Adam Air hits severe financial problems; may be shut down in three weeks

March 17, 2008 Indonesian budget airline Adam Air has been given a three-week ultimatum by the authorities to prove its economic stability or its license will be revoked, said Transportation Minister Jusman Djamal. This is because major financial difficulties have become apparent today, with two major shareholders pulling out of the company.

PT Global Transport Service (GTS) and Bright Star Perkasa, who between them own a 50% stake in the company, have decided to sell back all their shares to their original owners, who control the other 50%. These are the family of founder Adam Suherman and Sandra Ang.

The companies invested in the airline last year, when the company was struggling after the New Year's Day disappearance of Adam Air Flight 574 with 102 on board. The Boeing 737 (B737) was ultimately determined to have crashed into the sea near Sulawesi, and all on board are presumed dead. Shortly afterwards, Adam Air Flight 172, another B737, snapped in half during a hard landing, but held together preventing fatalities. These were not the first serious accidents for the company, as in February 2006 Flight 782 became lost for several hours after navigation systems failed and the plane entered a radar blackspot, forcing a subsequent emergency landing many miles from the intended route. The given reasons for the withdrawal are a lack of improvement in safety and financial irregularities.

The company has now also defaulted on debt payments to aircraft lease firms, resulting in 12 of their 22 planes being seized, and has cut the number of routes served from 52 to 12. The remaining ten planes are also in default and at risk of seizure. Adam Air owes leasing companies US$14 million compared to free capital of $4.8 million of free capital. They have agreed to buy back shares gradually for $11 million (100 billion rupiah), $6 million less than the investment firms paid for them. The cost difference will be borne by Harry Tanoesoedibyo's family, the founder of PT Bhakti Investama, of which GTS is a wholly owned subsidiary. The companies have also lost 157 billion rupiah worth of investment in the company since the April 2007 deal. 9,325 Rupiah are currently worth US$1.

GTS director Gustiono Kustianto said that "Since we joined, our priority has been safety" but that Adam Air's management had been unresponsive to pressure from the new investors to improve its poor record. Last weeek another company B737 shot off the runway during landing, damaging the plane and injuring five.

Lawyer Marx Andryan of Hotman Paris Hutapea, representing the investment firms, said they have documents proving the company has not adequatly seen to pilot recruitment, maintenance and insurance.

Suherman said "We have defaulted and the investors have done nothing about it. We'll continue to operate as long as we have planes," adding that there are no current plans to declare bankruptcy.

"Out of 22 planes, now we only have 10 because 12 of them have been declared in default. The other 10 have been declared in default as well, but I'm still trying to work out a way to restructure the payments," he told Reuters. He went on to say that a cash injection is required, and that "There is a possibility starting on March 21 Adam Air will temporarily cease operations until there is a decision from the shareholders regarding the insurance premium."