Indonesia’s aviation industry has recorded robust growth marked by increased passenger numbers, expanding fleets, and increased flights. The aviation sector offers huge investment opportunities given the country’s unique geographical conditions coupled with a rising middle-class and a strengthening domestic as well as international tourism industry.
Constraints, however, still remain including regulatory issues and poor airline management as well as the failure of the country’s infrastructure and human resources to keep pace with the growing number of passengers and flights.
Ever since the Indonesian government deregulated the aviation industry in 2000, Indonesia’s aviation sector has been growing at a brisk pace in terms of passengers, airlines, fleets, flights, and airports. For example, the number of airline passengers has increased from 9 million in 1990 to around 90 million in 2016. The same goes for the country’s airline fleets which have soared in numbers by more than ten-fold from 102 aeroplanes in 1990 to 1,030 in 2017.
The remarkable growth of Indonesia’s aviation industry is underpinned by the country’s continued economic growth (See Indonesia’s Economic Outlook in 2017: Remain Cautiously Optimistic), the emergence of low-cost carriers, and the growing number of affluent and middle-class families. Indonesia’s unique geographical nature whereby most of its major cities are separated by mountain ranges and seas means that transportation by land or sea can take days and this gives the aviation sector a competitive edge. It is therefore only natural that as airline tickets becomes increasingly affordable, Indonesians opt for plane travel over cumbersome and lengthy journeys.
Indonesia currently has 61 scheduled and unscheduled commercial airlines. The country is ranked as having the second-fastest growing aviation industry in the world after China in terms of aircraft order and business value. Domestic air passenger volumes have posted double-digit growth in the last five years. In 2013, air passenger growth reached 22.3%. A year later, the figure grew by 16.7%. In 2015, Indonesian air passengers recorded a 13.1% increase. Meanwhile, international air passenger volumes grew by around 8% in 2015 as more local and foreign carriers offer international flights.
The biggest airline in Indonesia in terms of the number of domestic passengers is Lion Air. Since it was established in 1999, the budget carrier has been an airline of choice among low and middle income passengers. The airline has dramatically reduced the country’s standard airfare which has enabled millions of people to fly. The emergence of Lion Air has created a new base of customers for the aviation industry.
Lion Air carried 26.48 million passengers in 2015 or 35% of total domestic passengers which equated to 76.62 million passengers. The airline has also successfully set foot in Malaysia and Thailand through Malindo Air and Thai Lion Air and plans to further expand its business overseas to Vietnam, India, and Australia. Its Vietnamese subsidiary is expected to commence operations in the second quarter of 2017.
To support its expansion, the company had purchased 770 Boeing 737 and A320 aircrafts from Boeing and Airbus in 2007 and 2013. The purchase of 234 A320 aircrafts for $24 billion USD or equal to 234.24 trillion IDR by the company set a new sales record for Airbus. The company currently has received 270 aeroplanes and the remaining 500 aircrafts will be delivered gradually until 2027. However, this fast paced growth has also seen the country plagued with a number of high profile problems including delayed flights and accidents which have seen it earn a poor reputation in terms of reliability and safety.
The second largest airline in Indonesia is Garuda Indonesia. The airline carried 19.96 million or 26% of total domestic passengers in 2015. Meanwhile, in terms of international passengers, Garuda occupied a market share of 16.54% or carried 4.17 million passengers in 2015. Indonesia AirAsia ranked second with 3.66 million passengers or 15%, followed by AirAsia of 2.41 million passengers.
Until the third quarter of 2016, Garuda posted a net loss of $43.6 million USD or down from that of last year when the company recorded a net profit of $51.4 million USD. The company attributed the losses to the spending incurred for the purchase of 35 aircrafts during the second quarter.
Garuda Indonesia Group, including Citilink, aims to increase its domestic and international flight market shares to 50% and 40% respectively by 2020. To support this expansion, the company needs to purchase an additional 115 wide and narrow body aircafts over the next three years which will increase the number of its fleet to 312 aircrafts.
Meanwhile, its subsidiary, Citilink Indonesia carried 8.23 million passengers until the third quarter of 2016 or increased by 20% from 6.86 million in 2015. The airline serves 54 routes to 27 cities in Indonesia with 260 daily flights using 43 aircrafts consisting of five Boeing 737-500 and 38 A320 aircrafts.
