Indonesian Avi

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Indonesian aviation enters an exciting new chapter:Outlook 201012th March, 2010 PREMIUM

Indonesia is a high-potential aviation market, w ith a strong natural requirementfor air services and a large population w ith rising incomes to support the industry.The rationalisation of domestic capacity over the past two years has helpedrestore financial health to the airline sector to the point where Garuda Indonesiais planning a landmark IP O later this year. Overall domestic capacity levels fell9.4% in 2008, with a further 12.7% contraction in 2009, meaning domesticcapacity has returned to 2004 levels in 2009.

Indonesia total network capa city on international and domestic routes: 2001 to 2009

Source: Centre for Asia Pacific Aviation and OAG Facts

This reduction can be attributed to the demise of Adam Air in 1Q2008. It accounted for upto 15% of Indonesian domestic capacity prior to its failure - a hole that is yet to be filled.The failure of Adam Air, which was renowned for its unrealistic pricing policies and poorsafety record has, however, given breathing space to incumbent airlines to concentrate onyield improvement, and improve their financial positions ahead of the next phase of

expansion.

Adam Air has not been the only recent casualty. While there has been a rapid growth in thenumber of Indonesian-based start-ups, reacting to the Indonesian Governments

liberalisation of the countrys air services arrangements early last decade, there have beenvarious failures, with a raft of bankruptcies and withdrawals of previously issued licences.The rapid growth has not always being accompanied by appropriate regulatory oversight orrigorous attention to air safety requirements.

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A disproportionate accident rate among both established and fledgling airlines has also led

to international concern, which culminated in a 2007 ban on any Indonesian carriers beingpermitted to operate to the European Union. This ban was lifted for four Indonesian airlinesin Jul-2009 (Garuda Indonesia, Airfast, Mandala and Premiair), following a concertedoverhaul of government regulatory structures, accompanied by a strong commitment toimprovement by Indonesias air carriers.

Much work, however, remains to be done, with some 47 airlines (many of which are papercarriers that have never flown) remaining on Europes unacceptable list, including LionAir , Merpati and Indonesia AirAsia. The Indonesian Transport Ministry has stated it plansto request the EU Air Safety Commission lift its 2007 ban on 20 of these carriers, reportedlyincluding Batavia Air, Lion Air and Sriwijaya Air. Meanwhile, the US FAA rates Indonesias

safety standard as Category 2 ie the country does not meet ICAO safety standards.

International capacity, meanwhile, has maintained its growth trajectory in the past fouryears, with the countrys aviation market to further benefit from the impending ASEANOpen Skies Agreement, which will open the region to increased traffic flows, in addition toimproved economic conditions in the country, and the region in general.

At the same time, Garuda Indonesia - the countrys largest carrier is proceeding with itsIPO and global alliance plans as it aims to position itself as a key airline in the region anddifferentiate itself from its low cost rivals, while Lion Air, the countrys larger private airline,has a rapid growth profile rivaling that of the regions fastest growing LCCs, with orders forover 150 aircraft. LCCs, including Indonesia AirAsia and Mandala, also represent a small, yet

high-potential and growing segment.

To support this airline growth, the Indonesian Government has pledged to double spendingon transport infrastructure, including airports, to USD140 billion over the next five years,part of a push to deliver economic growth of at least 6.6% by the end of 2014.

PART I: COUNTRY OVERVIEW

Indonesia weathers the global turbulence of 2009; poised to resume pre-crisisgrowth trajectory

Indonesia has weathered the global financial crisis relatively smoothly, aided by resilientdomestic demand, solid consumer confidence levels, stimulus programme spending, lowerinterest rates and political stability. These factors, led by President Susilo BambangYudhoyono, who has served as the countrys President since Oct-2004 (President

Yudhoyono was re-elected in Oct-2009, and named respected economist, Jusuf KallaBoediono, as his VP), have enabled the country to weather the global economic turbulenceof 2008/2009 and emerge poised to resume its pre-crisis growth trajectory.

Although the economy slowed significantly from the 6% plus growth rates recorded in 2007and 2008, Indonesias economy has remained robust, with expansion of 4% in 1H2009 andanticipated full year GDP growth of 4.5%, Indonesia has outperformed its regionalneighbours in the region posting growth during the crisis, with the Indonesian Governmentnow expecting GDP growth of 5.5% in 2010, with President Yudhoyono targeting 7.0%growth by the end of his second term in 2014 (the IMF is less bullish in its outlook, with anestimated growth of 4.8% in 2010 and 6.3% in 2014).

GDP grow th rates amo ng selected Asia economies: 2006 to 2014F

2006 2007 2008 2009F 2010F 2014F

Cambodia +10.8% +10.2% +6.7% -2.7% +4.3% +6.3%

Indonesia +5.5% +6.3% +6.1% +4.0% +4.8% +6.3%




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Source: Centre for Asia Pacific Aviation & IMF World Economic Outlook (Update), Oct-2009

Meanwhile, the Indonesian governments financing requirements will be about 4% of GDPthis year, less than half of those of India and the Philippines, and less than a quarter of

those of Greece, Portugal, Spain, and Turkey, according to Credit Suisse.

Successful economic policy throughout the downturn, but poverty, unemployment

and inflation remains a concern

The Indonesian Government has succesfully implemented fiscal stimulus measures andmonetary policy to counter the effects of the crisis. Specifically, the government introducedsignificant reforms in the financial sector, including tax and customs reforms, the use ofTreasury bills, and capital market development and supervision. Indonesia's debt-to-GDPratio in recent years has declined steadily, due to increasingly robust GDP growth and soundfiscal stewardship.

Impressively, Jakartas benchmark stock index gained 87% in 2009, with the IndonesianRupiah gaining 16% (for the best performance from an Asian currency outside of Japan).

Consumer confidence, meanwhile, rose in Jan-2010 to near the five-year high recorded inJul-2009.

Indonesia, however, still struggles with poverty (with approximately 14-15% of thepopulation below the poverty line and the government aiming to reduction this to around 8-10%), high unemployment levels (the country had an estimated unemployment rate of 8%in 2009, with the Government aiming to reduce this to 5-6%), inadequate infrastructure,corruption (which often relates to political instability), a complex regulatory environment,and unequal resource distribution among regions. Inflation also reached a nine-month highin Feb-2010, amid rising commodity and food prices, putting pressure on the central bank

to raise interest rates this year.

