Weak in­fra­struc­ture re­mains big prob­lem

WITH HUGE MAR­KET PO­TEN­TIAL, IN­DONE­SIA RE­QUIRES AD­E­QUATE AIR­PORT IN­FRA­STRUC­TURE TO SUP­PORT THE MO­BIL­ITY OF PAS­SEN­GERS AND GOODS

The Jakarta Post - Magazine - - Contents - JAKARTA

Is In­done­sia’s avi­a­tion in­dus­try grow­ing in the right direc­tion? The short answer is prob­a­bly yes, but there is an­other im­por­tant ques­tion to con­sider, and that is whether the air­line in­dus­try is also sus­tain­able? Op­er­at­ing in a broad coun­try with thou­sand of is­lands and the largest econ­omy in South­east Asia, In­done­sia’s avi­a­tion in­dus­try has the po­ten­tial to grow and grow.

There are three gen­eral ways to judge the prospects of the in­dus­try. The first is re­lated to the mar­ket. In­done­sia’s de­mo­graphic struc­ture and its vast archipelagic ge­og­ra­phy cre­ates a promis­ing mar­ket po­ten­tial for growth in the avi­a­tion in­dus­try.

More­over, im­prove­ments in eco­nomic ac­tiv­ity and the po­ten­tial for sta­ble eco­nomic growth in the fu­ture will also con­trib­ute to the de­vel­op­ment of the avi­a­tion in­dus­try. The tourist sec­tor, which is pro­moted by the govern­ment as a source of for­eign ex­change rev­enue, could pro­pel the avi­a­tion in­dus­try.

The num­ber of coun­tries set to en­joy a free-visa pol­icy is ex­pected to reach 174 within this year. This is in­tended to in­crease the num­ber of for­eign tourists vis­it­ing In­done­sia. It is hoped that 12 mil­lion tourists will visit this year.

Based on data from the Cen­tral Statis­tics Agency (BPS), the av­er­age growth rate of to­tal air­craft pas­sen­gers in In­done­sia over the last 10 years was 10.2 per­cent. Do­mes­tic and in­ter­na­tional pas­sen­ger growth was recorded at 10.2 per­cent and 11 per­cent, re­spec­tively.

This growth level ex­ceeded av­er­age growth rates in Malaysia (9.9 per­cent), Thai­land (9.9 per­cent), and Sin­ga­pore (7.1 per­cent), but was still lower than the Philip­pines (16.1 per­cent). The num­ber of In­done­sian air pas­sen­gers reached 85.3 mil­lion in 2014, with 84 per­cent of them com­pris­ing do­mes­tic trav­el­ers and the rest in­ter­na­tional trav­el­ers. That num­ber was nearly double the num­ber recorded in Malaysia and Thai­land, more than twice com­pared to Sin­ga­pore, and three times that of the Philip­pines.

Do­mes­tic and in­ter­na­tional pas­sen­gers were served by about 768,000 and 106,000 flights, re­spec­tively. Av­er­age growth of do­mes­tic and over­seas flights dur­ing the last 10 years was 6.2 and 7.4 per­cent, re­spec­tively. Mean­while, do­mes­tic freight growth was about 8.5 per­cent, two times big­ger than the growth rate recorded in over­seas mar­kets.

In­done­sia has the largest pop­u­la­tion in South­east Asia, and so the num­ber of air pas­sen­gers in the coun­try has the po­ten­tial to grow sig­nif­i­cantly. This is in line with fore­casts of pas­sen­ger traf­fic — the vol­ume of pas­sen­gers car­ried by an air­line — as mea­sured by rev­enue per pas­sen­ger kilo­me­ters (RPK) for the South­east Asian re­gion. The fore­cast, pro­vided by Boe­ing, says that RPK growth for ASEAN coun­tries over the next 20 years will reach 6.5 per­cent an­nu­ally, out­pac­ing Asian growth (6.1 per­cent) and world growth (4.9 per­cent). As a con­se­quence, the num­ber of air­craft re­quired will con­tinue to in­crease. Un­til 2034, Boe­ing fore­casts that the re­gion will need 3,750 new air­planes, val­ued at US$550 bil­lion. Air­ports

The se­cond fac­tor is re­lated to in­fra­struc­ture. With huge mar­ket po­ten­tial, In­done­sia re­quires ad­e­quate and ef­fec­tive air­port in­fra­struc­ture to sup­port the mo­bil­ity of pas­sen­gers and goods. This in­cludes fea­si­ble run­ways, air traf­fic con­trollers, air­port ter­mi­nals, im­proved air­port ac­cess, air­port park­ing spa­ces and other fa­cil­i­ties.

