Board of Directors’ Report


Dear Distinguished Shareholders,

Being the leading low-cost carrier, we have always been committed to deliver quality in our services to ensure safe and comfortable flights for our passengers. 2018 was particularly challenging for the commercial aviation industry in general. Other than the volatile global economy and major disasters in Indonesia, the carrier was most impacted by the increasing jet fuel price and operating costs. Backed by our strategic measures, we still managed to deliver good performance on some of the key performance indicators in 2018. Our ancillary revenue grew and we also recorded higher number of passengers. We are proud to have carried 5.2 million passengers.

Rp917.91 billion Revenues from Ancillary and Other Segment

Despite a challenging year, we appreciate that the Board of Directors remained cosistent in implementing the strategic measures. We believe that the strong position that the Company has in the aviation industry will lead to a better performance and that we will continue to fly with Indonesia.

2018 ECONOMY IN BRIEF

As one of the largest emerging markets in Asia, Indonesia experienced significant growth in 2018, as shown by its gross domestic product (GDP) growth of 5.2% that was supported by strong domestic spending and investment. In retrospect, this was greatly influenced by the Indonesian government priorities to enhance infrastructure; streamline regulations to boost competition and competitive edge; improve education quality as well as alleviate labor market regulations to support employment.

On the other hand, intensified global uncertainty from “trade wars” amid the ongoing US monetary normalization that has led portfolio outflows from emerging economy countries including Indonesia. In addition to the current account deficit, foreign outflows have resulted in downward pressure on Indonesian assets, stocks as well as currency. In the 2nd quarter of 2018, the Rupiah depreciated 4.8% and additionally 2.7% in July and August. In an effort to defend the Rupiah, Bank Indonesia (BI) raised its 7-Day Reverse Repo Rate 6 (six) times since May 2018.

Although the decisive and swift policy actions have significantly increased resilience to financial market volatility, Indonesia’s moderately low levels of exports and foreign direct investment (FDI) suggested that pressures from capital outflows were likely to persist. On a positive note, risk associated with financial crisis for Indonesia remains low due to strong policy coordination by the government, improved fundamentals and healthy foreign reserves.

INDUSTRY AND BUSINESS ANALYSIS

Indonesia’s commercial aviation industry experienced challenges in 2018, which disrupted their operations and affected profitability. The multiple volcanic eruptions in Bali, earthquakes in Lombok and tsunami in Palu have imposed a negative impact on both tourism and the aviation industry. Nevertheless, the Indonesian government deserved to be appreciated for its leadership in swiftly carrying out recovery measures in the affected areas. The prompt reaction combined with foreign aid played a huge part in the disaster mitigation process.

On the costs side, the weakening of the Rupiah against the US Dollar as well as significantly higher jet fuel price during the year put a heavy pressure not only for AirAsia, but also for all airline operators in Indonesia. Average jet fuel price increased by around 32.8% from around US$64/barrel in 2017 to as US$85/barrel in 2018. Additionally, as the majority of the aircraft leasing and maintenance costs are paid in US dollar, depreciation of Rupiah against the US dollar inevitably led to rising operational expenses. Overall, considering that fuel, aircraft lease and maintenance costs account for about 70% of the airline’s cost structure, the increase in airline operating costs was unavoidable for Indonesian aviation sector in 2018.

STRATEGIC MEASURES IN 2018

In response to those challenges and observing the AirAsia Values, the Company has implemented a number of strategic measures that have been crucial in securing its position to be the world’s lowest cost airline while maintaining its priority of the customers’ safety and comfort. Backed by the largest LCC in Asia, the Company enjoys unparalleled synergy potential that the region can offer. Its Low Cost Carrier business model has made AirAsia the world’s leading lowest cost airline with resilient profit growth that has successfully maximized the shareholder’s value.

To further establish its position as the leading Indonesian LCC in International Route, the Company is determined in reinforcing its position in Asia and ASEAN market through network expansion and frequency additions to further dominate existing markets and hubs.

Being part of the AirAsia Group also means the Company gained great advantage in bulk-buying procurement process and in receiving a more competitive pricing. Additionally, its synergy with the Group has faciltiated the Company in implementing various digital initiatives, co-developed with AirAsia Group, to improve business efficiency and to enhance customer experience.

Commercially, in 2018 the Company was focused on increasing ancillary target to 25% through a number of channels that include administrative fees, baggage fees, AirAsia’s ‘Santan’ (Inflight F&B), Seat Selections, RedCargo, Fly Thru, AirAsia Insure, as well as the new eCommerce Market Place, Merchandise & Duty Free ‘OurShop’.

The Company also exerts itself to evolve with its customers’ needs by becoming the leading digital LCC airline through Data, Centralisation & Digitalisation that will not only provide personalized and seamless services for its increasingly discerning customers, but also help the Company reduce costs further by automating more operations and integrating all operational data.

