INDONESIA'S ADAM AIR GROUNDED FOR SAFETY REASONS

UNCLAS SECTION 01 OF 02 JAKARTA 000598

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SUBJECT: INDONESIA'S ADAM AIR GROUNDED FOR SAFETY REASONS


1. (U) Summary. The Directorate General for Civil Aviation (DGCA)
revoked Adam Air's operational specification effective March 19,
2008, grounding the airline's entire fleet. On March 10, 2008 Adam
Air flight 292 skidded off the runway on the Indonesian island of
Batam with 177 passengers on board. Although there were no
fatalities, the incident raised safety concerns and, a week later,
two of the airline's biggest shareholders announced they were
pulling out of Adam Air. Since then media allegations of misuse of
internal funds have surfaced. On March 25, Indonesia's National
Transportation Safety Committee also reported that the Adam Air
crash on January 1, 2007 which killed 102 people including three
Americans, was due to pilot error and a faulty navigation system,
including 154 defects which Adam Air had failed to address. The
airline has three months to make improvements or it will permanently
lose authorization to operate in Indonesia. End Summary.

An Airline in Trouble
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2. (SBU) PT Adam SkyConnection Airlines (Adam Air) was founded by
House of Representatives Speaker Agung Laksono and businesswoman
Sandra Ang during Indonesia's airline deregulation period, and began
operations in December 2003 under the leadership of Ang's son, Adam
Suherman. Airline industry observers have criticized Adam Air for
refusing to acquire a professional management team, instead relying
on political protection from Laksono. (Note: Indonesian government
officials are not required to divest business interests while
holding office, often creating severe conflicts of interest.) The
airline claimed 20,000 daily passengers in 2007 and led the pack of
low-cost carriers in Indonesia for several years until accidents and
other safety incidents began damaging the airline's reputation.
Serious safety lapses began to multiply: on February 11, 2006
Flight 782 was lost from radar for several hours, requiring an
emergency landing; January 1, 2007 Flight 574 crashed along the
coast of the Indonesian island of Sulawesi, killing all 102 people
on board including three Americans; and February 21, 2007 Flight 172
had a hard landing in Surabaya, Central Java, causing the fuselage
to buckle.


3. (U) On March 25, 2008 Indonesia's National Transportation Safety
Committee released the final report of Adam Air flight 574 which
crashed into deep water January 1, 2007. The report blamed the
crash on a combination of pilot error and technical malfunction of
the Inertial Reference System (IRS). The technical log and
maintenance records showed 154 recurring defects related to the IRS
between October and December 2006. Adam Air said it had taken
corrective actions, including issuing instructions and procedures
for the evaluation and rectification of repetitive IRS problems and
ground school and aircraft simulator training in upset recovery for
pilots.


4. (U) Suherman and Ang own a 50% stake in Adam Air, while the rest
is held by Bright Star Perkasa business consortium at 31% and PT
Bhakti Investama (Bhakti) at 19%. The public owns approximately 81%
of the shares in Bhakti. According to industry watchers, Bhakti's
legal adviser Hotman Paris Hutapea said Adam Air's management had
misused internal funds totaling $230 million and that state owned
Bank Rakyat Indonesia faced potential losses of as much as $5.5
million from loans to Adam Air.

GE Wants Its Planes Back
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5. (SBU) Adam Air's financial problems go beyond losing
shareholders. According to documents provided by General Electric
(GE) representative David Hutagalung, Adam Air stopped making
payments over a month ago on seven Boeing 737 aircraft leased by GE
Commercial Aviation Services (GECAS). GECAS followed with the
appropriate notices before issuing termination notices on March 6,

2008. GECAS owns two of the aircraft through its subsidiaries and
manages the other five on behalf of third party owners. GECAS filed
a request with DGCA on March 17 to approve deregistration of the
aircraft so that GECAS can export the planes and take possession of
them.


6. (SBU) Adam Air initially agreed to release the planes on an "as
is" basis, however, GECAS did not accept those terms as they were
not in accordance with the leasing contract. In a meeting on March
24, 2008 with DGCA's Director of Airworthiness Certification Yurlis
Hasibuan, he said this issue initially delayed deregistration of the
aircraft. He said it would be easier, and therefore faster, for
DGCA to approve deregistration if Adam Air stated in writing that it
had "no objections" to deregistration of the aircraft. GECAS
continues to press DGCA for immediate approval of deregistration.
In an Embassy letter on March 25, 2008, we also urged the Director
General of Civil Aviation Budhi Suyitno to deregister the planes as

JAKARTA 00000598 002 OF 002


soon as possible.

Still A Long Way To Go For DGCA
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7. (SBU) Hasibuan told us that Adam Air was in good standing with
DGCA at the time of the Batam incident on March 10, 2008. After the
January 1, 2007 crash near Sulawesi, Adam Air hired consulting firm
GSX to help improve their safety practices and, according to
Hasibuan, the airline made "dramatic improvements" initially. DGCA
had been inspecting Adam Air every three months, each time with
passing grades on safety. Hasibuan said that inspectors saw what
they considered to be "normal" deficiencies and that the inspectors
failed to note Adam Air's systematic deficiencies. Hasibuan said
Adam Air's consultant at GSX told him the airline had not maintained
consistency in its safety improvements and had not implemented all
of GSX's recommendations.


8. (SBU) According to Hasibuan, after Bright Star Perkasa and Bhakti
announced they were pulling out of Adam Air, the airline began
grounding its aircraft voluntarily and had planned to ground the
entire fleet on March 20. Hasibuan thought the airline's financial
problems were indirectly causing some degradation in safety. DGCA
considered revoking Adam Air's operational certificate, which would
have shut down the airline, but feared the airline's 3,000 employees
would demonstrate against such an action. He said the employees
have not reacted against DGCA's decision to revoke Adam Air's
operational specification because "they know Adam Air is in
trouble." Although the airline has three months to demonstrate its
operations are safe, Hasibuan said, "I don't think Adam Air will
recover - that's my personal opinion." He said DGCA was making an
example of Adam Air for the rest of the Indonesian civil aviation
industry.


9. (SBU) When asked about rumors that DGCA officials took bribes
from Indonesian airlines, Hasibuan said only, "The rumors exist."
He said the wide gap in pay between government salaries and airline
salaries created vulnerabilities for corruption. He also said the
government did not have enough flexibility to reward or punish its
employees. He said DGCA tries to reduce corruption by having
multiple layers of inspections.

DGCA Improving
--------------


10. (U) DGCA has made significant improvements since last year's
Category 2 downgrade by the Federal Aviation Administration (FAA)
and European Union (EU) ban on all Indonesian airlines, including
increasing the number of inspectors and technicians, intensifying
training and increasing remuneration. DGCA has also created a more
transparent inspection process, for example, by including Government
of Australia experts during inspections and field instruction
training.

HUME