Thu, 25 Jan 2007
From: Asia Times
By Bill Guerin
JAKARTA - The rise and fall of Adam Air, until recently Indonesia's most popular budget airline, has cast a harsh light on the country's weak regulatory regime and reaffirmed already entrenched foreign-investor perceptions about the private sector's often corrupt and careless business practices.

The January 1 disappearance of an Adam Air flight carrying 102 people and the government's erratic response have left Indonesia's entire airline industry - dozens of new private airlines have taken to the skies since deregulation of the sector began in the 1990s - in disarray.

Adam Air was Indonesia's fastest-growing low-cost carrier before this month's tragic crash. Founded in 2002 and flying by 2003, the politically connected airline, which referred to itself in its promotional materials as a "boutique" carrier, had made its mark in one of the fastest-growing aviation markets in the world, expanding from 5 million to 25 million passengers over the past seven years.

According to the Sydney-based Center for Asia Pacific Aviation, that figure was expected to double to 50 million passengers yearly by the end of this decade. Those projections are now arguably primed for a major downgrade in the wake of the Adam Air accident and the various revelations that have since emerged about the industry's safety standards.

It seemed the sky was the limit for the profit-making budget carrier, co-founded by Agung Laksono, Speaker of the House of Representatives, and Sandra Ang, a wealthy ethnic-Chinese businesswoman who earned her family fortunes through trading in West Java. Prior to the January 1 crash, the airline's 19-aircraft fleet carried an average of 15,000 passengers and flew 73 flights per day, representing a high 90% average load factor.

The airline was acknowledged by the Asia Pacific and Middle East Aviation Outlook Summit as the Low Cost Airline of the Year in Singapore in November - two months before the fatal crash. Adam Air's management was in the process of spreading the airline's wings regionally, expanding its current international destinations to Singapore and Malaysia's Penang with new flights to Kuala Lumpur, Bangkok and Perth and new one-stop services to India and Vietnam via Singapore.

From the start, Adam Air was very much a family affair. Laksono's son, David Laksono, served as the airline's vice president in its early days and is still reportedly on the company's board of directors. Meanwhile, Ang's son Adam Adhitya Suherman, 26, is now president director and his elder brother, Gunawan Suherman, is chief executive officer. Another brother, Yundhi Suherman, is chief commercial officer.

Some well-placed local sources requesting anonymity claim that Agung Laksono never actually invested his own capital in Adam Air, but rather contributed to the enterprise's value through his official government position, helping to smooth the way for receiving hard-to-get licenses and airport landing rights. The same sources also point out that the Ang family had no business experience in aviation before starting up Adam Air.

Still, Adam Air rose quickly. The airline first took to the skies in December 2003 with just two Boeing 737s it leased from GE Capital Aviation Services. Yet early on, the airline showed a penchant for exaggeration and even obfuscation. For instance, Adam Air's early promotional campaign invited passengers to take to the skies with its "new Boeing 737-400s" when in fact its aircraft were used and more than 15 years old.

Still, the strong growth potential of Indonesia's aviation industry piqued the interest of some major foreign investors, including more established international airlines. Last February, the Ang family was reportedly in talks with several different parties, including Australia's Qantas Airways Ltd, about the possibility of selling a 20% strategic stake to an outside investor.

In October, US-based Texas Pacific Group, a private-equity fund, was spurned in its approach to acquire Adam Air outright, reportedly because of the Ang family's desire to maintain managerial control. More recently, Adam Air managers planned in either 2007 or 2008 to issue an initial public offering in Singapore, a move designed simultaneously to raise capital for new aircraft purchases and lift the airline's international prestige.

Crashing halt
Those heady days, however, have come to a crashing halt. After the still-unresolved January 1 accident that killed more than 100 people, revelations and allegations about Adam Air's safety record, suspect maintenance standards and questionable management practices now threaten to ground the once-respected budget carrier permanently.

Former Adam Air pilots have in recent days given a series of press interviews accusing senior management of putting profits before safety. Sutan Salahuddin, a former Adam Air pilot who flew 18 months for the airline, last week told the local and international press that on at least two occasions senior management had ignored his objections to flying aircraft that he deemed unsafe.

Specifically he said that one of Adam Air's owners telephoned him with a direct order to fly an aircraft to Padang in West Sumatra despite the pilot's voiced concerns about a malfunctioning navigational backup system. Salahuddin also claimed that on another occasion he was coerced into signing an aircraft-maintenance log without a mandatory check by engineers before a scheduled two-hour flight from Jakarta to Medan.

Feisal Banser, another former Adam Air pilot, said in press interviews that he was grounded for a week by senior management over his refusal to fly after he had exceeded the regulation limiting pilots to five daily takeoffs. "Every time you flew, you had to fight with the ground staff and the management about all the regulations you had to violate," Banser was quoted as saying by the Associated Press.

Both Salahuddin and Banser have also claimed in recent interviews that spare parts were recycled from other aircraft to save costs, that pilots were put under pressure to break international safety regulations, and that the company bribed aviation officials to look the other way. Notably, the former pilots' allegations do not come out of the blue.

