Indonesia’s aviation industry is booming. The archipelago’s geographic nature gives air transportation a natural advantage over road and rail, and rising personal incomes allow a growing part of the population to fly. Increasing tourism, international trade and the development of regional economic centres such as Medan and Makassar will continue to drive demand in the aviation sector. Indonesia’s Ministry of Transportation expects the number of airline passengers to rise by 15% to more than 100 million in 2014, extending the growth trajectory of the preceding years.
Commercial aviation in Indonesia, however, has become a victim of its own success, with its rapid expansion causing bottlenecks. The building of airports, maintenance facilities and flight schools has not kept pace with the increase in passenger capacity. The results are overcrowded terminals, disrupted flight schedules and headaches for airlines trying to recruit pilots and other staff. On the bright side, these bottlenecks represent opportunities for investment and should not in the long run hold Indonesia back from becoming one of the world’s leading aviation markets.
The number of airline passengers in Indonesia almost doubled from 2008 to 2012, with both domestic and international flights seeing double-digit annual growth.
Departures from Indonesian Airports (millions)
Source: Statistics Indonesia (BPS)
Strong growth in the sector continued in 2013 despite a general economic slowdown, and the market’s potential is far from exhausted. The World Bank estimates that over the course of the next twenty years, the portion of Indonesia’s middle class with sufficient disposable income to afford air travel will swell from the current 130 million people to 240 million people.
By far the largest carrier in terms of passengers is Lion Air, a no-frills airline that serves predominantly domestic routes and is operated by privately held Lion Mentari Airlines. Second in line is flag carrier Garuda Indonesia, which went public in February 2011 but remains majority-owned by the state. While Lion Air caters to the fast-growing lower end of the market, Garuda is a full-service carrier with a more international focus. Unlike other Indonesian airlines, it is no longer barred from the EU; hence it has access to routes that remain off-limits for its rivals. Both Lion Air and Garuda have subsidiaries to tap into each other’s main market. Lion Air recently launched premium airline Batik Air, while Garuda has budget carrier Citilink, which saw exceptional passenger growth but posted a financial loss in 2013. Sriwijaya Air, in third place, is much smaller than Lion Air and Garuda. It recently launched Nam Air with a view to operating full-service flights to secondary destinations. Meanwhile, Kuala Lumpur-based AirAsia Berhad is making inroads into the region’s largest market through Indonesia AirAsia, of which it owns 49% (The remaining 51% is held by Indonesian firm PT Fersindo Nusaperkasa as Indonesian law forbids foreign control of domestic airlines). As a regional airline, Indonesia AirAsia is particularly strong on routes in and out of the country but also serves domestic flights.
As they vie for market share, many airlines in Indonesia and neighbouring countries are drastically expanding their fleets. A 20-year forecast by aerospace company Boeing predicts that the fleet in Southeast Asia will more than triple to 3,490 aeroplanes by 2032. The combined effect of the massive aeroplane orders threatens to intensify competition in an already very competitive business, as carriers struggle to fill empty seats. While this makes airfares throughout Southeast Asia very affordable, it may erode margins to the point where some operators go under. One carrier to feel the heat was Batavia Air, which ceased operations in January 2013, shortly after a planned takeover by AirAsia fell through. Further industry consolidation is likely.
Competition must be expected to grow stronger yet through the ASEAN Open Skies policy, scheduled to take effect at the beginning of 2016. Part of the ASEAN Economic Community (AEC), the multilateral agreement does away with most national restrictions that currently shield domestic operators from foreign competition on routes to secondary airports. Indonesia’s five leading airports, Jakarta, Surabaya, Denpasar, Medan and Makassar, will be the first ones to be fully opened, with others to follow in later stages.
By establishing a liberalized air travel market across the ASEAN region for cargo and passenger transportation, the Open Skies policy raises the bar for quality and efficiency (See Indonesia’s Logistics Sector). Since it effectively forces Indonesian airlines to up their game, the Open Skies policy spells additional business for aerospace industries and providers of aviation services and equipment. While airlines are feeling the pinch of fierce competition, low prices and high costs (due to staff shortages and a weak rupiah), the market as a whole remains buoyed by rising demand. This is good news for companies offering aviation-related services, including airport construction, aircraft maintenance and pilot training.
