Big chal­lenges, great op­por­tu­ni­ties


The Jakarta Post - Magazine - - Contents -

The Jakarta Post hosted a dis­cus­sion meet­ing with air­line ex­ec­u­tives, con­sul­tants and an­a­lysts on In­done­sia’s avi­a­tion out­look on Feb. 22, ex­plor­ing the great busi­ness prospects but also iden­ti­fy­ing the short-term prob­lems and chart­ing out the ma­jor chal­lenges ahead.

The pan­elists at­tend­ing the dis­cus­sion were Lion Group’s pres­i­dent director Edward Sirait, AirAsia In­done­sia pres­i­dent director Sunu Widy­atmoko, sec­re­tary-gen­eral of the In­done­sian Na­tional Air Car­ri­ers As­so­ci­a­tion Tengku Burhanud­din, Angkasa Pura II director of oper­a­tions and en­gi­neer­ing Djoko Mur­jat­modjo, Com­mu­nic Avia man­ag­ing con­sul­tant Gerry Soe­jat­man,

Sa­mu­dra Sukardi of CSE Avi­a­tion con­sult­ing com­pany and air­line an­a­lyst Dudi Sudibyo. The fol­low­ing ar­ti­cle is the gist and most salient points that tran­spired dur­ing the dis­cus­sions com­bined with ear­lier re­ports in The Jakarta Post.

In­done­sia’s avi­a­tion in­dus­try is one of the coun­try’s most promis­ing sec­tors. Be­ing the world’s largest ar­chi­pel­ago, In­done­sia nat­u­rally re­lies heav­ily on air travel for the mo­bil­ity of its peo­ple and goods.

With a pop­u­la­tion of 260 mil­lion and with a ris­ing mid­dle class, In­done­sians are hun­grier than ever for air trans­porta­tion. Strad­dling an ar­chi­pel­ago of 17,000 is­lands, 5,200 kilo­me­ters across from east to west and nearly 2,000 km from north to south, this is a coun­try that was re­ally made for air trans­porta­tion.

As grow­ing num­bers of In­done­sians are dis­cov­er­ing, air is the most ef­fi­cient option for get­ting around. The im­por­tance of avi­a­tion to the lu­cra­tive tourist in­dus­try is un­de­ni­able. It may be less ob­vi­ous, but even more im­por­tant to note, that avi­a­tion con­nects In­done­sian busi­nesses to mar­kets around the world.

Avi­a­tion is big busi­ness in In­done­sia to­day. But the po­ten­tial is much big­ger. Ac­cord­ing to Tony Tyler, the chief of the In­ter­na­tional Air Trans­port As­so­ci­a­tion (IATA) in an avi­a­tion day cel­e­bra­tion in Jakarta in March 2015, by 2034 In­done­sia is ex­pected to be the sixth­largest mar­ket for air travel.

By then some 270 mil­lion pas­sen­gers are ex­pected to fly to, from and within the coun­try. That will be more than three times the size of the 2015 mar­ket.

The spread of re­gional eco­nomic growth cen­ters to the outer is­lands of Su­ma­tra, Kal­i­man­tan, Su­lawesi, Pa­pua, Nusa Teng­gara and Maluku will gen­er­ate the need for more point-to-point flight ser­vices across the ar­chi­pel­ago.

But all pan­elists at The Jakarta Post avi­a­tion out­look dis­cus­sion agreed that air­lines are dif­fi­cult busi­nesses to run. They are cap­i­tal and si­mul­ta­ne­ously la­bor in­ten­sive. Air­lines have com­plex oper­a­tions and thin mar­gins, and they en­counter a great deal of un­pre­dictabil­ity.

No won­der credit fi­nanc­ing from do­mes­tic banks is very rare as there is vir­tu­ally no ex­pe­ri­enced an­a­lyst spe­cial­iz­ing in mon­i­tor­ing and as­sess­ing the risks of the air­line busi­ness.

