Indonesia's airline market is full of potential but has its share of problems, with safety clearly its biggest challenge. Last year there were five airline hull losses in Indonesia and all of the country's carriers were put on the European Union's blacklist after Indonesia failed an ICAO safety audit. The Indonesian government even had to warn its citizens that flying in the country was not safe.
Warwick Brady, the chief executive of Indonesia's second largest low-cost carrier Mandala, is well aware the impact the country's safety problem is having on the image of all Indonesian carriers at home and overseas. "In Indonesia if you say you are a budget carrier people will run away because they will think you will crash," Brady says.
Since joining Mandala last July, Brady has been working hard to change this perception. Brady is leading a restructuring of the airline which started in 2006 after Mandala was acquired by Indonesian transportation conglomerate Cardig and David Bonderman-led Indigo Partners. The airline, which began operations in the late 1960s and was formerly owned by a company linked to the Indonesian military, has already completed a transformation from a full-service to a strict no-frills carrier following the Southwest model. The latest phase of the restructuring includes a $2 billion fleet renewal and expansion programme and, most importantly, a renewed focus on safety. Mandala had a fatal crash in September 2005.
Since Brady joined Mandala from Indian low-cost carrier Air Deccan, Mandala has passed safety audits by Airbus and Boeing and is now being audited under IATA's Operational Safety Audit (IOSA) programme. Mandala also has invested in safety technology, including a fleet monitoring programme for its new Airbus A320 fleet. Brady says Mandala has benchmarked its operation against leading carriers overseas and has created a safety and quality department.
Brady is confident all these efforts will get Mandala off the EU ban. The carrier has no ambitions to fly to Europe - it currently does not even have any international flights within Southeast Asia - but getting off the ban will help it attract more domestic passengers. "We're on the fast track to get off the EU ban," Brady says.
He adds Mandala's operational transformation has already paid off because large Indonesian companies, which previously would only use flag carrier Garuda, have started authorising its executives to fly Mandala. This is partly the fruits of Mandala's ongoing communications campaign which promotes its new fleet of A320s and its safety-first philosophy. "Indonesia has got a lot of older aircraft and few airlines with international standards," Brady says. "Indonesia needs a good airline."
Mandala, which historically has operated ageing Boeing 737s, placed an order last year for 30 new A320s. Deliveries are not slated to begin until 2011 but Mandala has kick-started the renewal of its fleet by leasing two new A319s from CIT and two new A320s from AerCap. It also has leased two used A320s and has already committed to leasing two more used A320s, which will be delivered next year. "We'll take leased new ones if the prices are right but for now they are not," Brady says.
Brady aims to lease another four to six A320s for delivery in the second half of this year, which should give Mandala a fleet of between 10 and 12 A320 family aircraft by the end of 2008. "It depends on pricing. We have got aircraft identified but the pricing hasn't been finalised," Brady says.
Mandala currently still operates four 737-200s and two 737-400s alongside its four A320s and two A319s. It hopes to phase out its last 737 next year and have 28 A320s by the end of 2010, before the first of the 30 A320s it has ordered are delivered. But again Brady says how many aircraft it takes before 2011 depends on aircraft prices and availability. "I expect the leasing market will soften this year."
Indonesia has over 30 carriers, mainly smaller operators using old equipment, and Brady sees those that have invested in new aircraft emerging as the country's dominant carriers. Lion Air, Indonesia's largest low-cost carrier, has 178 Boeing 737-900ERs on order. Garuda also has up to 50 new 737s on order and Indonesia AirAsia plans to start replacing its fleet of 11 737-300s with new A320s later this year.
Brady adds consolidation among Indonesia's other carriers "is inevitable purely because of the fleet structures of airlines". He adds many Indonesian carriers lack the capital to renew their fleets and western lessors are skeptical to place aircraft with them. But he is quick to add: "There's a very positive outlook for airlines with efficient and modern fleets."
The Indonesian market has already had one major airline casualty. Adam Air, which had been Indonesia's second largest low-cost carrier with a fleet of about 20 older generation 737s, shut down in January. Brady says Adam Air was pricing irrationally the past few months prior to its shutdown, making it impossible for any carrier to make money as fuel prices increased. "It has changed a lot since Adam [ceased operations]," Brady says. "It's a good sign to market if you do irrational pricing this is what happens."
Lion Air claims it has been consistently profitable and Indonesia AirAsia claims it is now about to break even. But Brady does not believe this and says the air fares in Indonesia have simply been too low for any carrier to make a profit. "The market is tough here," he says. "We are not profitable but we are on our way."
Even with fuel prices at record highs, the outlook in Indonesia is bright. The domestic market, which last year consisted of about 35 million passengers, is expected to grow at annual clips of 20% or more. Brady points out that Indonesia has 250 million people and its geography makes it impossible to travel most places by road. Brady also points out the economy is growing at 6% annually and this is not expected to be slowed by a possible recession in the USA or Europe. "The market is healthy. The demand is high," he says. "With 240 million people and a low-cost base, there's opportunity here."
Brady, who is originally from South Africa, is the right man to lead Mandala's operational turnaround. He started his career as a pilot and before becoming chief operating officer at Air Deccan served as deputy director of operations at Ryanair.
Brady has brought with him several experienced operational managers including chief operating officer Steve Wilk, technical director Brian Bradbury and director of flight operations Cor Blokzijl. Wilk, a Kiwi, is a former chief executive of Air New Guinea and general manager of Heavy Lift. Blokzijl, a Dutchman, is a former chief operating officer at Go and director of flight operations at Nikki and Finnair. Bradbury, a Brit, is a former head of engineering and maintenance at Air Deccan and engineering manager for British Airways.
Asked how he is adjusting to life in Indonesia after a couple of years in India, Brady responds: "The two markets are similar but have different problems. India has a cost problem. Indonesia has a revenue problem. The results [heavy losses] are the same."
He adds he was offered the chief executive job at Air Deccan after Kingfisher Airlines parent the UB Group became its largest shareholder early last year but he thought Mandala was a more interesting opportunity. "I saw a lot of trouble ahead with merging a low-cost airline with a full-service airline. Two years is enough in India. Indonesia is a much easier place to live."