In regards to of share ownership, as of 9 October 2018, PT Rimau Multi Investama (RMI) has fully transferred all of their shares in PT Indonesia AirAsia Indonesia Tbk (IDX: CMPP) to AirAsia Investment Limited (AAIL) as previously stated in the prospectus during the Rights Issue done on 29 December 2017. Upon the completion of this, AAIL holds 49.25% of CMPP, PT Fersindo Nusaperkasa (FNP) holds 49.66% of CMPP while the Public shareholding amounts to 1.09%.

BUSINESS PERFORMANCE IN 2018

During the 4th quarter, the eight aircraft previously operated by Indonesia AirAsia Extra (“IAAX”) have been fully transferred back to Indonesia AirAsia (“IAA”), resulting in the Company’s higher than normal 4Q18 numbers. By the end of 2018, in addition to the eight aircrafts transferred back from IAAX, 1 additional aircraft was delivered in July making the total fleet size in 2018 to 24 aircrafts. This increase in aircrafts drove the total capacity by 16% as compared to 2017.

For the full year of 2018, the Company carried a total of 5.2 million passengers, up by 13% year-on-year while load was down by 2 percentage points to 82%.

The Company’s revenue increased by 11% to Rp 4.2 Trillion supported by increase in passengers while ancillary revenue is also up on the back of strong sales initiative and increase in baggage fees. On the other hand, total operating expense was up by 51%, largely driven by the 53% increase in fuel costs and USD denominated expenses such as aircraft lease and maintenance. In terms of operations, the Company made an operating loss of Rp987 billion, driven by higher expenses while net loss was recorded at Rp907 billion.

BUSINESS CHALLENGES

As a vast archipelago of more than 17,000 islands that sits on an active seismic area on the margins of the Pacific Ocean, Indonesia is especially vulnerable to volcanic eruptions, earthquakes and tsunamis. 2018 was a particularly tumultuous year not only for the Company, but also for the whole nation. The Mount Agung in Bali erupted occurred multiple times in January, June, July and December 2018 in varying strengths, forcing the Ngurah Rai Airport to shut down for a day in June, effectively stranding thousands of visitors and caused a significant decline in Bali’s tourism. In July and August 2018, strong quakes damaged most of the structures in the tourist area of Lombok and displaced more than 400 thousand people, but the worst of the catastrophes was the magnitude 7.5 quake and tsunami that killed more than 2,000 people in Palu, Central Sulawesi. These devastating earthquakes not only resulted in lives lost, but also affected the inbound tourists’ numbers to Indonesia and economic losses for Indonesian tourism and consequently to the aviation industry.

BUSINESS PROSPECTS

Although 2018 has proven to be a very challenging year for the aviation industry in Indonesia, the future of both aviation and tourism remains bright for the coming year. President Joko Widodo has underlined and included tourism as one of the priority sectors to focus on due to its substantial benefits for Indonesia’s economic growth, including increase in GDP contribution, additional employment opportunities as well as reducing current account deficit and currency stabilization.

To that end, one of the government’s key strategic plans is to develop “10 New Balis” throughout Indonesia along with 10 new airports in to support the destinations. The government also introduced policies to ease of foreign direct investments (FDI) and increase visa free countries traveling to Indonesia to drive this initiative.

Despite the natural disasters, which disrupted Indonesian tourism sector, foreign tourist arrivals grew by around 15% to 16 million in 2018. This increase were supported by the robust growth of the aviation industry, highlighted by expanding fleets and increased flights, and the growing number of Indonesia’s middle-class population. Indonesia’s unique archipelagic geography also gives the aviation sector a competitive edge as the country’s most convenient means of transportation.

Moreover, the coming regional, legislative and presidential elections in 2019 will also bring an increase in air passengers. Overall, successful implementation of government economic policies will boost tourism and positively affect the aviation sector. We are optimistic that we will have profitable operations in 2019 driven by recent downtrend in fuel price as well as strengthening of Rupiah against USD, which are 2 key factors in maintaining the costs of operations for aircraft operators.

To further enhance customer experience, our digitalization initiatives will also continue in 2019 with plans for new IT innovations such as facial recognition boarding system and robotic process automation. To boost sales, we plan to introduce potential new routes, which include KL to Belitung, Denpasar to Labuan Bajo and Lombok-Perth as well as increasing frequency on some of our existing routes. In terms of market share expansion, we also plan to add 5 additional aircrafts in 2019, which will increase our fleet to 29 A320s.

COMMITMENT TO GOOD CORPORATE GOVERNANCE

As laid out in the previous discussion, all companies and especially the aviation industry is exposed to a very broad spectrum of business challenges and risks. For this reason, consistent and sustainable good corporate governance (GCG) is crucial to increase the accountability of our company and to avoid massive disasters before they occur while also controlling risk and assuring compliance to the applied rules and regulations.

GCG implementation in 2018 has also adhered to the GCG Roadmap that we have developed through Formulation, Implementation, Monitoring and Evaluation. This is done sustainably to ensure the achievement of GCG Roadmap expected goals, namely GCG Excellent. The Company will also further its governance implementation through a GCG self-assessment that it will start to carry out in 2019. The evaluation of GCG practices in the overall operational and non-operational activities of the Company will inform the Ccompany’s continuous GCG refinement.