Key Indonesia eco nom ic statistics: 2000 to 2008

Hong Kong SAR +7.0% +6.4% +2.4% -3.6% +3.5% +4.3%

Malaysia +5.8% +6.2% +4.6% -3.6% +2.5% +6.0%

Myanmar +13.1% +11.9% +4.0% +4.3% +5.0% +5.1%

Philippines +5.3% +7.1% +3.8% +1.0% +3.2% +4.5%

Singapore +8.4% +7.8% +1.1% -3.3% +4.1% +4.6%

South Korea +5.2% +5.1% +2.2% -1.0% +3.6% +4.5%

Taiwan +4.8% +5.7% +0.1% -4.1% +3.7% +5.0%

Thailand +5.2% +4.9% +2.6% -3.5% +3.7% +6.0%

Vietnam +8.2% +8.5% +6.2% +4.6% +5.3% +7.0%

2000 2005 2007 2008

Population, total (millions) 206.27 220.56 225.63 228.25

Population growth (annual %) 1.3 1.4 1.2 1.2

Surface area (sq km, thousands) 1,904.6 1,904.6 1,904.6 1,904.6

GNI, PPP (current international, USD billions) 462.43 670.84 802.79 875.06

GNI per capita, PPP (current international, USD) 2,240 3,040 3,560 3,830

GDP (current USD) (billions) 165.02 285.87 431.93 514.39

GDP growth (annual %) 4.9 5.7 6.3 6.1Inflation, GDP deflator (annual %) 20.4 14.3 11.3 18.3

Agriculture, value added (% of GDP) 16 13 14 14




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Source: Centre for Asia Pacific Aviation and World Bank

Geography ideal for air transportation

The geography and demographics of Indonesia are also ideal for air transportation: TheIndonesian archipelago is comprised of 17,508 islands (6,000 inhabited), covering an areaof 1.9 million sq km and making Indonesia the 16th largest country in the world.

The country also has the fourth largest population in the world, with 240.3 millionpassengers (behind China, India and the US) and a growth rate of approximately 1.1% p/a.

Approximately 52% of the total population lives in urban centres, with a 3.3% annual rateof change in the rate of urbanisation. The country has a net immigration rate of -1.24migrants/1,000 population, based on estimates for 2009.

Map of Indonesia

Source: The World Factbook

Steep reductions in tourism receipts in 1H2009; tourism arrivals not so bad lyaffected

According to the UNWTO, Indonesia witnessed steep reductions in tourism receipts in1H2009, with a 12.8% slump in receipts (with reductions of 14.5% and 11.2% in 1Q2009and 2Q2009, respectively). Prior to this, Indonesias international tourism receipts increased38% year-on-year in 2008, to USD7.4 billion, or 3.6% of total international tourism receipts

in the Asia Pacific region, with growth of 20.2% in 2007 to USD5.3 billion.

Indonesia intern ational tourism receipts: Q1/2008 to Q2/2009

Industry, value added (% of GDP) 46 47 47 48

Services, etc., value added (% of GDP) 38 40 39 37

Exports of goods and services (% of GDP) 41 34 29 30

Imports of goods and services (% of GDP) 30 30 25 29

Gross capital formation (% of GDP) 22 25 25 28

Market capitalisation of listed companies (% of GDP) 16.3 28.5 49.0 19.2

Merchandise trade (% of GDP) 66.1 56.9 48.8 51.6




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Source: Centre for Asia Pacific Aviation & UNWTO

However, Indonesias international tourism arrivals were not so badly affected, with a 1.4%year-on-year increase in 2009, to 6.3 million passengers, for the highest annual total of thedecade.

International visitor arr ivals to Indonesia (mill) and year-on-year growth: 2003 to 2009

Source: PATA

In 2008, Indonesia had 6.2 million international tourism arrivals, up 13.2% year-on-year,following growth of 13.0% in the preceding year, and accounting for 3.4% of the total AsiaPacific tourist arrivals in 2008.

Indonesia intern ational tourist ar rivals: Q1/2008 to Q2/2009




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Source: Centre for Asia Pacific Aviation & UNWTO

Business travel consumption and average spend per trip expected to fall further in

2010

Meanwhile, the World Travel and Tourism Council stated business travel and tourismconsumption contracted 1.2% in 2009, with this expected to contract further in 2010, by

3.4%, while overall travel/tourism consumption is expected to continue to contract in 2010,by 4.2%, before seeing higher levels of growth from 2011 onwards.

Real Travel & Tourism a ctivity growth (% per ann um) (Vietnam ): 2000 to 2012F

Source: Centre for Asia Pacific Aviation and World Travel and Tourism Council

Meanwhile, the average spend per trip is expected to slump further in 2010, to USD799,

according to the World Travel and Tourism Council, after peaking at USD1,165 in 2008. Theaverage trip fares spend is, however, expected to increase, from USD91 in 2009 to USD97in 2010.

International Visitor Num bers (Indonesia): 2000 to 2012F

% grow th 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PersonalTravel &Tourism

9.09 9.36 27.08 -7.84 1.75 1.18 -0.18 7.59 3.69 3.44 3.69 5.32 7.45

BusinessTravel &Tourism

16.63 7.89-

10.95-

15.556.61 10.22 -3.12 9.22 0.23 -1.22 -3.41 4.13 7.08

Travel &TourismConsumption

12.17 10.18 3.09-

17.295.95 0.93 -5.82 7.62 5.98 -2.39 -4.24 11.72 7.10

Travel &TourismDemand

15.03 7.44 2.04 -11.42 8.28 6.36 -1.57 4.77 8.22 -1.24 -2.90 8.41 7.45

GDP - directimpact

0.18 11.60 -8.01 -11.94 7.20 3.11 -6.96 7.73 4.38 -2.02 -7.83 14.55 6.89

Employment- directimpact

-3.87 8.87 -11.15-

16.745.32 -2.20

-10.40

6.06 2.16 -2.33-

11.029.78 3.01

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012




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Source: Centre for Asia Pacific Aviation and World Travel and Tourism Council

PART II: AIRLINES

While Garuda Indonesia is the national airline of Indonesia, the nations largest privateairline, Lion Air, currently commands the largest domestic capacity share, at 40.8% of thetotal (equating to slightly under 400,000 weekly seats), considerably more than Garuda

Indonesia, with its 24.5% capacity share (or 235,000 weekly seats). Lion Air describes itselfas a hybrid low cost operator, offering both economy and business-class seating.

