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Opening the Skies
Indonesia revamps its aviation infrastructure in the wake of Asean air market liberalisation

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by IBR SEA
26 May 2015
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Opening the Skies Indonesia revamps its aviation infrastructure in the wake of Asean air market liberalisation

At the start of last year, the skies over Southeast Asia were buzzing. A growing middle-class and increased affluence had been fuelling the regional aviation market which, according to Reuters in a February 2014 report, was set to overtake North America as the largest in the world. 12 hectic months later and things are not as rosy. Southeast Asia carriers are recording losses, confidence has been affected by three aviation disasters involving regional airlines, and binge purchases of aircraft have resulted in an overcapacity of seats. However, the general belief is that this period of turbulence is temporary and that the sector will be flying high again.

Land of Potential

Among the major reasons for this optimism is the potential of the Indonesian market. Southeast Asia’s largest economy and most populated nation with 250 million people, it is also regarded as one of the world’s must-watch emerging countries. In addition, its land area of more than 1.9 million sq km makes it prime for growth, in both domestic and international aviation.

The election of President Joko Widodo last year, has also buoyed the economy. Jokowi, as he is popularly known, has promised much needed economic reforms, such as accelerating the process of upgrading the country’s infrastructure, including its airports.

The Burden of Success

At present, there are 22 commercial airlines operating in the country, offering domestic and international flights, flying in and out of more than 200 airports. Passenger and airline growth in Indonesia is strong.

However, its airports are unable to keep up. The country’s largest airport – Soekarno-Hatta – has the distinction of being one of the top 10 busiest airports in the world, as named by the Airports Council International (ACI). Each year, approximately 62 million people pass in and out of the 30-year old terminal, including more than 3.4 million using the Singapore-Jakarta route and more than 1.8 million plying the Kuala Lumpur-Jakarta route.

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The problem is that the airport was not built to handle such numbers. The actual capacity of Soekarno-Hatta is a mere 22 million passengers a year, meaning that the airport has been operating at nearly three times its capacity since hitting that mark in the early 2000s. Add to that the fact that flag carrier Garuda, is one of the fastest growing airlines in the region (this year it expects to take hold of another 23 aircraft) and it is clear why the airport’s operator, state-run PT Angkasa Pura II, believes that expanding Soekarno-Hatta is crucial.

Angkasa Pura II’s plans to do so by expanding the airport’s three terminals as well as building a fourth one. Under the master plan to revamp Soekarno-Hatta, capacity in Terminals 1 and 2 will be increased from 9 million each to 18 million and 19 million respectively. Terminal 3’s expansion will be even more dramatic. At present, it has a capacity of 4 million, and this is to be increased to 25 million. Finally, the planned-for Terminal 4 will have a capacity of 20 million.

A refurbished Soekarno-Hatta will be able to handle 82 million passengers a year, thus ensuring ample space for growth. The total cost of this is US$2.1b, and the recent plunge in the value of the rupiah against the US dollar is likely to cause some financial strain, as it has become more expensive to put the plan into action.

Ironically, the airport’s success is probably the biggest obstacle to revamping Soekarno-Hatta. With the massive passenger traffic, the challenge for Angkasa Putra II is to find a balance between renovating the airport and ensuring that it will not be too disruptive of airline operations.

Even when done in a phased manner, it still means that the already overcrowded airport will lose capacity. Nor can the expansion of the terminals be completed in the blink of an eye, as construction work may take more than a few years. However, as revealed by Angkasa Putra II President-Director Tri Sunoko to Forbes Indonesia, passenger growth at Soekarno-Hatta is increasing at an average of 10% each year.

Spreading the Wealth

So we come to the seemingly perfect storm. On one hand, Soekarno-Hatta needs to expand. There is no question about that. On the other hand, the operator needs to consider what to do with flights that will have to be rerouted because of the renovation.

Angkasa Putra II has already opened up the Halim Perdanakusama Airport – normally used for chartered, VVIP and Haj flights – for domestic commercial aviation use. However, its capacity is a mere 2.2 million, far less than any one of Soekarno-Hatta’s terminals.

Outside of the Jakarta area, but still within the island of Java, there are five other international airports. The closest one to the capital is the Husein Sastranegara International Airport in Bandung, which has a capacity of 1 million. Since September 2014, the airport has been undergoing renovation, and once complete, capacity is expected to rise to 3 million passengers per annum.

Together, Halim Perdanakusuma and Husein Sastranegara may be able to handle the excess from Soekarno-Hatta. The fly in the ointment though, is accessibility. It takes more than 2 hours to drive from Husein Sastranegara to the centre of Jakarta, and that is already a very generous estimate considering the aged and less-than-ideal conditions of Indonesia’s road network.

This is why the expansion of airport infrastructure in Indonesia cannot be done in a vacuum but must take place within a greater scenario where the overall road and rail infrastructure of the country is revamped. And this makes Indonesia one of the hottest destinations for investment, as the government has earmarked US$35b to upgrade the roads, rails, sewerage systems, and airports, with most of these projects being run by joint-partnerships between private enterprises and government agencies.

The country will also be building an additional 24 airports, and the most exciting development for overseas investors is that foreign companies will be able to hold a maximum stake of 49% of ownership in any airport. Considering the expected growth in Indonesia’s aviation market as well as that of the greater Southeast Asian region, this may be an offer that is too good to refuse.

Freeing the Skies

The other major push factor that is driving Indonesia’s aviation ambitions is the Asean Open Skies agreement, which came into effect at the start of this year and will be fully implemented by the end of 2015.

This agreement will liberalise the aviation market in Southeast Asia, allowing airlines to transport passengers and cargo from second countries to third countries. As explained by market research firm UOB Kay Hian in The Star, “A Singapore Airline (SIA) flight will be able to pick passengers/cargo from Kuala Lumpur and fly to Bangkok before returning to Singapore. Prior to that, SIA would not have the right to pick up passengers/cargo from Kuala Lumpur en route to Bangkok.”

This will effectively create a single aviation market for Southeast Asia. The catch is that while Indonesia has ratified part of the agreement, it has yet to accept the provisions related to passenger and cargo. Its fear is that its airlines will be unable to handle the competition.

By refusing to accept full liberalisation, Indonesia risks being by-passed in a region where 8 out of 10 member countries (the other holdout is the Philippines) are in accordance with each other on the Open Skies agreement.

To be fair, Jakarta has not made any blanket rejection of the agreement. Its concern is that it is not ready. To become prepared, it commissioned consultancy Mott Macdonald to analyse the costs and benefits of full implementation of the Open Skies agreement. The results are quite compelling.

Ultimately, the idea of a single or even a liberalised aviation market in Southeast Asia without the participation of the biggest and most populous country in it is quite unfathomable. Indonesia needs to be a full participant if the open skies concept in the region is to become a success. But before it can do that, its aviation and airports sector needs to be revitalised. The doors are open and the opportunities are there for those who wish to play a role in this enterprise.

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