DAVID FULLBROOK / JAKARTA
With deregulation and a growing market for cheaper air travel, Indonesia's low-cost operators risk getting locked into a fares war
Ask anybody if airlines are thriving anywhere and the likely response will be head scratching and puzzled looks. Some might suggest China. Mention Indonesia, and the replies will invariably talk about riots and corruption. Less well known though, is that Indonesia's domestic airlines are growing rapidly on the back of a reviving economy and calmer politics.
Since industry deregulation began in late 1999, airlines have mushroomed. Once there were just four. There are now around 20 and more are on the way.
Maman Sunarsa, marketing support manager for AWAIR International, one of the new crop of airlines, predicts traffic will return to 1996 levels by the end of 2002 now the political tension has subsided.
Optimists like Maman take heart from last year when 7.9 million trips were taken against 6.3 million in 1999, almost double the 10% growth rate most airline and government officials plan for. If politicians keep their heads, Indonesia's 210 million people will feel more confident about spending, driving the economy onwards and in turn fuelling demand for air travel.
Indonesia's economy grew 4% last year when politicians spent most of the year intriguing and fighting corruption allegations. The economy, depressed by political woes, will continue playing catch-up despite flagging global growth as Indonesians, having endured a few grim years, are eager to get back to work.
September's terrorist attacks on the USA are however affecting Indonesia's budding airlines. "Aircraft prices have come down, but insurance has gone up," says Lion Air president director Rusdi Kilana.
Mirroring airline deregulation are government moves to give more power and revenue to the provinces, in a bid to ease discontent and stoke the economy. This is good news for airlines, says Bayu Air managing director Permadi Wiratanuningrat: "I think the prospects are very bright. If everything goes well economically and politically, people will travel more. Government autonomy policy will create more travel between towns and cities over the next few years."
Fighting for a slice
Deregulation is ensuring there will be no shortage of airlines to fight for a slice of a rapidly growing pie. Fare wars have already broken out on busy trunk routes, hitting many new domestic carriers hard. "Competition is very normal. We only have to think how we can manage the situation," says a sanguine Maman. Cut-throat pricing makes Lion wary of overreaching in the domestic market and will lead to casualties, says Rusdi: "I think by mid-2002 we will see one or two airlines close."
While applauding liberalisation, Pelita Air president director Soeratman, who like many Indonesians has one name, says the government must ensure a seat glut does not provoke a larger price battle that could severely damage the industry. "The government needs to jump in and make some effort to prevent a price war. If it continues, no airline will survive in Indonesia."
To fortify against competition, Pelita formed a commercial alliance with Mandala Airlines, one of the old carriers. Bouraq Indonesia Airlines, another old hand, and Dirgantara Airlines will join soon.
Price wars are not the only problem facing nascent carriers. As they start heading overseas, they will be forced to re-evaluate their Boeing 737-200s, the backbone of Indonesia's domestic air fleet, as they do not meet noise restrictions imposed at many international airports. Mandala will replace its 737-200s with quieter -400s, supplied by US lessor Tradewinds, over the next three years in preparation for launching regional services next year. Long-term, Mandala is considering current model 737s and 767s. Other carriers will face little choice but to follow its lead.
Permadi thinks some may opt for Fokker 100s for which there are squadrons of unemployed pilots, as making 737s stage III compliant is expensive. But with lease prices tumbling as airlines around the world dump aircraft, quieter 737s will be more affordable for Indonesian carriers.
Airports also need upgrading and industries woken up to opportunities air transport gives in reaching global markets, adds Permadi. Persuading industry of the merits of air transport is but one of many opportunities carriers are eyeing. Deregulation and decentralisation allow new routes between provincial cities and to other cities in South-East Asia to be developed, says Merpati Nusantara Airlines president Wahyu Hidayat.
Last restrictions
Many provincial airports were recently awarded gateway status, providing more route options, especially if, as upstart carriers hope, the government removes the last single-carrier restrictions on some routes. This allows airlines to avoid Jakarta and Denpasar (Bali), instead taking tourists and businessmen direct to Indonesia's generous endowment of tourist attractions.
So where does opportunity lie in Indonesia's sprawling but troubled archipelago? "Number one is within Java, Sumatra and Kalimantan. But I see prospects on the eastern part of Indonesia like Irian Jaya or Moluccas," says Maman.
