David Fullbrook, Jakarta – Unnoticed by most, a quiet revolution took place in Indonesia in 1999. Its consequences were plunging air fares and dozens of new airlines. Air travelers are doubling every three years. Indonesia was low-fare, no-frills way before those shimmering phrases grabbed headlines elsewhere in Asia.
Last year, 16 million trips were taken, against 6.6 million in 1999. Conservatively, 20 million seats will be sold this year, which is 7 million more than in crony-capitalist regulation-choked 1997, when Indonesia's high-speed economy shattered.
The economy is still being put back together, growing around 4 percent annually. "From past experience passenger growth is three or four times economic growth," said Kelly Humardani, president of Bali Air. Five or six times seems the case these days.
Air transport is booming because Indonesia, like many developing countries, lacks fast, expansive roads and railways that vein developed economies (impossible anyway for travel between the country's thousands of islands). A microcosm of Asia in many ways, Indonesia shows the future awaiting airlines and passengers when regulations are rolled up in mega-markets such as China and India.
Indonesia's policy became possible when society's political fabric was ruffled, perhaps torn permanently, by the collapse of the Suharto regime in 1998, giving new players at least a brief opportunity to influence policy and break into the market.
It was also a response to the dire situation facing airlines as the economy crashed. "We, the regulators and the operators, thought about how to solve the problem. We concluded that the relaxation of regulations was the best way. Now we can see air transport is growing very rapidly," said Santoso Eddy Wibowo, director of domestic air transport at the Directorate General of Air Communication (DGAC).
So is the DGAC's work. Before 1999 there were five scheduled carriers and a few charter operators to watch. There are now 37 licenses on issue, a few more pending, with 23 scheduled airlines operating.
Tumbling prices are fueling the boom. "It's getting very, very cheap traveling by plane. The population is very big and the quickest way to get around thousands of islands is by air. It's even cheaper than ship on some routes," said Humardani.
Rusdi Kirana, president and founder of Lion Airlines, concurred: "The main reason is the low fares. Only 16 million trips were taken last year. As a percentage of total population that's small. There's a lot of potential if prices are kept low. Lion pioneered low fares. Within four years it has taken the largest share of the domestic market."
Survival of the fittest
Crowded skies make a mean market. "The domestic airlines have to keep costs below 3 [US] cents per kilometer or they're not going to survive. There are some airlines here that are not set up as low-cost carriers, but are having to sell at a low fare. I believe some have costs around 5 cents per kilometer. The only way for them to survive is to be more efficient," said Humardani.
Airline bosses frequently grumble that the policy will destroy them. "I think many of the airlines are screaming now – they are expecting the government to control capacity," said Humardani.
A respite from the Darwinian scrum looks unlikely. "Some people worry there are too many airlines in Indonesia. From our point of view, as the government, we are only interested in services, in ensuring that supply meets demand," said Wibowo.
It also reflects a broader, long-term view. "We want to teach the airline industry to be competitive. The strategic environment is globalization – it's very dynamic," said Wibowo.
As regulations fall and invisible borders are ripped from Asia's skies, common aviation areas, like Europe's, will emerge, especially in Southeast Asia, that allow airlines to fly between any airports within the common area. Competition-toughened Indonesian carriers will be positioned to expand within the region and beyond.
Competition does not bother Kirana. "Competitors can be handled. Macro issues like [the terrorist attacks of September 11, 2001] and SARS [severe acute respiratory syndrome] are much harder to deal with."
Innovative Lion is odds-on to survive. Its flights, not always the cheapest, are popular. Others face cloudier prospects. "Some airlines will pull out, if they don't change their strategy – like adding more seats – they might have to restructure routings," said Humardani.
Crowded skies, crowded airports
Success brings its own headaches. "The airport now is getting very crowded, just like the bus or train station. Some of the airports just cannot handle any more. That is the problem when you have high growth. The airports are not ready, there are not enough parking bays," said Humardani.
Competition is rattling the industry. Airlines battle for crews. "It's quite a serious problem," said Humardani. "Pilots [and cabin crew] leave to join new airlines that offer higher wages. Some come to regret it as due to the competition some airlines fail."
Already many European and Argentine pilots work in Indonesia. Meanwhile, overseas training bills are mounting as not all training can be done in Indonesia now.
Retention and personnel shortages are growing in many areas. "The problem we are facing in the very near future is human resources. We should push training," said Wibowo.
Engineering, ground handlers, caterers and other suppliers are being pressured hard by the fight for contracts, raising safety concerns. "The public are starting to question safety. They're wondering if costs are being cut on maintenance. Is the airline doing any maintenance with low fares?" said Humardani, who admits himself to having cut some concerns.
"People even get on the wrong flight. They only realize when the plane lands. They are not listening to announcements. The government is planning a campaign to educate first-time travelers. It is a security issue. The ground handling agents have been warned by the government," said Humardani.
Indonesia is not alone in struggling to meet the demands of fast expansion. Problems have arisen elsewhere, including the United States during its federalization of airport security.
Isolated incidents and, as yet, unrealized fears cannot be ignored. DGAC is adding more staff and increasing training while working closely with the International Civil Aviation Organization, said Wibowo: "Safety is our first priority."
Ultimately, congestion and safety can only be dealt with by better airports, air-traffic control, services and training. With French money, two new air-traffic control centers at Jakarta and Makassar – which opens in 2005 – will replace the existing four centers. "The difficult side is the facilities. We haven't solved it completely, but we are working on it," said Wibowo.
Opportunities abound for private investors in what was once the exclusive domain of government. Foreign engineering companies such as Air North Icelandic and SAS Component are prospering, alongside consultants such as Parc Aviation. "It's a pro-aviation development atmosphere with all the government officials," said Jim Eckes, managing director of consultancy Indo-Swiss Aviation.
Big bucks are in developing and managing airports. "The breakneck growth of air services also has significant implications for airport and air-navigation service infrastructure, which will need to be addressed as a matter of urgency. As with [flag carrier Garuda Indonesia], privatization is seen as the vehicle to attract greater levels of external investment," the Center for Asia Pacific Aviation (CAPA) says in a recent report.
BAA, the world's largest airport operator, is among the big names flirting with Indonesia; others are Schiphol and Fraport.
Lion has a verbal agreement to build and operate Sukarno-Hatta's (Jakarta) third terminal. Once its government contract is inked, it will be seeking consultants and partners to help create a terminal matching Singapore's renowned Changi airport. Investors are needed for Medan's new airport and Bali's new terminal, designed for 5 million passengers a year.
Airlines, which can be 49 percent foreign-owned, offer big rewards, and big risks, which should see investors moving in. "Provided the political climate remains stable, there is a reasonable prospect that foreign investment levels will improve this year," says CAPA.
With the Indonesian government forecasting 5 percent economic growth in 2005 and 6 percent in 2006, a slowdown in air travel is not on the horizon. "The potential for growth is certainly good," said Eckes. "Indonesia is the place. If I was going to start an airline in the Asia and had a good partner, I'd pick Indonesia over anywhere else."