In the air freight business, the implementation of the ASEAN Open Sky policy (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?) in early 2016 has benefited Indonesia because it has enabled Indonesian air cargo companies to directly transport their cargoes to the destination countries. Previously, all cargoes transported into and out of Indonesia had to transit in one of the airports in Singapore, Thailand, or Vietnam which dominated the air freight business in the ASEAN (See Indonesia’s Logistics Sector; Making Connections).
Indonesian airports are among the busiest airports in Asia. In fact, Soekarno-Hatta International Airport has recorded the most takeoffs and landings in the region, reaching 72 occurrences per hour or 1,200 – 1,700 occurrences per day. This is far above the regional average where takeoffs and landings in Kuala Lumpur, Changi, and Suvarnabhumi airports are only 971, 948, and 868 occurrences a day.
The Indonesian government has strived to improve the country’s aviation infrastructure by enlarging and modernising existing airports as well as building new ones, especially in remote areas to ensure equal development and to boost the local economy. From 2015 to 2016, the Indonesian government has constructed new airports throughout the country such as Miangas Airport in Talaud Islands, North Sulawesi. Moreover, a number of old airports have also been expanded, particularly the Soekarno-Hatta International airport. The airport’s new Terminal 3 Ultimate is expected to accommodate another 25 million passengers.
In addition to the airline industry, the domestic MRO industry has grown in parallel to support the sector. Indonesia’s Ministry of Industry estimated that the industry was worth $1 billion USD in 2014 and is projected to grow by 10% over the next five years and will double its value to $2 billion USD by 2019.
Currently, 70% of domestic airlines are engaged with foreign MRO companies. That is why the government provided tax incentives to local MRO companies to help them compete with foreign competitors. According to the Ministry of Industry, Indonesia has 72 MRO firms which are members of the Approved Maintenance Organisation (AMO) and 28 MRO companies which are members of the Indonesia Aircraft Maintenance Services Association (IAMSA).
The largest MRO in Indonesia is Garuda Maintenance Facility (GMF) AeroAsia which is a subsidiary of Garuda Indonesia. In 2016, the Minister of State-Owned Enterprises Ms Rini Soemarno inagurated the company’s fourth hanggar which is the world’s largest aircraft maintenance facility for narrow body aircraft as it is able to simultaneously host 16 airplanes with a total area of 67,022 sq.m.
Indonesia has a nascent aircraft manufacturing sector. PT Dirgantara Indonesia is currently developing 19-passenger N219 as well as N245 and N270 airplanes. In addition, the state-owned enterprise has also produced a number of propeller-based aircrafts and helicopters in partnership with Bell Helicopter and Eurocopter. The N219 is ideal for use in remote areas such as in Papua and is produced with close to 75% local content. In the private sector, PT Regio Aviasi Industri is developing R80 aircraft which is able to carry 80-90 passengers and was initiated by former President B.J. Habibie.
With all the potential of Indonesia’s aviation sector laying ahead, the country’s infrastructure and human resource development are unable to keep pace with its booming aviation industry (See High Stakes for Indonesia's New Infrastructure Push). This can be seen from overcrowded airports, dense traffic, high holding rate, steep avtur price, frequent flight delays and cases of flight accidents.
Soekarno-Hatta International Airport, for example, was initially designed to handle 22 million passengers. Meanwhile, in 2014, the number of passengers that departed and arrived at the airport reached 62.1 million. To reduce the traffic load to Soekarno-Hatta airport, the Indonesian government has constructed a railway to connect the airport with the capital. The state railway company (KAI) has prepared 10 train sets to serve the route. Two of these train sets will be delivered in February 2017 and the airport rail link is expected to commence operations in the middle of the year (See Indonesia’s Railways; Just the Ticket to Improve Logistics).
In terms of human resources, Indonesia still lags behind. The country needs approximately 800 new pilots a year, while only half the number are available to meet the demand. The same holds true for other jobs in the aviation industry (See Indonesia’s Brain Drain Pains). For example, the annual demand for ATC personnel and aircraft mechanics are 200 personnels and 1,000 mechanics respectively, while their yearly supply are 40-60 personnels and 200 mechanics. Indonesia’s Ministry of Industry estimates that the country needs 12,000-15,000 mechanics over the next 15 years. The lack of human resources is mostly due to the lack of aviation education (See Vocational Education in Indonesia; Crucial to Compete in the ASEAN). Indonesia only has 13 flight schools which are inadequate to meet the growing number of aircrafts. To improve the human resource quality in the aviation industry, the government recently established LAM-PT Penerbangan to accredite all study programmes in Indonesia’s aviation schools and colleges.
