DG Tatang told the TSA he had hoped TSA could
remove its Public Notice before Indonesia hosts the
conference of Civil Aviation Director Generals in Bali in
early December. However, it now appears that given
remaining security issues, early 2007 is the soonest date
that DGCA could realistically request TSA return for a
reassessment. TSA officials from Singapore and Washington

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DC plan to visit Jakarta and Bali on November 9 for further
consultations.

PASCOE