Board of Directors’ Report
Dear Distinguished Shareholders,
We are thankful to God Almighty for bestowing us the blessings with which we were able to journey through a challenging year of 2017. Despite the many challenges, we succeeded in fostering our performance and services, thus maintaining our position as the passengers’ airline of choice.
18 planes with a total of 157 routes
IAA owns and controls 18 aircraft with a total of 157 route that has received a Scheduled Commercial Air Transport License
Our vision is clear from the very beginning; we are the airline with a single-minded goal of realizing anyone’s dream to enjoy affordable, yet quality, air transport. We have revolutionized air travel ever since as evident from the growing number of passengers by the day that make AirAsia their preferred choice for flying. By doing so, we have accomplished our mission of being the low-cost carrier that makes it possible for everyone to fly.
The year 2017 was a momentuous one for AirAsia. Following the completion of all requirements on the rights issue of PT Rimau Multi Putra Pertama Tbk, AirAsia’s Indonesian affiliate PT Indonesia AirAsia (IAA) officially became a subsidiary of the Company. This transformation is expected to drive AirAsia’s performance to the next level in Indonesia.
This transformation will foster our competitiveness in commercial aviation industry. Having the advantage of extensive connectivity and AirAsia Group’s support, the Company is confident that we will be able to continuously expand our market share in indonesia’s international flights.
During 2017, the Company carried out various Continuous Improvement initiatives in cost management, delay and On Time Performance management, and process efficiency
The strategies rendered positive impacts on our operational and financial performance. The Company was able to maintain a stable passenger load factor level at 84% while financially we posted positive profit before tax. Our revenue was strong and costs were well under control. We shall continue to improve our performance in the future in order to create higher values for our shareholders whilst delivering the best services for the Indonesian people.
REVISITING THE ECONOMY AND INDUSTRY IN 2017
It was generally agreed that 2017 was a turning point for the global economy. Global growh was recorded at 3% after hitting the lowest point in 2016. Growth also occurred in both developing and developed countries due to increasing investment, manufacturing, and consumption activities.
Among developing economies, the United States’ economic recovery, following the increasing employment and investment, was recognized as one of the drivers of global growth. In response to the situation, in October 2017 the US Government applied monetary normalization policy. The Federal Reserve, the US’ central bank, raised its interest rate to around 1.25%-1.50% by the end of 2017, a decision which affected the movement of exchange rates against the US Dollar.
Also contributing to global growth was the economic improvement in Europe and Japan, while China contributed to regional growth in particular after the country’s government focused on domestic growth.
Commodity prices rose alongside global economic improvement including primary commmodities, e.g. crude oil, CPO, and coal. This development was favorable for exporting countries such as Indonesia. Oil price increase, however, drove the rise of fuel price; this affected the aviation industry that throughout 2017 had to navigate around the hike of fuel price increase.
For the national economy, global growth certainly rendered positive effects. Central Statistics Agency (BPS) data shows 5.07% economic growth in 2017 on the back of higher export, investment, and government spending volume as the result of massive implementation of infrastructure projects, although household consumption decelerated.
Indonesia’s economic growth was followed by solid macroeconomic indicators, i.e. foreign exchange reserves, balance of trade that posted financial and capital surplus, and current account deficit that was well under control. Inflation rate was fairly low and still within Bank Indonesia’s expectations, while Rupiah exchange rate strengthened.
While macroeconomic indicators were overall positive, consumers’ purchasing power was under pressure. This situation affected the real sector including the aviation industry. Our data shows that the industry’s performance started to dip in 2016 with a number of airlines reporting losses.
INDUSTRY AND BUSINESS ANALYSIS
Indonesian aviation industry experiences rapid growth in the past several years. Indonesia’s growth was above the average of other countries, which enticed airlines to continue expanding their market share. To illustrate, the following table breaks down the industry’s passenger market share by airline in Indonesia until September 2017:
|Airlines||2016||2017 (SEPTEMBER)||GRAND TOTAL|
|Source: DGCA Report 2017|
The significant growth occurred due to a number of factors, among others the high economic growth of ASEAN countries especially Indonesia; increase in urbanization in Indonesia; increase in domestic and international travels; low-cost carrier business model development; airport development; growth of business and trade in various Indonesian cities; government’s support to increase the number of international travelers, targeting 20 million foreign visitors in 2019.
The increase in consumers’ interest to use commercial airline services will certainly affect the Company’s business in a favorable manner. Through subsidiary IAA, the Company is committed to continue providing direct connectivity between Indonesian cities and the various destinations and Southeast Asia as well as other AirAsia Group’s destinations across Asia Pacific via fly-thru connectivity
In support of this mission, the Company has expanded its fleet and opened new, profitable routes. Today, IAA owns and controls 18 aircrafts with a total of 157 routes authorized by virtue of Operating License of Scheduled Commercial Air Transport, consisting of 85 domestic routes and 72 international routes. By the end of 2017, IAA has operated 30,822 flights, recording a capacity of 5,547,960 passengers, and served 4,634,001 of passengers.