Cur­rently, the ra­tio of air­ports (medium and large) per 1 mil­lion peo­ple in In­done­sia is 0.22. This ra­tio is smaller com­pared with some neigh­bor­ing coun­tries, namely the Philip­pines (0.5), Thai­land (0.61), Malaysia (0.9) and Sin­ga­pore (1.09). To­day, In­done­sia has about 443 air­ports. Most of them are small air­ports, ac­count­ing about 87 per­cent of to­tal air­ports. Based on the cat­e­go­riza­tion from the Fed­eral Avi­a­tion Ad­min­is­tra­tion (FAA), a small air­port is an air­port with the han­dling ca­pac­ity of be­tween 0.05 and 0.25 per­cent of a coun­try’s an­nual pas­sen­ger board­ing. A medium-sized air­port has a ca­pac­ity of 0.25 to 1 per­cent, and a large air­port has over 1 per­cent.

As in many coun­tries, the ma­jor­ity of air pas­sen­ger move­ment in In­done­sia is through the medium and large air­ports that are gen­er­ally lo­cated in more de­vel­oped cities or re­gions such as Java and some ma­jor cities in Su­ma­tra, Kal­i­man­tan and Su­lawesi. If we con­sider pro­duc­tiv­ity, air­ports in In­done­sia are less pro­duc­tive than those in some ASEAN coun­tries.

To il­lus­trate, In­done­sia’s ra­tio of to­tal pas­sen­gers to to­tal air­ports in 2014 was about 192,000 pas­sen­gers per air­port. It is lower than the Philip­pines (262,000 pas­sen­gers per air­port), Malaysia (475,000 pas­sen­gers per air­port), Thai­land (638,000 pas­sen­gers per air­port). Al­though to­tal reg­is­tered car­rier de­par­tures in In­done­sian are higher than in neigh­bor­ing coun­tries, av­er­age pas­sen­gers car­ried per de­par­ture is smaller at 121.2 pas­sen­gers. The num­ber of car­ried pas­sen­gers per de­par­ture in Sin­ga­pore, the Philip­pines, and Thai­land is about 173.9, 137.3, and 136.4 pas­sen­gers, re­spec­tively.

What can be done to im­prove the pro­duc­tiv­ity of air­ports in In­done­sia? There are sev­eral things that can be done. We could add new do­mes­tic and in­ter­na­tional flight routes, in­crease the num­ber of air­craft de­ployed to ac­com­mo­date the grow­ing num­ber of ad­di­tional routes, in­crease air­port ca­pac­ity, en­hance bet­ter reg­u­la­tions re­gard­ing air fares, more ef­fi­ciently pro­cure spare parts and bet­ter or­ga­nize fuel prices.

Given the slow growth of road in­fra­struc­ture, the cur­rent de­gree of con­nec­tiv­ity be­tween cities and is­lands, and a large pop­u­la­tion with a grow­ing mid­dle

class, air trans­porta­tion de­mand will in­crease in the fu­ture. The ini­tia­tive to open short routes, es­pe­cially to east­ern In­done­sia where there is eco­nomic growth, will im­prove the pro­duc­tiv­ity of air­ports. This will be re­flected through an in­crease in flight fre­quency and the num­ber of pas­sen­gers.

Short routes to east­ern In­done­sia are in ac­cor­dance with the small air­ports in east­ern In­done­sia. Ca­pac­ity de­vel­op­ment of cer­tain air­ports that are po­si­tioned as hubs, such as Sorong Air­port, needs to be en­hanced. Key hubs are im­por­tant to sup­port the emer­gence of the new short routes.

Re­lated to the pro­cure­ment of spare parts, there is an in­cen­tive from govern­ment through the ex­emp­tion of 21 tar­iffs on spare parts and com­po­nents used for re­pair or air­craft main­te­nance.

This pol­icy was is­sued be­cause some air­craft com­po­nents are not pro­duced in the coun­try and air­craft main­te­nance ser­vices need to speed up im­ports of spare parts. In re­gards to air fares, the low­est price limit is set at 40 per­cent of the max­i­mum rate, up from a pre­vi­ous level of 30 per­cent. This will help air­lines main­tain and im­prove their fi­nan­cial per­for­mance in the long run. Es­pe­cially in facing com­pe­ti­tion as a con­se­quence of ASEAN’s Open Sky Pol­icy and con­fronting the risk ex­po­sure of cur­rency volatil­ity.

Prof­itabil­ity

The third is­sue per­tains to prof­itabil­ity. Strong de­mand, ef­fi­cien­cies and fall­ing oil prices will help air­lines main­tain their fi­nan­cial per­for­mance. Avi­a­tion re­quires sig­nif­i­cant in­vest­ment for air­craft pro­cure­ment and main­te­nance. Some air­lines have come into pur­chase agree­ments with air­craft man­u­fac­tur­ers like Boe­ing and Air­bus. But these pur­chas­ing ar­range­ments are risky due to fluc­tu­a­tions in ex­change rates. The trans­ac­tions can­not be made through hedg­ing mech­a­nisms.