Domestic Indonesia ca pacity (seats): Mar-2010

Source: Centre for Asia Pacific Aviation and OAG

Lion Air plans to grow and grow and grow

Lion Air, wholly-owned by Rusdi and Kusnan Kirana (Indonesias 22nd richest people in

2009, with a net worth of USD480 million), took to the skies from Indonesia in 2000 withone aircraft in its fleet. Within eight years of operation, Lion Air now operates to more than36 destinations in Indonesia and other destinations in the region (including Singapore,Malaysia and Vietnam) with up to 160 daily services.

VisitorIndex(1988=100)

274 277 294 283 329 346 358 375 393 384 390 405 430

OvernightIntl Visitors(000s)

5,064 5,153 5,033 4,467 5,321 5,002 4,871 5,506 6,209 6,143 6,284 6,636 7,198

Total Intl

Visitors(000s)

5,064 5,153 5,033 4,467 5,321 5,002 4,871 5,506 6,209 6,143 6,284 6,636 7,198

Averagetrip travelspend(USD)

982 1,024 1,050 904 902 904 913 971 1,165 1,033 799 1,217 1,260

Averagetrip fares'spend(USD)

75 86 102 95 80 114 91 88 87 91 97 100 103

Carrier Weekly Seats %

Lion Air 391,928 40.8%

Garuda Indonesia 235,106 24.5%

Sriwijaya Air 109,982 11.5%

Merpati Nusantara Airlines 73,079 7.6%

Mandala Airlines 64,640 6.7%

Wings Air 38,754 4.0%

Indonesia AirAsia 27,804 2.9%

Pt Trigana Air 12,558 1.3%

Indonesia Air Transport 3,940 0.4%

Riau Air 2,000 0.2%

Total 959,791 100%




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Lion Air destination map : Mar-2010

Source: Lion Air

Lion Air plans to expand its international network by mid-2010, with the carrier considering

services to Incheon, Beijing, Shanghai and Tokyo. The carrier added that China would bethe airlines main target, focusing on the leisure segment. Services to Japan and SouthKorea would be targeted more at business travellers.

Lion Air GM, Edward Sirait, in Dec-2009, stated negotiations with prospective partners havealready been initiated, commenting, were currently studying a plan to expand into EastAsia carefully. It should be finalised by June or July next year. We would establish severalnew flights to the region after we get the traffic rights.

To become the largest airline in Southeast Asia by fleet in the next decade

The carrier currently operates a fleet of 48 aircraft, including B737-900ER, B737-300/400,MD-80 and MD-90 equipment. Lion Air was the launch customer of the B737-900ER,receiving its first B737-900ER in Apr-2007 and currently having 32 of the aircraft type in itsfleet, with orders for a further 150 more.

Lion Airs existing and p lanned fleet: Mar-2010

Source: Centre for Asia Pacific Aviation and Ascend

Deliveries ramp up form one per month in 2010 to two between 2011-2015. It is a

breathtakingly bullish growth profile that will require considerable financing to achieve.

Lion Airs B 737NG delivery schedu le: Mar-2010

Aircraft Type In Service On Order Total

B737CFMI 10 0 10

B737NG 32 150 182

B747 2 0 2

MD-80 1 0 1

MD-90 3 0 4

Total 48 150 198

Delivery year Number of aircraft

2010 11




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Lion Airs fleet expansion could see it become the largest airline in Southeast Asia, ahead of

AirAsia (Malaysia), Singapore Airlines (Singapore), Malaysia Airlines (Malaysia) andVietnam Airlines (Vietnam), assuming all its orders are fulfilled. The carrier has thelargest number of aircraft on order (150), ahead of AirAsia (105) and Vietnam Airlines (73).

Fleet plans of select Southea st Asian air lines: Feb-2010

2011 26

2012 23

2013 24

2014 24

2015 24

2016 18

Total 150

Airline In Service On Order In Storage Total

AirAsia 48 105 1 154

Bangkok Airways 17 7 0 24

Batavia 37 0 10 47

Cambodia Angkok Air 4 0 0 4

Cebu Pacific 29 17 0 46

Gardua Indonesia 70 31 0 101

Indonesia AirAsia 16 0 1 17

Jetstar Asia 6 3 0 9

Jetstar Pacific 6 0 0 6

Lao Airlines 8 2 0 10

Lion Air 48 15 0 2 20 0

Malaysia Airlines 88 41 1 130

MASWings 17 2 1 20

Merpati Nusantara Airlines 20 13 36 69

Myanmar Airways 2 2 0 4

Philippine Airlines 41 6 0 47

Royal Brunei Airlines 10 5 0 15

Silk Air 17 9 0 26

Singapore Airlines 106 59 4 169

Thai AirAsia 19 0 1 20

Thai Airways 87 8 4 99

Tiger Airways 10 53 0 63




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Whats happening to Lion A ir Australia?

In Jan-2008, Lion Air announced plans to commence Australian operations in late 2008,

flying as Lion Air Australia, and using a six B737-900ER aircraft fleet. Under the proposedplan, Lion was to hold 49% of the new company, which was to be 51% owned by (nowdefun t) small Australian charter operator, SkyAirWorld. Under the proposed plans, Lion AirAustralia was initially only looking at international routes, to Indonesia and Southeast Asia,although a move into the domestic market was expected.

However, these plans were thrown into disarray in Feb-2009 when Brisbane-basedSkyAirWorld suspended operations, with GECAS repossessing all the carriers Embraeraircraft. The carrier reportedly owed creditors more than AUD36 million. Lion Air has not

commented on its plans following SkyAirWorlds collapse.

So, the question remains as to what exactly the carrier plans to do with all its aircraft. News

of other potential cross-border JVs in Asia has ceased amid the global economic downturnbut as conditions improve, Lion Air may soon dust off its offshore expansion plans.

Wings Air a 100% subsidiary of Lion Air

Lion Air is also the parent company of Wings Air, which operates a domestic networkcovering 22 destinations. The fully-owned Lion Air subsidiary plans to continue to expand itsnetwork in Western Indonesia, following the launch of new routes in Central and EasternIndonesia.