STRATEGIC MEASURES IN 2017
The Company implemented several strategic business measures in 2017. To win in an increasingly competitive airline industry, the Company through IAA applied strategic measures based on LCC business model and implemented route network development and commercial and operational improvement.
LCC business model was realized among others by utilizing AirAsia Group’s strengths in branding, IT system, shared services, and training facilities. The Company used only one type of aircraft, the Airbus 320-200, to keep operating, lease, maintenance, spare part, and expert training expenses low.
In terms of routes, the Company strategically built direct connectivity between major international cities and Indonesian destinations. The Company has also operated fly-thru routes with stop-overs in the group’s international hubs. Kuala Lumpur and Bangkok, thereby expanding IAA’s routes from Indonesia to potential markets such as India and China.
Commercially, the Company applied the latest route revenue management method, supported by system optimization, professional staff, and the Group’s regional Center of Excellence. As the result, the Company was able to achieve an optimum balance between load factor and air fares. Additionally, the Company rejuvenated its brand through inspirational marketing campaign and promoted online ticket booking system using either mobile app or website airasia.com.
In terms of operations, the Company carried out various Continuous Improvement initiatives in cost management, delay and On Time Performance management, and process efficiency. IAA is known as the first airline to introduce a mobile system that can handle booking, payment, and passenger check-in.
BUSINESS PERFORMANCE IN 2017
Business strategy implementation brought positive impacts to the Company’s performance. In 2017, the Company posted Rp300.29 billion in profit before tax, a noteworthy 224.65% growth from Rp92.49 billion in 2016.
Contributing to the profit was operating revenue amounted to Rp3.82 trillion. This number was nearly equal to the operating revenue generated in the previous year of Rp3.89 trillion. The 2017 vulcanic eruption of Mount Agung in Bali affected IAA’s performance, which in turn impacted the Company’s performance in this regard.
By the end of 2017, the Company has operated a fleet consisting of a total 17 Airbus A320 aircrafts and 30,822 flights. Load factor stood at 84% and the Company safely delivered 4,634,001 passengers to their destinations. In terms of routes, the Company operated 9 domestic routes and 21 international routes through 4 hubs. Jakarta, Denpasar, Medan, and Surabaya.
The Company’s efficiency measures were successful. Operating expenses decreased by 7.14% from Rp3.70 trillion in 2016 to Rp3.44 trillion in 2017, resulting in 104.2% increase in operating income from Rp185.33 billion to Rp378.50 billion.
Aside from the strategies carried out during the year, this success was also contributed by a turn-around that Company took in 2016 where the Company decided to focus on highly profitable routes and optimize its assets by increasing aircraft utility level.
There were industry-wide challenges that inevitably affected the Company, among others the weakening of Rupiah against the US Dollar and increase in jet fuel price due to higher global crude oil prices. Additionally, we also had to manage increase in components such as airport and navigation costs.
Maintaining and increasing market’s trust was another key challenge we had to address primarily by reducing accident risk. To that end, the Company took improvement measures and ensured that customers’ convenience and flight safety and security were constantly at the heart of its services. Furthermore, vulcanic eruption of Mount Agung in Bali that occurred at the end of 2017 considerably affected the Company’s business.
As other airlines, the Company also challenged by limited slots and parking areas for its fleeds at the main tourism airports such as Jakarta and Bali. High demand is not yet met with the adequate availability of fleeds’ slots and parking areas.
The economy is heading towards a better direction propped by the government’s prospective efforts and strategies to advance the economy. Infrastructure development as one of the economy drivers will create multiplier effects in many sectors.
The overall confident outlook gives positive signals for Indonesia’s aviation business. The Company believes in Indonesia’s ample potential due to the country’s cultural and tourism diversity, vast geographical territory, and large population. Today, Indonesia is the country with the largest population in Southeast Asia and the 4th largest in the world. In addition, it is an archipelagic country with dispersed economic centers, resulting in great demands for air transport in support of business, tourism, or personal travels.
Indonesia is also rich with destinations that appeal to foreign travelles. Bali is one of Southeast Asia’s most popular destinations; demand to fly to the island is not only strong, but also continues growing. Not only Bali, other destinations such as Yogyakarta, Bandung, Surabaya, and Medan are also rapidly developing.
The government is currently highly supportive of private business communities’ efforts to raise the number of foreign visitors to Indonesia. As purchasing power and mobility are on the rise, demands for air travel will certainly follow.
Based on these considerations, the Company is optimisticthat its business will only continue to grow. Through IAA, the Company is well-positioned in Indonesia’s scheduled flight market especially international flights. The IAA’s international flight frequency is the second highest in Indonesia after Garuda Indonesia.
Branding-wise, AirAsia brand is particularly very strong in Asia Pacific as evident from it being recognized as the “Best Low Cost Carrier in the World” for 9 consecutive years at the Skytrax World Airline Award annual event. Subsequently IAA becomes the airline of choice for foreign travellers seeking to visit Indonesia using low-cost carrier, and vice versa.
