Indonesia grounds Adam Air; may be permanently shut down in three months

March 18, 2008 Indonesia has suspended the operating license of PT Adam Skyconnection Airlines, who trade as Adam Air, over safety concerns. The airline has recently suffered safety problems and financial difficulty.

Formed in 2003, Adam Air hit financial crisis on Monday when two major shareholders, investment companies who control 50% of the airline, announced they were pulling out and selling all shares back to the original owners, who still control the other half. The reasons given were a lack of improvement in safety and alleged financial mismanagement.

The shares were bought after two major accidents hit the budget carrier last year. On New Year's day Adam Air Flight 574 disapeared and was found to have crashed into the ocean near Sulawesi, leaving 102 missing and presumed dead. Shortly afterwards, another company aircraft snapped in half during landing, but fatalities were prevented because the compromised airframe held together. Both were Boeing 737 (B737) aircraft. At the airline's height, it operated 22 of these, serving domestic routes across the Indonesian archipelago and daily international flights to Malaysia and Singapore.

Adam Air also had a serious incident in early 2006, when all navigational systems on a B737 failed, causing the plane to inadvertently enter an accident blackspot. The aircraft was lost for several hours before performing an emergency landing hundreds of miles from its intended destination.

On March 10, another Adam Air B737 overshot the runway during landing at Batam island's airport. Since then, Adam Air has been issued two deadlines in rapid succession by the authorities - one to solve safety issues, and one to prove its financial viability. They have cut routes from 52 to 12, and defaulted on all payments on their aircraft to the leasing companies, who have seized back 12 of them.

Gustiono Kustianto, director of one of the two leasing companies, said the carrier's "life expectancy is less than a month," and that it owes US$14 million to leasing companies compared to $4.8 million of free capital.

Aviation director general Budhi Mulyawan Suyitno said that Adam Air had been grounded due to inadequate Maintenance, Repair and Overhaul (MRO) standards and poor pilot training. He said that investigations into last week's crash, which injured five people and severely damaged the aircraft, had revealed "the pilot had no idea what to do in an emergency situation." The airline will spend three months grounded, after which it will be shut down entirely if it does not show it has improved.

"The Transport Ministry has decided to revoke Adam Air's operational specification, effective 12am Wednesday (4am AEDT),'' said Suyitno. "With this, Adam Air is banned from operating its aircraft. All of its planes must be automatically grounded." He commented that a quarterly evaluation had uncovered "violations that could put passengers' safety at risk".

The news coincides with a two-day ultimatum from Adam Air's insurance provider. Failure to pay the insurance premiums would also have resulted in grounding.

Founder Adam Suherman - whose family owns half the airline alongside Sandra Ang - commented today that the situation with the shareholders had demoralised pilots. "That in turn would affect their performance. It is very dangerous." He also said that he was not surprised Adam Air had been grounded. Yesterday, he said that there were no plans to file for bankruptcy.

His immediate reaction to the news from the insurance - which preceded the grounding by several hours - was that his airline likely could not insure the entire fleet, saying "There have been warnings from the insurance companies... Because every aircraft that is in operation must be insured, the operational activities will be temporarily suspended until there is a further decision from shareholders."

Adam Air's 2007 accidents, coupled with Garuda Indonesia Flight 200, sparked an industry review that determined none of the nation's air carriers were safe. The United States subsequently warned against using Indonesian airlines, and they were all added to the list of air carriers banned in the EU.