Wings Air plans to expand over the next two years, with the delivery by 2011 of 15 ATR 72-

500 aircraft (the carrier has orders for 30 new aircraft). The carrier took delivery of the first

three of the aircraft type in Jan-2010 and plans to use the aircraft to develop feeder routesto the main hubs and expand its network to remote areas of Indonesia. The aircraft will alsobe used to replace MD 80 aircraft on existing routes and increase frequencies on existingroutes operated with Lion Air B737-900ERs.

Wings Air currently operates one ATR 72-500 in Western Indonesia, with two of the aircraftoperated in the Eastern and Central regions of the country (the carrier also operates twoBombardier Dash 8s and five MD-80s). The carrier recently launched Bandung-Yogyakarta,Yogyakarta-Surabaya and Surabaya-Semarang services in Feb2010, with future plans tolaunch Denpasar-Labuan Bajo, Denpasar-Maumere, Denpasar-Bima, Medan-Sibolga,Medan-Lhokseumawe, Medan-Gunungsitoli, Medan-Nias, Medan-Meulaboh and Padan-

Bengkulu services.

Garudas profit performance better than many others and anticipated to soar -but pressure intensified in the domestic market

Surging competition on regional, domestic and short-haul international routes - from bothLCCs and full service carriers - has intensified the pressure on Garuda Indonesia.

A long-time poor performer, Garuda has, however, enjoyed a return to form in recent yearsunder President Director, Emirsyah Satar. Under his leadership, Garuda implemented aBusiness Transformation Programme in 2005, which saw losses progressively reduced insubsequent years, until net profits returned in 2007, which was followed by a net profit of

USD67 million in 2008. The carriers net and operating profit margins improved accordingly,to 3.7% and 5.6%, respectively, in 2008.

Garuda Indonesia oper ating and net profit margins (%): 2003 to 2008

Vietnam Airlines 52 73 1 126

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Source: Centre for Asia Pacific Aviation and Garuda Indonesia

The 2008 net profit was up ten-fold from 2007, as the result of better revenues (whichsoared 38%), improved traffic results (up to 10.3 million passengers, with an passengerload factor of 73%) and a successful effort to weed out corruption in the awarding ofcontracts.

Garuda Indon esia passenger (m illions) and pa ssenger load factors (%): 2003 to 2008

Source: Centre for Asia Pacific Aviation and Garuda Indonesia

The 2008 net profit was, however, also assisted by the sale of Garudas corporate

headquarters building in downtown Jakarta. Garuda also completed negotiations mid-year torestructure USD465 million in debts owed to the European Credit Agency (ECA). Under theagreement with the ECA, Garuda secured a seven-year extension on debt payments.

Garuda has also benefited in that the global economic crisis had a minimal effect on theIndonesian economy, meaning that Garuda is seeing greater potential in the premiumtravel sector, compared with other markets where premium travel is on the decline.

In 2009, Garuda Indonesia signed MoUs for corporate sales with 580 large companies in

Indonesia, with total income reaching USD64.7 million (IDR600 billion), and recentlyconfirmed the conclusion of a corporate sales agreement with Shell Indonesia, as part of theairline's efforts to enhance service towards its corporate customers. In line with increases in

capacity in 2010, the airline targets cooperation with 750 companies to secure a potential




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income of USD215.5 million (IDR2 trillion).

66% increase in net profit expected in 2009; three fold increase by 2014

Mr Satar stated the carrier expects to report a bumper net profit of approximately USD108

million for 2009 (a 66% year-on-year increase), after handling 10.3 million passengers and106,000 tonnes of cargo.

Mr Satar is bullish on his carriers financial future, stating the carrier is targeting a net profitof USD370 million by 2014, by increasing its fleet and expanding its route network.However, question marks remain over the sustainability of its profits over the short andmedium term, as Garuda attempts to fend off rising competition from Lion Air and the LCCs.There will be a huge influx in seats in Indonesia from next year.

Garudas Quantum Leap" a high growth, high risk strategy

In addition to this net profitability target, Garuda's five-year "Quantum Leap" strategy also

contains several other ambitious growth targets. For example, the airline aims to increasethe number of international departures by more than 300% to 1,222 a week by 2014,expanding its destinations by some 51%.

Garuda s 2014 Quantum Lea p Program me highlights

Source: Centre for Asia Pacific Aviation & Garuda Indonesia

To more than double existing fleet

As part of the Quantum Leap programme, Garuda Indonesia is planning a massive fleetrejuvenation and enhancement strategic, as part of which the carrier plans to more thandouble its current fleet of 67 aircraft to 116 aircraft over the next five years, based mainlyon B737-800NGs and A330-300/200s, which are operated on medium and long haul routes.The airline will also introduce ten B777-300ERs on new ultra long-range flights starting in2011 as it expands its international network.

During 2010, Garuda plans to add ten domestic routes, and increase frequencies on regional

services including Singapore and Hong Kong. The carrier added that it plans to developsecondary hubs in Indonesian major cities, in addition to its major hubs in Jakarta and

Denpasar, as part of the 'Quantum Leap' programme. The secondary hubs would includecities such as Balikpapan in East Kalimantan, Medan in North Sumatra, Surabaya in EastJava and Makassar in South Sulawesi.

Garuda has come a long way since commencing service in 1949 as Indonesias first carrierwith a single DC-3, growing to currently operate to more than 46 domestic and internationaldestinations. In 2008, Garuda aircraft provided 68,998 domestic services, 79.4% of thecompanys total main brand services, with 27 domestic routes.

Garuda Indonesia Route Map (based on the 2008 Annual Report)

BusinessAspect

2014 target

Fleet50 new B737-NG 800s, ten B777-300ERs and four A330-200s to increase fleet from62 to 116 aircraft by 2014

Destinations Increase from 41 in 2009 to 62 in 2014

Passengernumbers

Increase from 10.1 million p/a to 27.6 million in 2014

Profits IDR3.7 billion in net profits from 2014

Quality Increase Skytrack rating from four to five stars by 2014




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Source: Garuda

Widebody aircraft serve long haul routes on the companys international network todestinations such as Japan, Korea, China and the Middle East. The company serves 24international routes, with Australia currently the carriers largest international market,accounting for 21.9% of international capacity (comparatively, Singapore was previously thecarriers largest market, with close to 35.0% international capacity in Jul-2008, followed byAustralia with approximately 18% of the capacity share, and Japan).