We truly believe that GCG practices will result in higher performance and better services, thus strengthening our position as a publicly listed enterprise and a leading low- cost carrier company.

BOARD OF DIRECTORS’ COMPOSITION CHANGES

There was no change in the Board of Directors’ composition during 2018.

HUMAN CAPITAL DEVELOPMENT

We fully realize the pivotal role of human resources development and management that can adapt to the Company’s ever-changing needs and business challenges. For this reason, our human resources operational development in 2018 was a digitization initiative called ‘Go Digital’ that digitalizes our human resources process to be able to expedite business process and the management’s decision making.

The initiative was implemented in two phases: the digital HR platform was launched first on 28 June 2018, covering human resources management and attendance as well as digital recruitment functions, followed by the launch of data talent management in November 2018.

In terms of human resources development, 21 trainings were conducted within the Company, including English and Japanese language proficiency training that were regularly carried out and conforming to each department’s internal arrangements. In total, the Company spent Rp614.75 million for soft skill trainings in 2018. Moreover, we also made sure that all of our employees had the opportunities to grow their careers through the succession and promotion program.

INFORMATION TECHNOLOGY DEVELOPMENT

The Information, Commercial and Technology (ICT) department has central role in the Company’s utilization of technology. For this reason, the department takes great measures in implementing technological innovations that best suits the Company’s needs to improve cost efficiency, marketing and promotional activities, as well as business operations through efficient automations, with full consideration of the ICT development policies.

AirAsia Indonesia is the first carrier to implement a number of IT breakthroughs including electronic ticketing, mobile application for booking, payment, and check-in, self-check-in kiosk, among others. In 2018, we again developed two major innovations that will further secure the Company’s position as the early adopter among other LCC airline in the region: E-POS point of sales system and the FACES facial recognition technology. The E-POS is an Android-based system that will be deployed to all IAA cabin crews to assist them in selling IAA ancillary products on board. This system will replace the currently implemented manual point of sale system. With E-POS, not only that the transactions will be quicker, but product availability will be easier to monitor and all transaction records will be seamlessly uploaded to the data server as soon as the airplane lands.

On the ground, the FACES facial recognition system will expedite the passengers’ airport experience from check-in at the counter to all the way at the gate. The technology relies on three camera points: one in the check-in counter & KIOSK, one in immigration gate, and one at the boarding gate, and all will be integrated with the passengers’ manifest to ensure efficient data management.

In 2018, The Company through IAA has integrated its system with the related stakeholders such as Angkasa Pura, Angkasa Pura Solusi, Angkasa Pura Support, MCO, SITA, and ARINC. Currently, IAA is the only entity to have entered into special agreements with APS, both Angkasa Pura 1 (AP1) and Angkasa Pura 2 (AP2), for the delivery of service management in all areas utilized by IAA. By having the support of the integrated services from Angkasa Pura, the Company expects to also realize better services to all IAA’s customers. The new system has been tested in 2018 and will be fully implemented in 2019.

CORPORATE SOCIAL RESPONSIBILIT COMMITMENT

In addition to business excellence, the Company is also committed to the pursuit of Corporate Social Responsibility which adheres to the four pillars necessary for sustainable growth and stakeholders relations: environmental responsibility, occupational, social, and consumer-related CSR activities.

In 2018, CSR in the environment sector includes Go Green activities, stray animal spay & neuter program, Hammock Amok Project, and the Bali beach cleaning. While to implement the best industrial and Occupational Health and Safety measures, we made sure that all employees get their social and health benefits fulfilled.

As part of its commitment to the community, AirAsia promptly responded to the 2018 natural disasters with ‘Air Asia Peduli Lombok’ and #IndonesiaWithLove, an on-board fund-raising initiative conducted by the cabin crews to encourage passengers in helping the victims of Palu, Sigi, and Donggala victims. Last but not least, the Company also maintained consumer relations through a well-executed consumer protection and complaint handling mechanism.

APPRECIATION

The Board of Directors and I would like to wish our appreciation to all customers, business partners, the government, and all of our stakeholders for their loyalty and support, without which we cannot render our achievements over the years.

To the management and all employees, we extend our highest appreciation for the cooperation and dedication that has enabled the Company to grow and deliver the best of services to the customers. All support has been invaluable as we continue to evolve to bigger and better accomplishment in the future.

Last but not least, I would like to express our gratitude to all of our shareholders and to the Board of Commissioners for their continued trust and guidance in overcoming challenges in 2018 and prudently keeping the Company’s business acumen and principles in check.

With the consistent support from all the stakeholders, I believe in our ability to achieve stronger performance as well as contribute to and serve the Indonesian people.

Jakarta, 30 April 2018

On Behalf of the Board of Commissioners

DENDY KURNIAWAN

President Director