Other problems that hamper the domestic aviation industry is the high avtur price. The price of aviation fuel sold by Pertamina in Indonesia is 27% more expensive than in Singapore because of it being subject to VAT. This is a hefty amount given that fuel accounts for 40%-50% of an airline’s total operating cost. This has reduced the competitiveness of Indonesia’s domestic aviation industry.
These underlying problems have held back Indonesia’s efforts to be re-elected as a member of the International Civil Aviation Organization (ICAO). Despite significant improvements in aviation safety and security standards, Indonesia failed to secure enough votes to become an ICAO member, a position which was firmly held under the Soeharto administration from 1968 to 1998.
The Indonesian government has deregulated a number of regulations to boost investment in the aviation sector and eliminate dual authority and double payments in the industry. These regulations cover various aspects of the aviation industry, from commercial airlines, airports, airmail, air cargo, flight schools and ground support facilities to online air transport licenses.
List of Policy Deregulations in the Aviation Sector
Moreover, the government has simplified 98 permits which have slashed permit processing time by 50%. To support the domestic MRO industry, the government has exempted 21 aircraft components from import duty through the eight-phase policy package following four items which have been exempted since 2013.
Indonesia’s aviation sector still offers huge investment opportunities for domestic and foreign investors. There are lots of potential routes that are not yet fully facilitated especially to regions outside Java such as in Kalimantan, Sulawesi, Maluku, Papua, and Nusa Tenggara.
Kalstar Air for example, managed to carry 100,000 passengers a month using an ATR-type aeroplane from and to Kalimantan. Other local airlines such as Sriwijaya Air and Citilink are also eyeing potential new routes to Indonesia’s secondary cities. The former, for instance, opened a new route from Jakarta to Silangit airport near Toba Lake in April 2016.
Citilink opened six new routes from and to major cities outside Java in 2016, such as Medan-Aceh, Bandung-Pekanbaru, Jakarta-Lombok, Ujung Pandang-Manado, Surabaya-Manado, and Jakarta-Jayapura.
In the international flight segment, both domestic and foreign airlines are competing to connect Indonesia with other major cities in the world. Garuda Indonesia, for instance, has opened a new route to Mumbai, India, whose tourist numbers are expected to reach 350,000 in 2016. To tap into the booming Chinese travel market, Citilink now offers a charter flight from China to Tanjung Pinang from December 2016 to March 2017 (See Indonesia’s Tourism Sector; Making True ‘Wonderful Indonesia’).
Foreign airlines still see potential business opportunities in the Indonesian aviation market which is apparent from their aggressive expansion. Qatar Airways, for instance, plans to open new routes to Medan, Batam, and Manado, in addition to its current, regular flights to Jakarta and Surabaya. The airline aims to make Batam its cargo logistics centre in order to penetrate into the ASEAN market.
Turkish Airlines plans to open an Istanbul-Bali route by the end of 2017 following the success of its Istanbul-Jakarta route. The airline currently operates daily flights from the Indonesian capital to Istanbul with a load factor of 85% – 90%.
Global Business Guide Indonesia - 2017
The number of airline passengers in Indonesia almost doubled from 2008 to 2012, with both domestic and international flights seeing double-digit annual growth. 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.
As the 12th largest aviation market in the world to date, Indonesia’s Commercial Airline Industry has an exciting future ahead of it. This section looks at some of the challenges faced by the sector as it braces itself for increased competition from the ASEAN Open Skies Policy in 2015.
Contribution to GDP: 39.07% (Q3 2015)
Sector Growth: ICT 10.83%, Hospitality 4.53% (yoy, Q3 2015)
Number Employed in the Sector: 54.9 million (February 2015)
Main Areas: Retail, Transportation, Media, Telecommunications, Finance, Hospitality, Tourism.
Government Bodies: Ministry of Trade, Ministry of Tourism, Ministry of Transportation, Ministry of Manpower.