Last February, an Adam Air flight destined for Makassar after three hours aloft made an emergency landing with 145 passengers on board in remote West Sumba, East Nusa Tenggara, after disappearing from traffic control's radar on an international flight path. Upon landing 525 kilometers from their planned destination, the pilots blamed a malfunctioning navigation system. Adam Air insisted the system was working properly and called the police in to arrest the pilots on charges of endangering passenger safety, according to news reports at the time. (One of the pilots, Tri Nusyigo, was ironically also an official at the Transportation Ministry's Airworthiness Certification Directorate.)

The government's Directorate General of Air Communications (DGAC) sent an immediate instruction to Adam Air to ground the aircraft, repair the faulty system and then conduct 13 test flights with DGAC officials on board before it would be approved again for commercial flights. For unknown reasons, Adam Air left behind a team from the National Transportation Safety Committee (KNKT) scheduled to fly with the airline's engineers to the site. The airline's technicians had reportedly repaired the mysterious fault and the suspect aircraft was flown back to its original destination.

Iksan Tatang, director general of air transportation, the country's top aviation official, at the time called this a "a serious violation" and told reporters that Adam Air's management should be investigated over the incident. However, there was nothing subsequent on the public record about the investigation's findings, underscoring perhaps the airline's strong political connections.

But Adam Air's troubles didn't stop there. Seventeen of the carrier's 150 pilots resigned in May 2005 over their joint concerns about aircraft safety. Upon leaving the airline, they publicly complained about several incidents where they disagreed with management about the readiness of certain aircraft.

Adam Air has denied the allegations and has taken legal action against the defecting pilots in a Jakarta court. However, the essence of the company's legal claim is not related to the damage the pilot's allegations may have had on the company's reputation and future business, but rather demands compensation for the investment it made in training the departed pilots.

Haphazard deregulation
According to the KNKT, since 2001 there have been 73 major and minor aircraft accidents across the country accounting for 201 fatalities, a rise that has directly coincided with the explosive growth of budget airlines in Indonesia.

The recent Adam Air accident and the subsequent former staff allegations against the airline are forcing regulators and the industry to change course quickly - at least rhetorically. Last Wednesday, Transport Minister Hatta Radjasa implemented new regulations limiting aircraft already operating in Indonesia to a maximum of 35 years' service or 70,000 flight hours. Meanwhile, used aircraft brought into Indonesia will not be allowed to exceed 20 years of service or 50,000 flight hours.

Industry analysts applaud such proclamations, but fret about the actual implementation. After the September 2005 crash on takeoff of a 24-year-old Boeing 737-230 operated by budget carrier Mandala Airlines, Radjasa blamed corrupt officials for allowing airlines to sidestep safety standards. He later announced that random checks would be carried out to ensure aircraft were being properly maintained - though it is not apparent that that measure was ever implemented, analysts say.

After announcing the new regulations on aircraft purchases, Radjasa himself admitted as much, saying soon after issuing the new regulations that the real difficulty would be in "how to implement these regulations without officials who can be bribed".

Five days later, the minister launched a series of high-profile surprise aircraft inspections at Jakarta's Soekarno-Hatta international airport, replete with television crews recording ministry officials snooping around for evidence of non-compliance with safety regulations. Five Boeing 737-200s were temporarily grounded, but the televised inspection smacked more of a publicity stunt than a serious overhaul of regulatory practices.

Even so, the new regulations will put new financial pressures on Indonesia's budget carriers. Adam Air's and other budget carriers' business models are predicated on the low cost of purchasing heavily used Boeing 737s decommissioned by international airlines (although some of those cost savings - at least in theory - should be counterbalanced through higher maintenance costs required of older aircraft). Meanwhile, spiking global fuel prices have substantially pushed up operating costs and trimmed down profits across the industry.

Adam Air has said that some 60% of its total income is swallowed up by fuel costs. The still-missing Adam Air aircraft had flown only 45,371 hours since it first took flight 18 years ago, then with British Airways. It was declared airworthy by Indonesian regulators on December 25, 2005, and its next checkup was due this month.

When asked by Tempo magazine what was responsible for the January Adam Air accident, chief executive officer Suherman said: "It was a weather problem. Everything was okay when the plane took off, except for the X factor. We are not God." He said the missing aircraft experienced 130km/h winds and heavy storms halfway through the two-hour flight, forcing it to change course.

Yet the prospects of discovering the real cause of the fatal crash appear as slim as the chances that Radjasa will resign over his inability to regulate and assure the safety of Indonesian airlines effectively.

Last year an investigative report by the Kompas daily, Indonesia's biggest newspaper, claimed that "mafia" surrounding the handling of cargo at Jakarta's international airport were frequently involved in superseding allowed cargo weight limits. However, there was no subsequent government action or investigation to prove or disprove the controversial story.

Consumer groups are trying to fill the gap left by lax regulators. They have recently filed a US$100 million civil suit against Adam Air on the legal grounds that the airline compromised safety in pursuit of its low-cost strategy. Yet without a strong commitment from the government to clean up the aviation sector and vigilantly enforce basic aviation safety standards, the allegations and lawsuit now hanging over Adam Air may threaten to undermine confidence in all Indonesian airlines.

George Stelios, owner of the United Kingdom's highly successful budget carrier EasyJet, a role model for many of Asia's budding low-cost airlines, once said: "If you think safety's expensive, try an accident. One accident can actually destroy an airline." Unfortunately for Indonesia, the impact from Adam Air's crash could be significantly more than just the downfall of one airline.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.



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