There is an urgent need for new runways and terminals to accommodate the growth in passenger numbers. Jakarta-serving Soekarno-Hatta International Airport, which handles the lion’s share of Indonesian air traffic, is running far above its intended capacity, serving some 58 million travellers in 2012 instead of the 22 million it was designed for. An expansion of Terminal 3 will boost capacity to 62 million passengers, but further upgrades will be needed before long. Plans include a fourth terminal and a third runway, possibly offshore. Other airports in the Jakarta area are preparing to take some of the burden off Soekarno-Hatta such as Halim Perdanakusuma Airport, but may entail large-scale construction efforts.
Almost all of the country’s commercial airports are also running far beyond their intended capacity. Surabaya’s Juanda International in East Java saw the highest passenger growth in 2012. Expansions and new airports will provide many years of work for construction companies and consultants, including foreign ones.
The government and state-owned airport operators Angkasa Pura I and Angkasa Pura II are keen to attract participation in public-private partnerships (See Indonesian Infrastructure: Tremendous PPP Opportunities). One aspect that has in the past made foreign investors reluctant to fund new airports is a regulation that prevents them from managing the facilities’ operation. This is set to change with the adjustments to the Negative Investment List to allow foreign companies to take stakes of 49% in airport operators.
The fleet surge at major carriers necessitates a similar increase in the capacity for aircraft maintenance, repair and overhaul (MRO). Having sufficient MRO facilities of their own is vital for airlines to contain their operating costs and buttress their independence. This makes a strong case for investment in hangars and equipment. Garuda Indonesia’s Jakarta-based MRO unit GMF AeroAsia is constantly expanding its capabilities and in 2013 announced plans for a new facility on the island of Batam. Lion Air, meanwhile, is constructing its main maintenance facility on Batam, where industries benefit from proximity to Singapore and tax exemptions. Lion Air plans to allocate some 30% of its heavy maintenance capacity at the site to third-party work as long as its own needs are met.
The need for MRO is set to increase so fast that foreign companies will continue to play a major role in providing maintenance services to Indonesian carriers. GMF AeroAsia forecast that Indonesian MRO spending would swell to $2 billion USD by 2015 from an estimated $950 million USD in 2013. In addition, as local firms and the government boost domestic MRO capacity, a lot of foreign capital and knowhow will be needed to construct facilities.
Besides infrastructure bottlenecks; the shortage in human resources poses a threat to the future growth of Indonesia’s airline industry. According to estimates, Indonesia requires 1,000 new pilots every year until 2015 but cannot produce even half that number. Greater yet is the need for technicians and engineers, while air traffic control officers and safety inspectors are also in short supply. Foreigners currently help fill the gap but the government is keen to avoid this where possible, which provides an investment case for pilot schools and other training institutions.
Current regulations permit foreign investors to partner with local entities when entering the non-formal education sector in Indonesia, insofar as their ownership stake does not exceed 49%. For specialized non-formal education, including flight schools, a special license is required.
The business fields outlined above are by no means exhaustive of Indonesia’s aviation and aerospace sector. Enticing investment prospects might be found in many other areas. For example, the country’s dispersed geography, increasing personal wealth and rising business activity make a strong case for investment in private and business aviation, such as jet charter services.
Global Business Guide Indonesia - 2014
Contribution to GDP: 4.19% (Q3 2015)
Existing Road Network: Paved 287,926 km, Total 508,000 km (2013)
Existing Toll Road Network: 840 km March 2016)
Active Railway Network: 4,814km (2016)
Number of Airports: 237; 35 with runway length >2,000 metres (2015)
Active Commercial Sea Ports: 121 (2016)
Main Government Bodies: Ministry of Transportation, BAPPENAS, Ministry of Public Works and Housing, Indonesia Toll Road Authority (BPJT).
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