To optimize growth opportunities in the future, the Company will execute route strategy, namely by reducing lessprofitable routes and focusing more instead on commercial routes. The Company will also seek to boost its revenues by increasing average ancillary income per passenger as well as to increase aircraft utilization.
COMMITMENT TO CORPORATE GOVERNANCE
Challenging business condition is inevitable for any business. To overcome it, the Company needs to have appropriate business strategy and to consistently employ prudent business management practices in line with good corporate governance (GCG) principles.
We are aware of how important GCG implemenation is; the Company is committed to always observe good business ethics and transparency principle in compliance with prevailing regulations. For sound GCG implementation, the Company has GCG structure in place, comprising Corporate Secretary, Internal Audit Unit, Audit Committee, Nomination and Remuneration Committee, and has appointed Independent Commissioner and Independent Director. The Company ensures that all GCG elements work according to their mandates.
Our efforts to implement GCG are also reflected from our dedication to securing better transparency and accountability, especially as a company listed in the Stock Exchange. 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 lowcost carrier company.
CHANGES IN THE BOD’S COMPOSITION
In 2017, the Company chaged the composition of the Board of Directors. The following is the current composition of the Board of Directors as of 31 December 2017:
|President Director||:||Dendy Kurniawan|
|Independent Director||:||Dinesh Kumar|
HUMAN RESOURCE DEVELOPMENT
Acknowledging that human resources is vital to the Company’s performance, we strive to provide regular competency enhancement programs consisting of training and skill-building activities to make sure that the capacity of our people is always consistent with the Company’s growth and needs.
We have differentiated training programs for pilot, air crew, and our ground staff. For pilots, training activities include sessions in an Airbus simulator in Kuala Lumpur. In collaboration with Airbus, we also provide special training for our pilots in line with aviation industry regulations. All Air Asia all pilots must be certified and pass fitness test every 6 (six) months in order to maintain the highest performance quality. Until 2018, the Company maintains 1,819 employees.
For aircrew members, the Company provides the highest standard of safety and service training to equip them with the necessary skills in serving domestic and international routes. Our crew members has to also updated their certifcation and fitness test every year in compliance with the regulations. With respect to that, our aircrew members are mandatory to participate in certification update program carried out by the Ministry of Transport.
On operational aspect, the Company continues to develop service quality by continuously emphasizing technology application in every elements, both directly and indirectly connecting with the services to the passengers, and ensuring the comphrehension and utilization of such technology by the Company’s HR in order to improve the commercial and efficiency performance.
COMMITMENT TO SUSTAINABLE DEVELOPMENT
The Company realizes that the communities are one of the stakeholders that influence business continuity. The Company observes four pillars of sustainable development as the basis of its Corporate Social Responsibility (CSR) programs, namely human development, social and economic development, environment, and responsibility towards consumer.
In 2017, the Company’s sustainability efforts delivered through subsidiary included social and community-oriented activity of providing donations for orphaned children. For environmental responsibility, the Company conducted go green campaign, and in Occupational Health and Safety (OHS) as well as HR, the Company provided various training programs and intership. Meanwhile, as part of its responsibility towards consumers, the Company has service recovery program developed pursuant to the regulations.
Information technology is vital to the Company’s services and operations. With this understanding, the Company consistently carries out system and technology improvement to enhance overall business performance. The Company has Innovation and Technology (ICT) system in place to boost performance and reduce operating expenses.
The Company is the first low-cost carrier that applies online booking and electronic ticketing - implemented to enable greater efficiency. Today, travel booking is made mostly via online booking on AirAsia.com. Passengers’ preference in online booking prompts the Company to introduce mobile application for ticket booking, payment, and checkin available for Android and iOS platforms to ensure passengers’ convenience in accessing AirAsia’s services.
To date, we are also the first carrier to introduce AirAsia mobile application for ticket booking, payment, and passenger check-in. We are the pioneers of self-check in system through online, mobile, and kiosk check-in. With the release of automatic luggage drop system, the passengers are able to register their luggage for hand-carry into the aircraft independently in several airports of AirAsia’ routes. These breakthroughs effectively reduce the Company’s operating expenses.
The Company has also used cloud-based systems and technologies as well as disaster recovery center (DRC) available in the cloud data center to ensure efficient, secure, and safe operations. To support the operations of our our online system, we have ensured solid backbone infrastructure by using dual homing technology that perform automatic back-up in the event of network disruption.
To close, on behalf of the Board of Directors, I would like to express our appreciation to all shareholders and the Board of Commissioners for their continued trust and assistance. I also would like to wish our appreciation to all customers, business partners, the government, and all of our stakeholders for their support to our business endeavors. To the management and all employees, we extend our highest appreciation for your cooperation that has enabled the Company to grow not only today but also tomorrow.
All the trust and support to us have been tremendeously valuable throughout our transformation journey as we continue to evolve and create sustainable values for our stakeholders. We believe that through this transformation we will be able to provide continuous services to the Indonesian people, and build the Company founded upon solid synergy and robust business performance
Jakarta, April 2018
on behalf of the Board of Directors