Garuda Indonesia interna tional capacity (seats): Mar-2010


Back to Europe at last

Following the Ministry of Transport of the European Union lifting the ban imposed on Garudaand other three Indonesian domestic carriers in Jul-2009, Garuda is planning to resumeflights to Europe by Jun-2010. Garuda aims to serve Amsterdam, Frankfurt and London,with the Dutch capital the first on the list (with Jakarta-Dubai-Amsterdam service). Garudafaces less direct competition in long-haul markets, so re-establishing itself in Europe andthe Middle East will be crucial for the airline in coming years.

Arrival Country Number of weekly seats Percentage

Australia 6,952 21.88%

Singapore 6,860 21.59%

Saudi Arabia 6,420 20.21%

Japan 3,809 11.99%

China 2,202 6.93%

Hong KONG SAR 1,554 4.89%

South Korea 1,545 4.86%

Malaysia 1,442 4.54%

Thailand 986 3.10%




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The carrier will initially deploy A330 aircraft on the Amsterdam route, but plans to take

delivery of ten B777-300ERs from 2010 to allow the introduction of non-stop services toEurope.

Mr Satar commented, we have set an aggressive five-year growth strategy for the airlinethat will allow Garuda to take its place alongside other leading international airlines in theAsia Pacific region. Establishing a strong presence in Europe is an important element of

meeting these targets.

As a renewed starter in the field, Garuda is sure to feel the weight of heavy competition thatfast-growing Middle East and other established Asian hub carriers will provide, and this willmean the prospects of profits could be elusive.

In other network news, Garuda Indonesia reportedly plans to resume Denpasar-KualaLumpur and Medan-Kuala Lumpur services by Sep-2010, stating it has landing rights in

Kuala Lumpur and plans to apply for slots in mid-2010. The carrier suspended the servicesin 2004, due to a lack of demand. Garuda currently achieves load factors of approximately70% on its Jakarta-Kuala Lumpur route.

Garuda wins approval to restructure debt ahead of IPO

The carrier added that its long-running debt restructuring is almost complete, with plans toconduct an IPO on the Jakarta Stock Exchange in 3Q2010, in line with expectedimprovements in global macro-economic conditions. The carrier has already receivedapproval from parliament to float up to 40% of its shares and plans to raise USD300 million

to support the carriers long-term growth plans. It will also increase the transparency of thecarriers operations.

100% of the carriers debtors accepted Garudas financial restructuring in Jan-2010, with

the approval paving the way for the carriers IPO. As part of the restructure, the carrier has

reduced its debt by over USD45 million, significantly strengthening the carriers balancesheet. The carriers debts, as at Dec-2008, stood at USD570 million, as follows:

European Credit Agency: USD465 million reorganisation completed in mid-2009; Bank Mandiri: USD100 million in mandatory convertible bonds; Unnamed creditor in Singapore: USD130 million in floating rate notes;

Other: USD45 million.

Garuda Executive VP Finance, Eddy Porwanto, commented that the agreement represented

a very important milestone for us, adding that having completed our debt restructuring,we will be in a much better position in terms of our balance sheet for the IPO.

However, a key concern is maintaining operational efficiency amid rising fuel prices (the

carrier expects its aviation turbine fuel consumption to increase 20% this year, to 1.2 billionlitres). In reaction to this, Garuda signed an MoU with Pertamina in Feb-2010 to secure fuelsupplies from the company for Garudas overseas operations at a considerably lower price,at destinations including Dubai, Bangkok, Kuala Lumpur, Hong Kong and Singapore. Garudaexpects the MoU to cover 80% of its fuel requirements in foreign countries.

Garuda Indonesia aims for SkyTeam membership

Improving the airlines product is now a central focus. Mr Satar commented that the carrieris lacking a distinct uniqueness, with the carrier currently undergoing a branding exercise

to create a new service culture for Garuda Indonesia based on the traditions and values ofIndonesian hospitality.

A bigger step however was Garudas plans, announced in Jul-2008, to join the SkyTeam




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Alliance, having secured a commitment by cooperation partner and SkyTeam founding

member, Korean Air, to endorse the Indonesian airlines application.

Membership of SkyTeam, which includes Aeroflot, Aeromexico, Air France-KLM, Alitala,China Southern, Czech Airlines, Delta Air Lines, Korean Air and Vietnam Airlines(pending), would be a major boost for Garuda.

In Nov-2009, Air France-KLM Group President, Pierre Gourgeon, added that it is verypleased to support the candidacy of Garuda, a long-standing partner of ours in Asia, butadded that the process would take a year until Garudas official entry, meaning a possible2011 entry into the alliance. Mr Satar added, the soonest, the better.

Garuda Indonesia Codeshare Operations

Source: Centre for Asia Pacific Aviation and Garuda

Considering to launch a separate LCC subsidiary? Future of Citilink remainsunclear

Another critical strategic issue for Garuda is its reaction to the current low cost threat in theIndonesian market. Garuda is reportedly considering plans to launch a separate LCCsubsidiary, Citilink, by the end of 2010, to defend and grow its share of the domestic and

short-haul international markets. Mr Satar, in Feb-2010, stated the carrier would operate

approximately 20 aircraft, including some of Garudas older B737s.

The carrier currently operates a low fare unit (also branded Citilink) service on certain

domestic routes, but its future is unclear, as the mainline operation looks to significantlyexpand its own short-haul network over the coming 12-18 months.

Citilink currently operates three B737-300s from its parent from its base in Surabaya.Citilink was established in 2001 and currently operates to Balikpapan, Banjarmasin, Batam,Ujungpandang and Jakarta. The units operation has been reduced from its peak in 2005 ofthree B737-300s and six Fokker F28s, as the Group has refreshed its fleet.

Implementation of the LCC strategy will be crucial, and it remains to be seen how much

autonomy the budget unit will be given by its parent.