Ma­jor fac­tors af­fect­ing re­sults, such as fuel prices, weather, vo­latile for­eign ex­change

rates and macroe­co­nomic shifts, are be­yond air­line man­age­ment’s con­trol. For all these rea­sons, com­pa­nies fo­cus in­tently on con­trol­ling costs, es­pe­cially la­bor costs — the se­cond-largest ex­pense cat­e­gory (af­ter fuel) for most air­lines.

The pan­elists shared the view that there are three main is­sues within the air­line in­dus­try in In­done­sia: a smart reg­u­la­tory net­work, build­ing an ad­e­quate fleet and in­fra­struc­ture ca­pac­ity, no­tably mod­ern air­ports, and safety.

Reg­u­la­tors in In­done­sia now over­see a global avi­a­tion pow­er­house, with do­mes­tic air­lines op­er­at­ing ap­prox­i­mately 425 jets — car­ry­ing more than 50 mil­lion pas­sen­gers an­nu­ally — but the re­sults of the latest In­ter­na­tional Civil Avi­a­tion Or­ga­ni­za­tion (ICAO) au­dit put In­done­sian safety stan­dards be­low the global av­er­age.

New air­planes con­tinue to come in great num­bers and the pas­sen­gers will be there to fill them, but it re­mains to be seen whether new air­ports can be built fast enough to ac­com­mo­date both the planes and the peo­ple.

In ad­di­tion to hav­ing a safe in­dus­try sup­ported by in­fra­struc­ture ca­pac­ity, it is im­por­tant to have govern­ment reg­u­la­tions that are con­sis­tent with global stan­dards and that fa­cil­i­tate busi­ness growth.

The pan­elists also shared the same view that avi­a­tion is a highly reg­u­lated in­dus­try. Safety reg­u­la­tions based on global stan­dards are crit­i­cal. But they noted some in­stances of over-reg­u­la­tion, which are coun­ter­pro­duc­tive and which treat air­lines un­like any other com­pa­ra­ble busi­ness.

The civil avi­a­tion direc­torate gen­eral clas­si­fies the air­line in­dus­try in In­done­sia into three cat­e­gories: full-ser­vice, medi­um­ser­vice and low-cost (bud­get) car­ri­ers. But then what is the point of the ceil­ing and floor ticket prices set by the govern­ment?

Both air­line ex­ec­u­tives and an­a­lysts ques­tion the pur­pose of the govern­ment-set floor and ceil­ing price range, ar­gu­ing there is no direct re­la­tion be­tween ticket prices and safety. The fare dif­fer­en­tials only re­flect the lev­els of the air­line ser­vices. There is no air­line com­pany that is so silly as to com­pro­mise its safety stan­dards and risk de­stroy­ing its rep­u­ta­tion to be able to of­fer low fares.

The reg­u­la­tors can sim­ply au­dit the rates of in­sur­ance pre­mi­ums paid by air­lines. If the pre­mium rate paid by an air­line com­pany is un­usu­ally high, then it de­serves fur­ther in­ves­ti­ga­tion. But if the pre­mium is the av­er­age within the in­dus­try, then the safety stan­dards are sim­ply OK.

Air­line ex­ec­u­tives also com­plained of the bu­reau­cratic red tape and high tar­iffs on the im­port of air­craft spare parts, which are vir­tu­ally un­known in most other ASEAN coun­tries. The im­port bu­reau­cracy in­volves the trans­porta­tion, trade, in­dus­try and fi­nance min­istries. Worse still, the in­dus­try must still de­pend al­most en­tirely on im­ported spare parts.

Strange though it is, In­done­sia is the world’s se­cond-largest pro­ducer of rub­ber. But its air­lines must send their

air­craft tires to Bangkok or Hong Kong for re­con­di­tion­ing. The govern­ment re­cently of­fered duty re­lief for spare-part im­ports as part of the re­form pack­age but its im­ple­men­ta­tion, which in­volves sev­eral min­istries, is still very dif­fi­cult.

Ar­du­ous bu­reau­cratic pro­ce­dures for the im­por­ta­tion of air­craft spare parts have be­come one of the big­gest bar­ri­ers to in­vest­ment in air­craft main­te­nance, re­pair and over­haul (MRO) cen­ters in In­done­sia. Cur­rently only the na­tional car­rier Garuda In­done­sia and the Lion Group have MRO cen­ters, in Jakarta and Batam re­spec­tively. No won­der more than 70 per­cent of the MRO ser­vices for In­done­sian air­craft are pro­vided over­seas.

