Long-haul per­spec­tive for In­done­sian avi­a­tion

A LACK OF QUAL­I­FIED HU­MAN RE­SOURCES AND EX­CES­SIVE REG­U­LA­TION ARE AMONG THE IS­SUES IN­VESTORS WILL BE LOOK­ING TO SEE AD­DRESSED

The Jakarta Post - Magazine - - Contents - JAKARTA

As an ar­chi­pel­ago com­pris­ing more than 17,000 is­lands, with un­der­de­vel­oped road and train in­fra­struc­ture, the ge­og­ra­phy of In­done­sia makes fly­ing the pre­ferred mode of trans­porta­tion. This, com­bined with the fourth-largest pop­u­la­tion in the world and a grow­ing mid­dle class ea­ger to travel, of­fers a promis­ing mar­ket for avi­a­tion in­vest­ment.

Al­though in­vest­ment op­por­tu­ni­ties ex­ist in ar­eas such in­fra­struc­ture de­vel­op­ment, ca­pac­ity build­ing and air­port re­tail, the sec­tor faces chal­lenges that will have to be reme­died by the govern­ment in or­der to boost pri­vate par­tic­i­pa­tion.

A lack of qual­i­fied hu­man re­sources, ex­ces­sive reg­u­la­tion and one of the low­est safety rank­ings in the world are among the is­sues in­vestors will be look­ing to see ad­dressed. Prospects for growth

Ac­cord­ing to a fore­cast by the In­ter­na­tional Air Trans­port As­so­ci­a­tion (IATA), In­done­sia will rank the fourth-fastest growth mar­ket in the world in terms of pas­sen­ger traf­fic through to 2034, with trav­eler vol­umes set to reach 219 mil­lion.

A re­cently pub­lished re­port by con­sul­tancy Pricewater­house­Coop­ers (PwC) found that In­done­sia’s air traf­fic has grown at a rate of 11.3 per­cent per an­num since 2006 and will con­tinue to grow by roughly 4.8 per­cent per year un­til 2025, with US$25 bil­lion worth of in in­vest­ment in avi­a­tion in­fra­struc­ture ex­pected over the next decade.

Spend­ing on main­te­nance, re­pair and over­haul ser­vices is also on the rise, more than dou­bling from $930 mil­lion in 2013 to around $2 bil­lion by the end of last year, as per data from Garuda Main­te­nance Fa­cil­ity AeroAsia.

Pos­i­tive year-end re­sults from Garuda In­done­sia have spurred fur­ther ex­pec­ta­tions for growth. The na­tional car­rier booked net prof­its of $76.5 mil­lion last year, com­pared to a loss of $370.1 mil­lion in 2014.

The na­tional car­rier is also in­creas­ing In­done­sia’s con­nec­tiv­ity with Europe, and opened a new five-flight-per-week route be­tween Jakarta and Lon­don’s Heathrow in March.

Pri­vate sec­tor

Al­though large-scale in­fra­struc­ture projects of­fer at­trac­tive in­vest­ment op­por­tu­ni­ties, some in the in­dus­try have ar­gued that the con­di­tions for pri­vate par­tic­i­pa­tion are not suf­fi­ciently at­trac­tive.

“The govern­ment’s plans are good, but the mech­a­nisms to im­ple­ment the ex­pan­sion projects are not ro­bust,” Ju­lian Smith, global trans­porta­tion and lo­gis­tics in­dus­try leader at PwC, told Ox­ford Busi­ness Group. “There is cur­rently not enough fund­ing, man­age­ment ca­pac­ity and ex­per­tise to do all these projects at the same time.”

“There should be a bet­ter way of in­volv­ing in­ter­na­tional part­ners and the pri­vate sec­tor,” Smith added. “If new air­ports are to be fi­nanced by the pri­vate sec­tor, the govern­ment will need a solid le­gal frame­work and a new risk al­lo­ca­tion model which does not cre­ate un­nec­es­sary risks for the in­vestors.”

Ex­ces­sive reg­u­la­tion has also been cited as an ob­sta­cle to pri­vate sec­tor in­vest­ment. “In­done­sia has sev­eral reg­u­la­tions which are coun­ter­pro­duc­tive and which treat air­lines un­like any other com­pa­ra­ble busi­ness,” Tony Tyler, director gen­eral and CEO of IATA, said in a key­note ad­dress in Jakarta in March 2015.

For ex­am­ple, de­spite am­ple mar­ket com­pe­ti­tion, car­ri­ers are re­quired to set prices within reg­u­lated lim­its, and, un­like train com­pa­nies, air­lines are barred from sell­ing tickets at air­ports. In ad­di­tion, the com­pa­nies are re­quired to sell tickets in lo­cal cur­rency, whereas their sup­plies are per­mit­ted to in­voice them in US dol­lars. Fo­cus on safety

Safety con­cerns also re­main at the fore­front. In­done­sia cur­rently ranks 151st out of 181 coun­tries in terms of im­ple­men­ta­tion of the In­ter­na­tional Civil Avi­a­tion Or­ga­ni­za­tion’s safety guide­lines, and all but five In­done­sian car­ri­ers are cur­rently black­listed by the EU.

The col­li­sion of two planes on the Halim Per­danakusuma air­port run­way in early April, which led to the sus­pen­sion of air traf­fic con­trollers and ground han­dling ser­vice providers, was a re­minder of the fre­quency of both small and large safety in­ci­dents in the coun­try.

Sec­tor stake­hold­ers seem to agree that the scarcity of qual­i­fied pi­lots, dis­patch­ers and op­er­a­tion man­agers is at the heart of the prob­lem.