To safe­guard their fi­nan­cial per­for­mance, air­lines are ex­pected to fo­cus on re­duc­ing costs and boost­ing rev­enues. On the cost side, the de­cline in oil prices is a sig­nif­i­cant near term in­cen­tive. Fuel ac­counts for be­tween 20 and 50 per­cent of an air­line’s cost struc­ture. In ad­di­tion, lower oil prices pro­vide a stim­u­lant to con­sumer in­comes, and thus cre­ate an op­por­tu­nity to open ad­di­tional routes and fre­quen­cies that might not have been prof­itable at higher oil price lev­els.

How­ever, there are some fac­tors that fre­quently af­fect a com­pany’s op­er­a­tion. Some of these in­clude cur­rency volatil­ity, vol­canic ash clouds and for­est fires. These were fac­tors that im­paired the fi­nan­cial per­for­mance of air­lines last year. In ad­di­tion to deal­ing with more vo­latile oil prices, air­lines are also an­tic­i­pat­ing a strength­en­ing of the US dollar. This cur­rency volatil­ity will re­strain the near term ben­e­fit of lower fuel prices be­cause fuel and other costs are of­ten paid in US dol­lars.

In the case of in­ter­na­tional routes, cur­rency volatil­ity can also af­fect in­ter­na­tional trav­eler vol­umes due to changes in pur­chas­ing power. Al­though in­creased cur­rency volatil­ity will be a head­wind for some air­lines, they have al­ready im­ple­mented hedg­ing mech­a­nisms in or­der to min­i­mize the ef­fects. Hence, the out­look for over­all air­line prof­its in the long term re­mains pos­i­tive ow­ing to solid de­mand, lower fuel prices and eco­nomic growth.

Open Sky Pol­icy

The adop­tion of the ASEAN Open Sky Pol­icy came into ef­fect on Jan. 1, 2015. The pol­icy, which is also known as the ASEAN Sin­gle Avi­a­tion Mar­ket (ASEAN SAM), is in­tended to in­crease re­gional and do­mes­tic con­nec­tiv­ity, in­te­grate pro­duc­tion net­works and en­hance re­gional trade by al­low­ing air­lines from ASEAN mem­ber states to fly freely through­out the re­gion via the lib­er­al­iza­tion of air ser­vices un­der a sin­gle and uni­fied air trans­porta­tion mar­ket.

As it was in­tended, greater con­nec­tiv­ity be­tween avi­a­tion mar­kets should en­cour­age higher traf­fic growth and ser­vice qual­ity, while low­er­ing air fares for con­sumers

If ASEAN SAM is suc­cess­fully im­ple­mented, there will be no reg­u­la­tory lim­its on the fre­quency or ca­pac­ity of flights be­tween in­ter­na­tional air­ports across the 10 ASEAN mem­ber coun­tries. As of 2014, in­traASEAN traf­fic for tourism had reached 49.2 mil­lion and its an­nual growth rate over the last 5 years was about 8.9 per­cent.

In­done­sia has 13 in­ter­na­tional air­ports that can be ac­cessed by other ASEAN coun­tries. This equals to half of all in­ter­na­tional air­ports in Sin­ga­pore, Thai­land, Malaysia and the Philip­pines. There­fore, In­done­sia’s mar­ket will be a more at­trac­tive one to ex­plore in the fu­ture. The govern­ment should be able to over­see these in­ter­na­tional gate­ways in the fu­ture. The chal­lenge is in how to im­ple­ment this pol­icy in a mar­ket that is still dom­i­nated by state-owned air­lines, even though the role of pri­vate low­cost car­ri­ers com­pany is in­creas­ing.

Cur­rently, no plan has been made to al­low for­eign own­er­ship of air­lines in the re­gion. Thus, the trend of air­lines es­tab­lish­ing co­branded sub­sidiaries will con­tinue. Do­mes­tic air­lines should see this as an op­por­tu­nity to ex­pand more into re­gional mar­kets.

To beat the com­pe­ti­tion, air­lines have to able to reach economies of scale by pro­vid­ing more air planes and serv­ing more routes in ad­di­tion to en­sur­ing that all the safety as­pects can meet sat­is­fac­tory stan­dards. Proper risk man­age­ment prac­tices like hedg­ing schemes to tackle cur­rency and fuel price volatil­ity should fol­low ef­forts to ex­pand busi­nesses.

For state-owned air­lines, the com­pe­ti­tion is not in the fare, but in the ser­vice qual­ity and safety level pro­vided.

There­fore, the op­por­tu­nity lies in open­ing new re­gional routes so that air­lines will be able to take ad­van­tage of the grow­ing num­ber of busi­ness trips within the re­gion fol­low­ing the im­ple­men­ta­tion of the ASEAN sin­gle mar­ket.

An­tara

New­est air­port: Pas­sen­gers wait for a taxi at the Kualanamu In­ter­na­tional Air­port in Deli Ser­dang, North Su­ma­tra. The new air­port, which be­gan oper­a­tions in July 2013 has a 9-mil­lion pas­sen­ger ca­pac­ity. It is among the most mod­ern air­ports in the coun­try.

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