The air­craft MRO busi­ness is ac­tu­ally the most prof­itable part of the air­line in­dus­try and its oper­a­tions are la­bor in­ten­sive, which fit well for In­done­sia. But with­out con­ducive reg­u­la­tions and govern­ment as­sis­tance in ac­quir­ing large tracts of land near air­ports, no for­eign in­vestors are in­ter­ested in build­ing MRO cen­ters in In­done­sia. For­eign com­pa­nies in­stead build in Malaysia and Sin­ga­pore, which of­fer bet­ter in­cen­tives.

Like­wise, reg­u­la­tory bar­ri­ers have hin­dered the growth of high-qual­ity pi­lot train­ing cen­ters in the coun­try be­cause trainer air­craft are sub­ject to lux­ury sales tax and the im­port of sim­u­la­tors en­coun­ters bu­reau­cratic hur­dles. That is why Lufthansa Tech­nik AG, for ex­am­ple, de­cided to de­velop its train­ing fa­cil­ity in Malaysia and so did Canada-based CAE, the world’s largest pi­lot-train­ing com­pany, in a joint ven­ture with AirAsia.

The pan­elists shared the view that un­til 2025 the air­line in­dus­try should be treated as an agent of de­vel­op­ment, not as an en­tirely com­mer­cial busi­ness. As such the govern­ment should sup­port the in­dus­try with fis­cal in­cen­tives and con­ducive reg­u­la­tions to stim­u­late pri­vate in­vest­ment.

Air­line ex­ec­u­tives com­plained that avi­a­tion fuel prices in In­done­sia were mostly higher than those in other ASEAN coun­tries due in part to the ru­piah de­pre­ci­a­tion.


In­done­sia’s traf­fic growth needs to be sup­ported by avi­a­tion in­fra­struc­ture, both on the ground and in the air. This re­quires the build­ing of a world-class hub, man­ag­ing scarce ca­pac­ity to global stan­dards and mod­ern­iz­ing air traf­fic man­age­ment. The net­work nature of the air­line busi­ness is such that global stan­dards are crit­i­cal.

Con­sid­er­ing the po­ten­tial for an air-traf­fic boom in the fu­ture, it is es­sen­tial to de­velop new air­ports, re­fur­bish ex­ist­ing ones and build other nec­es­sary ground in­fra­struc­ture. The con­struc­tion of the mod­ern Kuala Namu In­ter­na­tional Air­port near the North Su­ma­tra pro­vin­cial cap­i­tal of Medan, the coun­try’s first air­port with direct raillink ser­vices, was a big step. The re­cent ex­pan­sion of the Si­lan­git Air­port near Lake Toba, the world’s largest vol­canic lake in North Su­ma­tra, is an­other im­pres­sive step for­ward.

The govern­ment plans to add 62 more air­ports in the next five years, and new ter­mi­nals are be­ing built for the flagship Soekarno-Hatta In­ter­na­tional Air­port (SHIA) in Jakarta.

The prob­lem now is that the acute low ca­pac­ity of air­ports, no­tably those in the ma­jor cities in Java, Su­ma­tra, Kal­i­man­tan and Su­lawesi, has also been made worse by their lim­ited work­ing hours.

Only a few air­ports are able to run 24 hours a day, not be­cause of the in­abil­ity of the state-owned air­port man­age­ment com­pa­nies (PT Angkasa Pura I and II). Air­port oper­a­tions need to be sup­ported by pub­lic ser­vices pro­vided by other govern­ment in­sti­tu­tions such as cus­toms and im­mi­gra­tion.

In short, In­done­sia’s avi­a­tion mar­ket has huge po­ten­tial. The govern­ment should work with air­lines and in­ter­na­tional reg­u­la­tory bod­ies as well as woo­ing as many in­vestors as pos­si­ble to the air trans­porta­tion sec­tor in or­der to pre­pare In­done­sia for the un­avoid­able surge in air traf­fic.