While the civil avi­a­tion in­dus­try re­quires around 1,000 new pi­lots ev­ery year, the coun­try is cur­rently able to meet just half of this de­mand.

Govern­ment and pri­vate in­vestors are ac­tively work­ing to im­prove the coun­try’s safety record, which could have pos­i­tive carry-through ef­fects on In­done­sian car­ri­ers’ re­gional com­pet­i­tive­ness.

AirNav, the or­ga­ni­za­tion re­spon­si­ble for pro­vid­ing all air traf­fic con­trol ser­vices

in In­done­sia, re­cently an­nounced it was pre­pared to dis­burse Rp 2.2 tril­lion ($167.2 mil­lion) worth of flight nav­i­ga­tion de­vices to more than 270 ma­jor and pi­o­neer air­ports op­er­ated by state-owned air­port ser­vices com­pa­nies Angkasa Pura I and II and the Trans­porta­tion Min­istry.

As im­proved safety leads to cheaper and more ef­fi­cient flights, In­done­sian car­ri­ers could see an eas­ing in in­sur­ance pre­mi­ums, which could al­low them to com­pete more ef­fec­tively once the ASEAN Open Sky Pol­icy is fully in place.

Im­ple­men­ta­tion of the agree­ment is ex­pected to sig­nif­i­cantly in­crease pas­sen­ger num­bers and should have a pos­i­tive im­pact on in­dus­try growth. Ac­cord­ing to a study by UK-based en­gi­neer­ing con­sul­tancy Mott Mac­Don­ald, the ASEAN Open Sky Pol­icy will add an­other $2.7 bil­lion to gross do­mes­tic prod­uct and cre­ate around 16,000 jobs by 2025.

How­ever, In­done­sian air­lines have raised con­cerns that the coun­try may not be fully ready to com­pete with its neigh­bors due to higher taxes and fuel costs, air­port in­ef­fi­cien­cies and a gen­eral lack of trans­porta­tion in­fra­struc­ture. Down to size

As re­gional com­pe­ti­tion scales up, In­done­sia will also need to make a de­ci­sion about Garuda’s fu­ture role and the ideal num­ber of plays in the sec­tor.

While stake­hold­ers agree there is need for con­sol­i­da­tion, a mo­nop­oly is also in­ef­fi­cient. The ideal solution likely lies some­where in the mid­dle.

Tra­di­tion­ally, In­done­sia has suf­fered from a pro­lif­er­a­tion of com­pa­nies, and the bar­ri­ers to en­try for cre­at­ing a new air­line were too low.

The coun­try could ben­e­fit from higher min­i­mum cap­i­tal re­quire­ments and would do well to give pref­er­en­tial ac­cess to cer­tain routes to air­lines that are well funded and dis­play long-term busi­ness plans and vi­able plan­ning.

Al­though the on­go­ing ex­pan­sion of Garuda is cer­tainly a pos­i­tive for the in­dus­try, In­done­sia needs more than a dom­i­nant player, and the sole pur­pose of hav­ing a na­tional cham­pion doesn’t jus­tify hav­ing a state backed player.

The ex­pan­sion of Garuda is be­ing fi­nanced to a large ex­tent through loans from state- owned banks, like the Rp 4.7 tril­lion se­cured in early 2016 from Bank Rakyat In­done­sia (BRI), Bank Negara In­done­sia (BNI) and Mandiri.

How­ever, if the govern­ment opts to back the na­tional flag car­rier, its oper­a­tions will need to be part of a broader strat­egy aimed at boost­ing eco­nomic growth and fos­ter­ing higher rev­enues in re­lated sec­tors like tourism. Tourism

In­deed, the govern­ment’s plan of de­vel­op­ing 10 new tourist des­ti­na­tions and reach­ing a tar­get of 20 mil­lion vis­i­tors

by 2020 will not be suc­cess­ful if it is not ac­com­pa­nied by in­fra­struc­ture de­vel­op­ment and greater con­nec­tiv­ity. Here, the chal­lenges are as sub­stan­tial as the dis­tance that sep­a­rates Aceh from Pa­pua.

Ex­ist­ing in­fra­struc­ture is largely in­suf­fi­cient, start­ing from Jakarta, where the Soekarno-Hatta In­ter­na­tional Air­port is con­gested. The air­ports and equip­ment are ob­so­lete, and mod­ern­iz­ing them is not only a mat­ter of ca­pac­ity, but also of safety.

The use of sea­planes, which pro­vide much-needed aerial con­nec­tions where hard in­fra­struc­ture is not an option, could ben­e­fit the tourist in­dus­try and help con­nect more re­mote parts of the ar­chi­pel­ago.

Achiev­ing con­nec­tiv­ity both within In­done­sia and be­yond will re­quire a more com­pet­i­tive land­scape that is open to pri­vate do­mes­tic and for­eign com­pe­ti­tion. The coun­try has a win­dow to solve these is­sues, and pol­i­cy­mak­ers need to be con­scious that any de­ci­sion made to­day will im­pact the coun­try’s de­vel­op­ment over the next half cen­tury.

Sky­ward bound: Pas­sen­gers with um­brel­las head to a Garuda Air­line air­plane at Tam­bo­lako Air­port in Sumba Barat Daya re­gency, East Nusa Teng­gara. By 2019, the num­ber of air­ports able to ac­com­mo­date Air­bus and Boe­ing air­craft is ex­pected to in­crease to 100 from only 60 at present. An­tara

JP/Ricky Yud­hi­s­tira

Ready to fly: Pas­sen­gers em­bark an AirAsia plane at Soekarno-Hatta In­ter­na­tional Air­port. The Malaysian low- cost car­rier serves many parts of In­done­sia.

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