Citilink is one of the carriers four strategic business units (also including Garuda Sentra

Medika (GSM) Business Unit, Garuda Indonesia Training Centre (GITC) Business Unit and

Codeshareservices

Details

China Airlines

Jakarta-Taipei (daily) and Denpasar-Taipei (daily) services

Jakarta-Taipei freight services (weekly) and Jakarta-Penang-Taipei freight services(twice weekly)

Korean Air

Jakarta-Seoul (daily) and Denpasar-Seoul (9 times weekly)

Jakarta-Incheon-Singapore-Jakarta freight services (3 times weekly) and Jakarta-Bangkok-Incheon freight services (weekly)

Silk Air

Singapore-Medan (15 times weekly), Singapore-Palembang (3 times weekly),Singapore-Semarang (daily), Singapore-Solo (3 times weekly), Singapore-Ampenan (3times weekly). Singapore-Balikpapan (daily) and Singapore-Pekanbaru (4 timesweekly)

Philippines Air Jakarta-Manila (3 times weekly) and Jakarta-Singapore-Manila (4 times weekly)

ChinaSouthernAirlines

Ghuangzhou-Jakarta (8 times weekly)

Vietnam Airlines Jakarta-Singapore-Saigon (daily)

SingaporeAirlines

Singapore-Denpasar (daily)




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Garuda Cargo Business Unit), with the carrier also owning five subsidiaries: PT Aerowisata

(travel, hotel, transportation and catering services); PT GMF Aero Asia (aircraftmaintenance); PT Abacus Distribution System (computer reservation provider); PT GapuraAngkasa (ground handling service) and PT Lufthansa System Indonesia (IT provider andsolutions).

Garuda Indo nesia Strategic Business Units


Garuda Indonesia subsidiary companies


Sriwijaya Air and Merpati Indonesias third and fourth largest domestic airline

The third largest domestic carrier in Indonesia is Sriwijaya Air, although the carriers weekly

capacity is less than half of Garudas and less than a third of Lion Airs.

In 2009, Sriwijaya Air expects to have carried more than six million passengers to a total of33 domestic and international destinations and in 2010, hopes to add new aircraft to launch

SBU DetailsGaruda SentraMedika (GSM)Business Unit

Plans to become a leading center for health care services and a preferred providerfor the airline as well as state-owned enterprises in Indonesia

Garuda IndonesiaTraining Centre(GITC) BusinessUnit

Sells cargo space in the companys aircrafts to air cargo service-providers andcurrently has no freighter aircrafts among its operational assets

Garuda CargoBusiness Unit

A Learning and Development Unit designed to develop the companys humanresources (HR).

Citilink BusinessUnit

Provides low cost fares targeting the steadily-increasing budget traveler segment inthe domestic market. Destination restructuring was initiated in Jun-2007 by

establishing Batam as the hub of the destination network. The move to restructuredestinations was based on profitability, market segment, competitive climate andthe companys presence through its main brand destinations.

Subsidiary Details

PT Aerowisata

Established in 1973, PT Aerowisata offers services related to hospitality andtourism. It has a number of subsidiaries engaged in hotel, food services, land-transportation services, and tours & travel agencies. These subsidiaries includeHotel Development Corporation, PT Senggigi Pratama International, PT AngkasaCitra Sarana Catering Service, PT Mandira Erajasa Wahana, PT Biro PerjalananWisata Satriavi, Garuda Orient Holidays Pty. Ltd. and PT Aerojasa Perkasa.

PT AbacusDistributionSystems Indonesia(PT Abacus DSI)

Established in 1993, the companys corporate vision is to become the leading GDS)and communication and information technology service provider in Indonesia. Thecompanys scope of activities covers computerized reservation system services,lease of computer equipments to travel agencies, providing employee-trainingfacilities for travel agencies and providing technical assistance in CRS for travelagencies

PT GarudaMaintenanceFacility Aero Asia(GMFAA)

Incorporated in 1992, to implement and support the Indonesian governmentseconomic and national development policies, particularly in the field of aircraftmaintenance and repair services as well as other businesses related to aircraftmaintenance, repair services and to generate profit for Garuda through aircraftmaintenance and repair services including engines and components.

PT LufthansaSystems Indonesia

Based in Jakarta, the company was established in 2005, with its scope of activitiescovering services in consultation and re-engineering of information technologysystems as well as maintenance for aviation companies and other industries. Thecompanys shares are owned by PT Garuda Indonesia (Persero) in the amount of3.4 million shares (51%) and Lufthansa System Group in the amount of 2.3 millionshares (49%).




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services to Bangkok, Guangzhou, Kuala Lumpur and Perth.

The carrier recently (in mid Jan-2010) migrated to SITAs Horizon passenger management

and distribution platform. As part of the five-year, USD9.5 million contract, the airline isimplementing several Horizon services including SITA Reservations, Inventory andDistribution, as well as SITA Ticketing, Departure Control Services and Passenger RevenueAccounting to support its 20% growth rate in passenger numbers.

State-owned Merpati Nusantara Airlines (MNA) is currently the fourth largest airline in thedomestic Indonesian market. The carrier has reported losses in all its 11 years of operationssince its launch in 1998, although the carrier improved its financial performance from late2008, according to the carriers President Director, Bambang Bhakti (in Nov-2009).

The carriers President Director added that revenues in 2009 were expected to total IDR2trillion (USD217.5 million), or approximately 10% of Grauda Indonesias revenues, in the

year. Also in 2009, MNA purchased six new aircraft to increase the number of its fleet to 24,with the carrier planning to increase its fleet to 46 in 2010 (the carrier currently operates afleet of 18 aircraft - seven B737CFMs, one B737JT8D, three Bombardier DHC-6 Twin Otters,two CAIC MA60s, one Fokker 100, one Indonesian Aerospace 212 and one Indonesian

Aerospace CN-235. The carrier currently has 13 CAIC MA60s on order, according to OAG).

The carrier currently operates 150 routes, with plans to increase its network to 250 sectorsin 2010. Most of the carriers routes are domestic services, with the carrier currently onlyserving two international destinations Kuala Lumpur and Dili.

Merpati, which fulfils an important social obligation role with services to underdevelopedregional cities, will likely continue to receive government support into the future.

Below average LCC penetration in Indonesia

LCCs remain a small segment of the Indonesian market, with LCC penetration in the countrybelow the average in the Asia Pacific region (and the world), at only 5.4% of total domesticcapacity (seats) share (compared to an average of 15.7% within Asia and 21.9%worldwide).

Asia Pacific dome stic LCC penetration by capacity (seats) by coun try: 2009

Source: Centre for Asia Pacific Aviation & OAG Facts

The LCC share has been stable at around 5% since 2006.