But In­done­sia, ac­cord­ing to the IATA, needs an avi­a­tion master­plan based on global stan­dards and de­vel­oped in part­ner­ship with avi­a­tion stake­hold­ers in­clud­ing the govern­ment. Such a plan should set a com­mon vi­sion for ad­dress­ing top pri­or­i­ties such as safety, ca­pac­ity and reg­u­la­tion. And of course it must be fol­lowed by real ac­tion.

Air traf­fic man­age­ment needs to be mod­ern­ized and ex­panded to han­dle steadily in­creas­ing traf­fic. Latest fig­ures show there are over 900 new air­craft on or­der by In­done­sian air­lines for de­liv­ery within the next two to three years. This means that the al­ready busy skies will be­come even more crowded.

There­fore, the skills of air traf­fic con­trollers should also be con­tin­u­ously im­proved to move for­ward with the im­ple­men­ta­tion of Per­for­mance Based Nav­i­ga­tion and in­tro­duce Air Traf­fic Flow Man­age­ment (ATFM).

Im­prov­ing Safety

Safety is cer­tainly avi­a­tion’s top pri­or­ity and the big­gest con­cern for the suc­cess­ful de­vel­op­ment of the air­line in­dus­try in In­done­sia. In the Uni­ver­sal Safety Over­sight Au­dit Pro­gram (USOAP) con­ducted by the UN’s tech­ni­cal agency for avi­a­tion, the In­ter­na­tional Civil Avi­a­tion Or­ga­ni­za­tion’s (ICAO), In­done­sia was as­sessed as be­low the global av­er­age.

The US’ Fed­eral Avi­a­tion Ad­min­is­tra­tion (FAA) has down­graded In­done­sia to Cat­e­gory 2 in its In­ter­na­tional Avi­a­tion Safety As­sess­ment pro­gram. And the EU con­tin­ues to up­hold a ban on all but five In­done­sian car­ri­ers.

The in­ter­na­tional avi­a­tion safety as­sess­ment pro­gram of the FAA fo­cuses on a coun­try’s, not in­di­vid­ual air car­ri­ers, abil­ity to ad­here to in­ter­na­tional stan­dards and rec­om­mended prac­tices for air­craft oper­a­tions and main­te­nance es­tab­lished by the ICAO.

Sim­i­larly, the ICAO’s au­dit pro­gram does not rate the safety or the man­age­ment of in­di­vid­ual car­ri­ers. In­stead, it is in­tended to gauge how well govern­ment agen­cies are staffed and fi­nanced to en­sure com­pli­ance with global stan­dards.

The IATA Op­er­a­tional Safety Au­dit (IOSA) is a global stan­dard and is at the core of our ef­forts to im­prove safety. But the or­ga­ni­za­tion claims that of the 62 In­done­sian air­lines (17 op­er­at­ing sched­uled and 45

char­tered flights), only Garuda is in the IOSA registry. Hence mak­ing IOSA com­pul­sory for any In­done­sian air­line op­er­a­tor could send a very strong sig­nal of a com­mit­ment to im­prov­ing safety.

The ASEAN open skies pol­icy, sup­posed to have started in early 2015, is ex­pected to boost con­nec­tiv­ity and peo­ple’s move­ment in a re­gion of more than 630 mil­lion and in turn spur re­gional eco­nomic growth.

The open skies pol­icy, known as the ASEAN Sin­gle Avi­a­tion Mar­ket (ASEAN-SAM), has been de­signed to in­crease re­gional and do­mes­tic con­nec­tiv­ity, in­te­grate pro­duc­tion net­works and en­hance re­gional trade by al­low­ing air­lines from the 10 ASEAN mem­ber states to fly freely through­out the re­gion via the lib­er­al­iza­tion of air ser­vices un­der a sin­gle, uni­fied air trans­porta­tion mar­ket.

But again in­ad­e­quate air­port ca­pac­ity, es­pe­cially in In­done­sia, ASEAN’s largest econ­omy, has hin­dered the full ben­e­fits of the pol­icy. Only five air­ports in In­done­sia have been in­cluded in the ASEAN open skies scheme and even flight ser­vices to these five cities are sub­ject to the avail­abil­ity of slots.