But despite the apparent opportunities, the volatile Indonesian currency provokes caution. "We will expand domestically when the rupiah is stable. Indonesia is an archipelago. There are so many islands to fly to. But the problem is the fluctuation of the rupiah," says Rusdi.
Instead, Lion is focusing on Northeast Asia, aiming to launch services to Taipei via Hong Kong from Jakarta, and Seoul via Taipei from Denpasar in time for the summer schedule. Lion's fleet is growing rapidly, with two Airbus A310s and one Boeing MD-82 added recently. It will lease nine MD-82s from Singapore's Region Air by mid-2002.
Region Air, which dominates aircraft leasing in Indonesia, is maintaining the MD-82s and supplying foreign instructor pilots. They are the first aircraft operated by an Indonesian airline with seat-back in-flight entertainment systems, says Rusdi proudly. They could prove a strong marketing point in the fight for thrills seeking passengers in Northeast Asia, and domestically in the long run.
A travel agent turned airline entrepreneur, Rusdi is keenly aware of Bali's appeal to tourists and to food importers in South Korea and Taiwan. "A lot of Taiwanese and Koreans fly to Denpasar. Cargo is also good from Denpasar, mainly seafood."
While Lion is said to be well financed, it could face stiff competition from Mandala, which averages load factors of 71% on its extensive and growing domestic network. It too plans services to Northeast Asia beyond from Jakarta, Denpasar or other Indonesian cities. Australia is next. "Perth and Sydney in 2003, maybe from Denpasar because it has high tourist traffic. We are optimistic about those routes," says commercial director Kamandanu.
AWAIR expects to break even this year on the back of a load factor averaging 75%. It plans aggressive expansion domestically using three 737-300s leased from Tradewinds and internationally to Singapore, Bangkok and Perth, with two A310s due from Region Air in the first half of 2002.
Freight, mainly general cargo, plus fruit, marine products and day-old chicks, support AWAIR's bottom line. "We are quite happy with our cargo loads, it's about 7t per flight," says Maman.
While most of Indonesia's new carriers focus on moving people and plot more domestic services similar to AWAIR, RPX is a cargo carrier that launched in October using a 737-200 freighter to link a handful of Indonesian cities with Singapore. The carrier expects the bulk of its loads to be general cargo, but aims to build up the share of express cargo, as its parent is the Federal Express licensee for Indonesia, and obtain four more aircraft by 2005.
Even Garuda Indonesia is milking the domestic market with its no-frills domestic subsidiary Citilink. Its five-strong Fokker F28 fleet is earmarked for replacement and expansion, although the type and financing remain big questions. "The response from the market is very, very positive. Now we are more serious in developing Citilink further," says Garuda executive vice president commercial Bachrul Hakim.
Creating a new market
New airlines like Lion and the resulting price war damaged Garuda's traffic and helped create a new market by offering services costing a few dollars more than first-class rail or ship, an opportunity that could not be ignored, says Hakim.
Garuda was largely shut out of the domestic market after Merpati, its former domestic subsidiary and Indonesia's biggest domestic carrier, was taken over by the government in the late 1990s. It is now up for sale as the government wants outof the airline business, with talks ongoing with bidders.
One thing Merpati is not considering is expansion. "We will be very careful, particularly with routes where there is no future. At the same time we will look for routes with potential," says Wahyu. As the search for partners and investors goes on, Wahyu is restructuring Merpati into five strategic business units. The plan is for Merpati Training Centre and Merpati Maintenance Facility to become separate entities.
While Wahyu struggles to secure Merpati's future, some of Indonesia's bullish domestic airlines are expanding their networks by reaching out to foreign carriers. Lion has agreed a codeshare with Asiana Airlines covering Seoul-Taipei. AWAIR is also courting foreign airlines, says Maman: "We have an agreement with Asiana and are negotiating with Swissair, KLM and China Southern."
Ties with foreign carriers will no doubt provide additional traffic, but will it be enough to survive what is turning into a bitterly competitive market? If Indonesia remains politically stable and the economy stays buoyant, it seems likely that the industry's development will follow that of post-deregulation USA. Therefore about half a dozen carriers are likely to thrive. At the moment, which ones is anyone's guess.
Source: Flight International
