Big challenges, great opportunities

June, 15 2016 | 06:25 am Vincent Lingga
Vincent Lingga

Vincent Lingga
The Jakarta Post/Jakarta

The spread of original economic growth centers to the outer islands will generate the need for more point-to-point flight services

The Jakarta Post hosted a discussion meeting with airline executives, consultants and analysts on Indonesia’s aviation outlook on Feb. 22, exploring the great business prospects but also identifying the short-term problems and charting out the major challenges ahead.

The panelists attending the discussion were Lion Group’s president director Edward Sirait, AirAsia Indonesia’s president director Sunu Widyatmoko, secretary general of the Indonesian National Carriers Association Tengku Baharuddin,  Angkasa Pura II’s director of operations and engineering Djoko Murjatmoko, Communic Avia managing consultant Gerry Soejatman,  Samudra Sukardi of CSE Aviation consulting company  and airline analyst Dudi Sudibyo.

The following article is the gist and most salient points that transpired during the discussions combined with earlier reports in The Jakarta Post.

Indonesia’s aviation industry is one of the country’s most promising sectors. Being the world’s largest archipelago, Indonesianaturally relies heavily on air travel for the mobility of its people and goods.

With a population of 260 million and with a rising middle class, Indonesians are hungrier than ever for air transportation. Straddling an archipelago of 17,000 islands, 5,200 km across from east to west and nearly 2,000 km from north to south, this is a country that was really made for air transportation.

As growing numbers of Indonesians are discovering, air is the most efficient option for getting around. The importance of aviation to the lucrative tourism industry is undeniable. It may be less obvious, but even more important to note, that aviation connects Indonesian businesses to markets around the world.

Aviation is big business in Indonesia today. But the potential is much bigger. According to Tony Tyler, the chief of the International Air Transport Association (IATA) in an aviation day celebration in Jakarta in March 2015, by 2034 Indonesia is expected to be the sixth-largest market for air travel.

By then some 270 million passengers are expected to fly to, from and within the country. That will be more than three times the size of the 2015 market.

The spread of regional economic growth centers to the outer islands of Sumatra, Kalimantan, Sulawesi, Papua, Nusa Tenggara, Maluku will generate the need for more point-to-point flight services across the archipelago.

But all panelists at The Jakarta Post aviation outlook discussion agreed airlines are difficult businesses to run. They are capital and simultaneously labor intensive. Airlines have complex operations and thin margins, and they encounter a great deal of unpredictability.

No wonder credit financing from domestic banks is very rare as there is virtually no  experienced analyst specializing in monitoring and assessing the risks of the airline business.

Major factors affecting results, such as fuel prices, weather, volatile forein exchange rates and macroeconomic shifts, are beyond airlines’ management control. For all these reasons, companies focus intently on controlling costs, especially labor costs—the second-largest expense category (after fuel) for most airlines.

Edward Sirait Sunu Widyatmoko Tengku Burhanuddin Samudra Sukardi
Dudi Sudibyo Djoko Murjatmodjo Gerry Soejatman


The panelists shared the view there are three main issues within the airline industry in Indonesia: a smart regulatory network, building an adequate fleet and infrastructure capacity, notably modern airports, and safety.

Regulators in  Indonesia now oversee a global aviation powerhouse with domestic airlines operating approximately 425 jets—carrying more than 50 million passengers annually—but the results of the latest International Civil Aviation Organization (ICAO)  audit put Indonesian safety standards below the global average.

New airplanes continue to  come in great numbers and the passengers will be  there to fill them, but it remains to be seen whether new airports can be built fast enough to accommodate both the planes and the people.

In addition to having a safe industry supported by infrastructure capacity, it is important to have government regulations that are consistent with global standards and that facilitate business growth.

The panelists also shared the same view that aviation is a highly regulated industry. Safety regulations based on global standards are critical. But they noted some instances of over-regulation, which are counter-productive and which treat airlines unlike any other comparable business.

The civil aviation directorate general classifies the airline industry in Indonesia into three categories: full-service, medium-service and low-cost (budget) carriers.  But then what is the point of the ceiling and floor ticket prices set by the government?

Both airline executives and analysts question the purpose of the government-set floor and ceiling price range, arguing there is no direct relation between ticket prices and safety. The fare differentials only reflect the levels of the airline services. There is no airline company that is so silly as to compromise its safety standards and risk destroying its reputation to be able to offer low fares.