Indonesian dom estic capacity (seats per month), LCCs as a pe rcentage of the total: 2001 to




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2009


On international routes, the picture is quite different, as the LCC sector is performingstrongly (driven by growth by Indonesia AirAsia, Jetstar Asia, Tiger Airways and MalaysiaAirAsia), having doubled their capacity share over the past two years. This is largely due tothe easing of restrictions on foreign LCCs by the Indonesian Government from serving thecountrys four main gateways, as well as the growth of home-based LCCs expanding

abroad.

Indonesian interna tional capacity (seats per m onth), LCCs as a percentage of the total:2001 to 2009


Mandala well positioned wi th key strategic investors Cardig International andIndigo Partners

Of the domestic Indonesian LCCs, Mandala Airlines has the most developed network,concentrating on the main route of Jakarta with other cities in Indonesia, including Medan,Padang, Jambi, Pekanbaru, Batam, Semarang, Yogyakarta, Malang, Surabaya, Denpasar,Makassar, Manado, Banjarmasin, Balikpapan, Tarakan and Ambon. This network has beenreworked to enable the carrier to benefit from Adam Airs exit from the market and to focuson historically successful routes to cities where Mandala was strong in the 1990s and early

2000s.

Mandala Airlines was founded in 1967 and commenced services in 1969 at a time when




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Indonesia was re-building an economy devastated by political and economic problems.

Mandala, owned by the Army (Kostrad), was in the 1990s the market leader on manyroutes.

However, following de-regulation of the aviation industry in 2002, Mandala, as a legacycarrier, self-admittedly was slow to react to the new environment, and could not competewith the new start up airlines. In 2005, a crash by a B737 soon after take off resulted in the

loss of almost 130 passengers and people on the ground, placing further pressure on theairline.

Along with growing concerns about the business influence of the military, this led to therequirement for Mandala Airlines to be sold. The airline was sold to Cardig International inApr-2006 who in turn sold 49% to leading LCC investor, Indigo Partners. Both investors

recognized the huge potential of Indonesias growing market and the requirement for awell-run modern generation airline.

Mandala Airlines key investors

Source: Centre for Asia Pacific Aviation and Mandala Airlines

The acquisition of Mandala by specialist investors heralded a period of significant change,

commencing with the rebranding of the airline and the addition of two Airbus A320 to thefleet and a change in strategy to position itself in the low cost market as a safe airline withyoung fleet and successful IATA and manufacturers safety audits. The strategic goal is togrow Mandala Airlines into one of the leading airlines in Indonesia and the region.

Mandala currently operates its extensive network across Indonesia utilising a fleet of twoA319s and seven A320s. With 30 aircraft on order, Mandala expects to grow its fleet by25% per year. While no traffic results have been published, the carrier was targeting 8-9million passengers in 2009, an 80% year-on-year increase from 2008, which was up 50%

on 2007.

Positive outlook for rapidly-expanding Indonesia AirAsia in 2010, despite losses

in 4Q2009

Another key, and growing LCC, in the Indonesian market is AirAsia Group subsidiary,Indonesia AirAsia. Established as private airline, Awair (Air Wagon International), servicescommenced operations in 2000 but were suspended in 2002 due to financial problems. InNov-2004 AA International Limited, 99.8% owned by AirAsia, acquired a 49.0% of Awairand re-launched it in late 2004, changing its name to Indonesia AirAsia in 2005. It focusesmore on the international market than Mandala, with services to countries includingAustralia, Malaysia, Singapore and Thaland.

AirAsia Group, upon the release of 4Q2009/FY2009 financial results, stated Indonesias

outlook for 1Q2010 is positive with encouraging passenger growth and unit cost

improvements, adding that a platform for sustained profitability has been established.

Indonesia AirAsia, however, reported losses in 4Q2009, with an EBITDAR loss of USD4.8million. The carriers 4Q2009 operating and net results were also in the red, of USD4.0

Investor Details

CardigInternational

Specialises in JV companies focused on the aviation sector i.e. airport services,integrated logistic solutions, in-flight catering, cargo airlines, international courier,passengers airlines and currently has investments in ten companies. The key companiesthat support the Indonesian aviation sector are JAS Airport Services (in partnership withSingapore Airport Terminal Services - SATS) and JAS Aero Engineering (inpartnership with Singapore Airlines Engineering Company - SIAEC).

IndigoPartners

Specialises in Airline and Transport sector investments and has a stake in SpiritAirlines (USA), Wizz (Europe), Tiger (Singapore), Abnanova Airlines (Russia) and,Mandala Airlines (Indonesia).




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million and USD15.9 million, respectively, compared to profits in the previous corresponding

period.

Indonesia AirAsia financial highlights for three m onths ended De c-2009

Source: Centre for Asia Pacific Aviation & AirAsiaBased on the conversion rate at 1 IDR = 0.000108342 USD^ Compared to a EBITDAR profit of USD9.1 million in the previous corresponding period~ Compared to a core operating profit of USD814,410 in the previous corresponding period* Compared to a net profit of USD814,410 in the previous corresponding period

The Indonesian operations, however, achieved significant passenger growth of 49% year-on-year in the quarter, with an average load factor of 74.1% (+5.3 ppts), supported by

increased passenger demand. However, average fares were lower by 21% (to USD59.09)due to the significant capacity addition of 55% in the period.

Indonesia AirAsia load fa ctor developmen t (%): 1Q2008 to 4Q2009

Source: Centre for Asia Pacific Aviation & AirAsia

The carriers growth has resulted in Indonesia AirAsia overtaking Garuda as the largestcarrier operating to/from Indonesia (with 14.3% and 13.7% capacity share, respectively).

AirAsia Malaysia is the third largest carrier operating to/from Indonesia, with a 9.3%capacity share.

Curren cy: USD 4Q2009 % Change

Revenue (mill) 62.5 +22%

EBITDAR (4.8) ^

EBITDAR margin (%) -7.3% -25.1 ppts

Core operating profit (4.0) ~

Core operating profit margin (%) -6.3% -7.9 ppts

Profit after tax (mill) (15.9) *

Profit after tax margin (%) -25.4% -27.0 ppts

Average fare 59.09 -21%

Traffic passengers 939,703 +49%

Traffic (RPKs) (mill) 1,1188 +67%

Capacity (ASKs) (mill) 1,604 +55%

Load factor 74% +5.3 ppts




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Capacity (seats) to/from Indonesia (sea ts): Mar-2010


AirAsia added the realignment of AirAsia Indonesias network capacity to focus oninternational routes to Australia and Singapore is proving to be immensely beneficial, andhas enabled the improvement of the carriers RASK vs CASK spread, as the Australian andSingapore routes have produced higher yields and load factors. Improved yields are

anticipated in 2010, with cost improvements also expected, as the carrier transitions to asingle-aircraft fleet.

