Indonesia: Reaching for the sky

The country’s airlines are benefitting from rapidly increasing demand throughout the archipelago and beyond as they look towards international expansion. With one airline having recently signed the largest single deal in aviation history and expansion of airports underway the sector is experiencing a structural turnaround.

In February, Indonesia’s largest private airline, Lion Air, announced it had signed a $22.4bn contract with US-based Boeing for the purchase of 230 aircraft. The company has ordered 201 Boeing 737 MAX and 29 737-900ERs and secured purchase rights for a further 150 aeroplanes, the delivery of which is expected to begin in 2017 and run to 2026.

Lion Air hopes the purchases will help it build its operations in Indonesia as well as internationally. Though the country began operations relatively recently, in 2000, it has rapidly grown to take a 51% share of the domestic market. It carried an average of 85,000 passengers daily in 2011 and aims to increase this to 100,000 by the end of this year.

The carrier’s founder and president director, Rusdi Kirana, has said that he plans to float the company on the stock market once it achieves its target of a 60% domestic market share, raising capital for further expansion and giving investors the opportunity to tap into the airline’s success.

Indonesia AirAsia, meanwhile, the local associate carrier of Malaysia-based AirAsia, is also expecting growth this year, both in fleet size and in passenger numbers. The low-cost airline is the country’s top carrier of international traffic and looks set to remain so throughout 2012. Indonesia AirAsia expects to increase its passenger traffic numbers from an estimated 3m in 2011 to 4m in 2012, representing growth of 33%.

To accommodate this increase, the airline plans to introduce five new aircraft to its current fleet of 16 Airbus 320s in 2012, with a further 14 to be added by 2015. At present, the airline has 41.5% of the international-flight market.

While Lion Air has enjoyed stellar success at home and AirAsia abroad, Indonesia’s flag carrier, Garuda, has seen a remarkable turnaround. At a meeting of the Jakarta Foreign Correspondents’ Club in February, Emirsyah Satar, the CEO of Garuda, said that the decade from 1995 to 2005 was a difficult one for the airline, as it only made a net profit in three of the 10 years. Some 85% of its routes were “non-optimal” loss leaders.

Satar, appointed to his position in 2005, set about reorganising the airline, including changing the management system, reducing staff numbers and intensifying training. The company’s debts were restructured and reduced from around $900m in 2005 to $400m as of 2011.

Garuda was seeing profit by 2007, and the airline expects net income of Rp1trn ($110m) this year, rising to Rp3.7trn ($407m) by 2014, despite the tough international climate for airlines, which has seen a number of carriers grounded or put out of business in the first three months of 2012 alone.

Garuda’s passenger numbers grew 39% to 17.1m in 2011, while load factors – an important indicator of airlines’ efficiency – rose to a healthy 74%. Total revenue rose 38% to Rp27.1trn ($2.98bn), though Satar would not comment on net profits.

In 2011, 46% of the airline’s revenue came from international flights, with the flag carrier playing a central role in Indonesia’s inbound tourism industry and its rapidly developing internal transportation network. In order to increase the volume of international passengers, Garuda has established offices in a number of key markets, including Japan, Korea and China. The fleet is expected to grow to 105 aircraft by the end of 2012, supporting a planned rise in passenger numbers to 22m.

The forthcoming ASEAN open skies agreement, which should come into effect in 2015, will likely boost expansion potential for all of Indonesia’s airlines. The rise in air traffic and the liberalisation of the market are also having profound effects on Indonesia’s commercial airports, which are operated by two state-owned companies – Angkasa Pura (AP) I, with 13 airports in eastern Indonesia, and AP II, with 12 in the west of the country.

“With an average trend of 12% growth, passenger traffic has exceeded airport capacity,” Tommy Soetomo, the president-director of AP I, told OBG. “The expectation is that the number of passengers will continue to increase for the foreseeable future. Therefore, we must focus on expanding and renovating the airports under our supervision. We are also building one new airport this year.”

AP II is also looking to expand its airports, including Jakarta’s Soekarno-Hatta Airport, which handled 51m passengers in 2011– more than twice its intended capacity of 22m. This year, AP II intends to unveil a master plan for the airport’s development, the firm’s president-director, Tri Sunoko, told OBG. The target is to build capacity to 67m passengers per year over the longer term, including the addition of a third runway, expansion of terminal buildings and improvement of transport links into Jakarta. In the short term, current facilities will undergo a number of changes that will improve its overall efficiency.

The Indonesian air transport sector has a huge amount of potential. Rising competition presents challenges for all operators in the region, but should also make room for opportunities for international expansion.