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 -------------- -------------- ¶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 -------------- ¶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 -------------- JAKARTA 00012825 002 OF 004 ¶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 -------------- -------------- ¶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 -------------- -------------- ¶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 JAKARTA 00012825 003 OF 004 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 JAKARTA 00012825 004 OF 004 DC plan to visit Jakarta and Bali on November 9 for further consultations. PASCOE