The regulators can simply audit the rates of insurance premiums paid by airlines. If the premium rate paid by an airline company is unusually high, then it deserves further investigation. But if the premium is the average within the industry, then the safety standards are simply ok.

Airline executives also complained of the bureaucratic red tape and high tariffs on the import of aircraft spare parts, which are virtually unknown in most other ASEAN countries. The import bureaucracy involves the transportation, trade, industry and finance ministries. Worse still, the industry must still depend almost entirely on imported spare parts.

Strange, though it is, Indonesia is the world’s second-largest producer of rubber. But its airlines must send their aircraft tires to Bangkok or Hong Kong for reconditioning.  The government recently offered duty relief for spare-part imports as part of the reform package but its implementation, which involves several ministries, is still very difficult.

Arduous bureaucratic procedures for the importation of aircraft spare parts have become one of the biggest barriers to investment in aircraft maintenance, repair and overhaul (MRO) centers in Indonesia. Currently only the national carrier Garuda Indonesia and the Lion Group have MRO centers, in Jakarta and Batam respectively. No wonder more than 70 percent of the MRO services for Indonesian aircraft are provided overseas.

The aircraft MRO business is actually the most profitable part of the airline industry and its operations are labor intensive, which fit well for Indonesia. But without conducive regulations and government assistance in acquiring large tracts of land near airports, no foreign investors are interested in building MRO centers in Indonesia. Foreign companies  instead build in Malaysia and Singapore, which offer better incentives.

Likewise, regulatory barriers have hindered the growth of high-quality pilot training centers in the country because trainer aircraft are subject to luxury sales tax and the import of simulator encounters bureaucratic hurdles. That is why Lufthansa Technik Ag, for example, decided to develop its training facility in Malaysia and so did Canada-based CAE, the world’s largest pilot-training company, in a joint venture with AirAsia.

The panelists shared the view that until 2025 the airline industry should be treated as an agent of development, not as an entirely commercial business. As such the government should support the industry with fiscal incentives and conducive regulations to stimulate private investment.

Airline executives complained that aviation fuel prices in Indonesia were mostly higher than those in other ASEAN countries due in part to the rupiah depreciation.


Indonesia’s traffic growth needs to be supported by aviation infrastructure, both on the ground and in the air. This requires the building of a world-class hub, managing scarce capacity to global standards and modernizing air traffic management. The network nature of the airline business is such  that global standards are critical.

Considering the potential for an air-traffic boom in the future, it is essential to develop new airports, refurbish existing ones, and build other necessary ground infrastructure. The construction of the modern Kuala Namu International Airport near the North Sumatra provincial capital of Medan, the country’s first airport with direct raillink services, was a big step. The recent expansion of the Silangit Airport near lake Toba, the world’s largest volcanic lake in North Sumatra is another impressive step forward.

The government plans to add 62 more airports in the next five years, and new terminals are being built for the flagship Soekarno-Hatta International Airport (SHIA) in Jakarta.

The problem now is that the acute low capacity of airports, notably those in the major cities in Java, Sumatra, Kalimantan and Sulawesi, has also been made worse by their limited working hours.

Only a few airports are able to run 24 hours a day, not because of the inability of the state-owned airport management companies (PT Angkasa Pura I and II). Airport operations need to be supported by public services provided by other government institutions such as customs and immigration.

In short, Indonesia’s aviation market has huge potential. The government should work with airlines and international regulatory bodies as well as wooing as many investors as possible to the air transportation sector in order to prepare Indonesia for the unavoidable surge in air traffic.

But Indonesia, according to the IATA,  needs an aviation masterplan based on global standards and developed in partnership with aviation stakeholders including the government. Such a plan should set a common vision for addressing top priorities such as safety, capacity and regulation. And of course it must be followed by real action.

Air traffic management needs to be modernized and expanded to handle steadily increasing traffic. Latest figures show there are over 900 new aircraft on order by Indonesian airlines for delivery within the next two to three years. This means that the already busy skies will become even more crowded.

Therefore the skills of air traffic controllers should also be continuously improved to move forward with the implementation of Performance Based Navigation and introduce Air Traffic Flow Management (AFTM).

Improving Safety

Safety is certainly aviation’s top priority and the biggest concern for the successful development of the airline industry in Indonesia. In the Universal Safety Oversight Audit Program (USOAP) conducted by the UN’s technical agency for aviation, the International Civil Aviation Organization’s (ICAO), Indonesia was assessed as below the global average.