Air­line in­dus­try an­a­lysts nev­er­the­less are very pos­i­tive about the new pol­icy and many say that the sin­gle avi­a­tion mar­ket will lead to growth and de­vel­op­ment as it opens up the mar­ket to more com­pe­ti­tion. Greater con­nec­tiv­ity be­tween avi­a­tion mar­kets aris­ing from the open skies pol­icy should en­cour­age higher traf­fic growth and ser­vice qual­ity, while re­duc­ing ticket prices.

When the ASEAN-SAM is fully im­ple­mented, there will be no reg­u­la­tory lim­its on the fre­quency or ca­pac­ity of flights be­tween in­ter­na­tional air­ports across the 10 ASEAN mem­ber coun­tries.

The most im­por­tant as­pect of lib­er­al­iz­ing avi­a­tion mar­kets is the guar­an­tee of the third, fourth, fifth and sev­enth free­doms of the air, which are as fol­lows: third and fourth free­dom rights: the right to fly from an air­line’s home coun­try to a for­eign coun­try and vice versa with­out govern­ment ap­proval. Fifth free­dom right: the right to fly be­tween two for­eign coun­tries dur­ing flights orig­i­nat­ing or end­ing in an air­line’s home coun­try. Sev­enth free­dom right: the right to fly be­tween two for­eign coun­tries while not of­fer­ing flights to an air­line’s home coun­try.

The third and fourth free­doms are al­ready pop­u­lar in the ASEAN re­gion. Al­though open skies will ap­ply to cap­i­tal cities, there will be a cap on slots given to air­lines. In ad­di­tion, there are re­stric­tions on cer­tain host coun­tries that do not ex­ist in other in­ter­na­tional open air agree­ments.

The ASEAN-SAM re­mains in­com­plete due to con­cerns from some mem­ber states over the ex­pected fierce in­tra-ASEAN com­pe­ti­tion such an agree­ment would gen­er­ate. Sev­eral ASEAN gov­ern­ments have al­ready rat­i­fied the first phase of the ASEAN-SAM, which en­tails open­ing up cap­i­tal city routes to all ASEAN-based air­lines, but most are hes­i­tant to en­dorse the se­cond phase, which en­tails widen­ing this to sec­ondary cities.

Key mem­bers of ASEAN, in­clud­ing In­done­sia and the Philip­pines, have voiced opposition to some of the pro­posed com­po­nents of the ASEAN-SAM agree­ment — namely re­lax­ations of the third, fourth and fifth free­doms of the air.

These free­doms en­tail, re­spec­tively, the right to fly from an air­line’s home coun­try to a for­eign coun­try and from a for­eign coun­try to an air­line’s home coun­try and the right to fly be­tween two for­eign coun­tries dur­ing flights orig­i­nat­ing or end­ing in an air­line’s home coun­try.

In­done­sia, Cam­bo­dia and Laos cur­rently re­main op­posed to sev­eral pro­to­cols within these agree­ments, how­ever, due to con­cerns that com­pet­ing air­lines from Sin­ga­pore, Malaysia and Thai­land would put lo­cal car­ri­ers out of busi­ness.

How­ever, sev­eral car­ri­ers such as In­done­sia’s Lion Group have be­gun es­tab­lish­ing over­seas sub­sidiaries in Malaysia and Thai­land with lo­cal own­ers to reach other ASEAN lo­ca­tions in an ef­fort to avoid the mar­ket re­stric­tions.


Tengku Burhanud­din

Edward Sirait

Sunu Widy­atmoko

Sa­mu­dra Sukardi

Gerry Soe­jat­man

Dudi Sudibyo

Djoko Mur­jat­modjo


Ex­panded fleet: Garuda In­done­sia air­craft park at Soekarno-Hatta In­ter­na­tional Air­port in Tangerang, Ban­ten. Garuda and its sub­sidiary Ci­tilink plan to add 23 more air­planes to their fleet this year.

Newspapers in English

Newspapers from Indonesia

© PressReader. All rights reserved.