VZCZCXRO3623
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0598/01 0850926
ZNR UUUUU ZZH
R 250926Z MAR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8453
RUEHGP/AMEMBASSY SINGAPORE 6281
INFO RUEHZS/ASEAN COLLECTIVE

UNCLAS SECTION 01 OF 02 JAKARTA 000598 
 
SIPDIS 
 
SIPDIS 
 
DEPT PASS FAA HQ 
DEPT ALSO PASS NTSB FOR MACINTIRE/BENZON/ENGLISH 
DEPT FOR EAP/MTS AND EB/TRA/AN 
SINGAPORE FOR FAA-WALSH 
 
E.O.  12958: N/A 
TAGS: EAIR ECON CASC ETRD PGOV ID
 
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 
--------------------- 
 
¶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 
------------------------ 
 
¶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 
------------------------------- 
 
¶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