The US’ Federal Aviation Administration (FAA) has downgraded Indonesia to Category 2 in its International Aviation Safety Assessment program. And the EU continues to uphold a ban on all but five Indonesian carriers.

The international aviation safety assessment program of the FAA focuses on a country’s, not individual air carriers, ability to adhere to international standards and recommended practices for aircraft operations and maintenance established by the ICAO.

Similarly, the ICAO’s audit program doesn’t rate the safety or the management of individual carriers. Instead, it is intended to gauge how well government agencies are staffed and financed to ensure compliance with global standards.

The IATA Operational Safety Audit (IOSA) is a global standard and is at the core of our efforts to improve safety. But the organization claims that of the 62 Indonesian airlines (17 operating scheduled, and 45 chartered, flights), only Garuda is in the IOSA registry. Hence making IOSA compulsory for any Indonesian airline operator could send a very strong signal of a commitment to improving safety.

Expanded fleet: Garuda Indonesia aircraft park at Soekarno-Hatta International Airport in Tangerang, Banten. Garuda and its subsidiary Citilink plan to add 23 more airplanes to their fleet this year. (Antara)
Expanded fleet: Garuda Indonesia aircraft park at Soekarno-Hatta International Airport in Tangerang, Banten. Garuda and its subsidiary Citilink plan to add 23 more airplanes to their fleet this year. (Antara)

The ASEAN open skies policy, supposed to have started in early 2015, is expected to boost connectivity and people’s movement in a region of more than 630 million  and in turn spur regional economic growth.

The open skies policy, known as the ASEAN Single Aviation Market (ASEAN-SAM), has been designed to increase regional and domestic connectivity, integrate production networks and enhance regional trade by allowing airlines from the 10 ASEAN member states to fly freely throughout the region via the liberalization of air services under a single, unified air transportation market.

But again inadequate airport capacity, especially in Indonesia, ASEAN’s largest economy, has hindered the full benefits of the policy. Only five airports in Indonesia have been included in the ASEAN open skies scheme and even flight services to these five cities are subject to the availability of slots.

Airline industry analysts nevertheless are very positive about the new policy and many say that the single aviation market will lead to growth and development as it opens up the market to more competition. Greater connectivity between aviation markets arising from the open skies policy should encourage higher traffic growth and service quality, while reducing ticket prices.

When the ASEAN-SAM is fully implemented, there will be no regulatory limits on the frequency or capacity of flights between international airports across the 10 ASEAN member countries.

The most important aspect of liberalizing aviation markets is the guarantee of the third, fourth, fifth, and seventh freedoms of the air, which are as follows:  Third and fourth freedom rights: The right to fly from an airline’s home country to a foreign country, and vice versa, without government approval. Fifth freedom rights: The right to fly between two foreign countries during flights originating or ending in an airline’s home country. Seventh freedom rights: The right to fly between two foreign countries while not offering flights to an airline’s home country.

The third and fourth freedoms are already popular in the ASEAN region. Although open skies will apply to capital cities, there will be a cap on slots given to airlines. In addition, there are restrictions on certain host countries that do not exist in other international open air agreements.

The ASEAN-SAM remains incomplete due to concerns from some member states over the expected fierce intra-ASEAN competition such an agreement would generate. Several ASEAN governments have already ratified the first phase of the ASEAN-SAM, which entails opening up capital city routes to all ASEAN-based airlines, but most are hesitant to endorse the second phase, which entails widening this to secondary cities.

Key members of ASEAN, including Indonesia and the Philippines, have voiced opposition to some of the proposed components of the ASEAN-SAM agreement – namely relaxations of the third, fourth and fifth freedoms of the air.

These freedoms entail, respectively, the right to fly from an airline’s home country to a foreign country and from a foreign country to an airline’s home country, and the right to fly between two foreign countries during flights originating or ending in an airline’s home country.

Indonesia, Cambodia and Laos currently remain opposed to several protocols within these agreements, however, due to concerns that competing airlines from Singapore, Malaysia and Thailand would put local carriers out of business.

However, several carriers such as Indonesia’s Lion Group have begun establishing overseas subsidiaries in Malaysia and Thailand with local owners to reach other ASEAN locations in an effort to avoid the market restrictions.