Weak infrastructure remains big problem
WITH HUGE MARKET POTENTIAL, INDONESIA REQUIRES ADEQUATE AIRPORT INFRASTRUCTURE TO SUPPORT THE MOBILITY OF PASSENGERS AND GOODS
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.
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.
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.