Indonesia AirAsia cost per ASK developm ent (US cents): 1Q2008 to 4Q2009


Indonesia AirAsia had a fleet of 16 aircraft (ten A320s and six B737s) as of Dec-2009, andis scheduled to take delivery of four A320s in 2010. The carrier is targeting a 20% increasein capacity in 2010, followed by a 23% increase in 2011, to become the fastest growingsegment of the AirAsia Group.

Carrier Weekly Seats %

Indonesia AirAsia 34,104 14.27%

Garuda Indonesia 32,752 13.70%

AirAsia 22,140 9.26%

Singapore Airlines 20,727 8.67%

Lion Air 13,713 5.74%

Malaysia Airlines 12,786 5.35%

China Airlines 9,714 4.06%

Cathay Pacific Airways 9,050 3.79%

Silkair 6,170 2.58%

Jetstar Airways 5,712 2.39%

Valuair 5,400 2.26%

Emirates 5,096 2.13%

Other 61,633 25.8%

Total 238,997 100.00%




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AirAsia Gro up capacity grow th plans: 2010 and 2011


In the full year of 2009, Indonesia AirAsia reported an EBITDAR of USD24 million, althoughthe carriers operating and net results were losses of USD8.6 million and USD20.5 million,respectively.

Indonesia AirAsia financial highlights for 2009

Source: Centre for Asia Pacific Aviation & AirAsiaBased on the conversion rate at 1 IDR = 0.000108342 USD^ compared to a core operating loss of USD15.3 million in the previous corresponding period/ Compared to a loss after tax of USD15.3 million in the previous corresponding period

And a host of other domestic airlines

There are also a number of smaller Indonesian airlines currently operating in the domesticmarket, with a significant number of other airlines currently registered, but yet tocommence operations.

Indonesias other domestic airlines

Curre ncy: USD 2009 % Change

Revenue (mill) 218.5 +32%

EBITDAR 23.6 +377%

EBITDAR margin (%) 10.8% +7.8 ppts

Core operating profit (8.6) ^

Core operating profit margin (%) -3.9% +5.3 ppts

Profit after tax (mill) (20.5) /

Profit after tax margin (%) -9.4% -0.2 ppts

Average fare 54.64 -10%

Traffic passengers (mill) 3.5 +40%

Traffic (RPKs) (mill) 4,133 +51%

Capacity (ASKs) (mill) 5,609 +51%

Load factor 74% -0.2 ppts

Fleet




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Source: Centre for Asia Pacific Aviation & Ascend^ Six ATR42s, three ATR72s, one B737CFMI, one B737JT8D, two Bombardier DHC-6 Twin Otters~ Ten B737CFMIs and 14 B737JT8Ds* Two Avro RJ Avroliners and five Fokker 50s> Two ATR42s, one Falcon 20/200, three Fokker 50s, one Fokker F.27 and two Hawker Beechcraft 1900s# Two A319s, five A320s, two A330s, 23 B737CFMIs and five B737-JT8Ds

However, the Indonesian Government, last year, introduced a law requiring all scheduledairlines to have a minimum fleet of ten aircraft by Jan-2012 - and that carriers must own

some aircraft, rather than relying entirely on leases. This law, coupled with the intense

competition in the Indonesian market, could result in further carrier consolidation, withsmaller players forced to either merge or close down.

All of the Indonesian carriers are based in Jakarta, with the exception of Riau Airlines,making Jakarta the largest domestic and international hub in the country.

The growth of air transp ortation hubs for dome stic passengers (depar tures): 2009

Airline Launch Hub Destinations Operations

Batavia Air 2002 Jakarta 30# 30

Operates to approximately 30 domesticdestinations, as well as Guangzhou,Singapore and Kuching (Malaysia). Theairline commenced services in Jan-2002 one of several new entrants in Indonesiasince the start of the decade. However,

Batavia Air has been in business in Indonesiafor more than 20 years, initially as a travelbureau.

SriwijayaAir

2003 Jakarta 24~ 33

Offers domestic flights to major cities inIndonesia and limited internationaldestinations. The carrier currently has aweekly capacity of 114,294 seats, with 41sectors operated.

TriganaAir

1991 Jakarta 13^ 35

Operates approximately 20 domestic sectors,with a weekly capacity of approximately13,000 seats. Operates some codeshareservices with Mandala Airlines.

IndonesiaAirTransport

1968 Jakarta 9> 8

Provides aviation services to the oil, gas andmining industries within Indonesia andSouth-east Asia, on and offshore. Operatesweekly capacity of approximately 4,000seats, over six sectors. The carriers largestsector is Denpasar Bali-Mataram.

RiauAirlines

2002Pekanbaru(Riau,Sumatra)

7* 5

Majority-owned by the ProvincialGovernment of Riau, with other localgovernment interests from provincesincluding Lampung, Bangka, Belitung andBengkulu. In 2008, the carrier reported a losof INR16 billion (USD1.45 million). Thecarrier operates four domestic routes:

Denpasar Bali-Labuan Bajo, Lubuan Bajo-Ruteng, Denpasar Bali-Tambaloka andTambaloka-Waingapu.




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Source: Centre for Asia Pacific Aviation and BPS-Statistics Indonesia

Juanda Surabaya is the second largest air transportation hub for domestic passenger in thecountry, behind Bali.

The growth of air transp ortation hubs for international passengers (depar tures): 2009

Source: Centre for Asia Pacific Aviation and BPS-Statistics Indonesia

Outlook: Strong growth ahead, but will profits follow?

Indonesia is entering its most exciting aviation development phase since the 2002deregulation of the domestic market. A revitalised flag carrier, the presence of two LCCswith outstanding international pedigree and a fast-charging private carrier makes for ahighly dynamic market place.

The countrys fleet profile is set to grow rapidly over the next 12 months, with capacitylevels soaring from 2011-2015, according to current orders. This will create enormous

competitive tension in the market, and yields are expected to come under pressure, even inan improving economic environment. In turn, profitability may have peaked in Indonesia

during the past couple of years of relative capacity restraint.

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