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