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2 Ups and downs for Indonesian
airlines By David Fullbrook
Cutthroat cost competition, overcrowded
airports and perennial safety concerns, including
a tragic accident involving an aged plane that
killed at least 90 people on Monday, would on the
surface seem to conspire against the prospects of
Indonesia's historically up-and-down aviation
industry.
But rapid deregulation has
initiated an aviation boom, with growth prospects
buoyant enough to hold and draw big new foreign
investors to Indonesia's
opening skies. Nineteen different domestic
carriers are competing for an estimated 34 million
passengers per year, according to Indonesia's
Directorate General of Air Communication. The
agency predicts 54 million air travelers will
buckle up annually by 2010, skyrocketing from the
mere 6.4 million who traveled in 1999.
By
comparison, India, with four times Indonesia's
population but comparatively heaps more red tape,
is currently looking at only 27 million air
passengers annually. If Jakarta finally sorts out
some of the economy's biggest problems, such as
expensive energy and a half-drawn investment
picture, as it promises, traffic could grow even
faster. With incomes rising and migration
increasing there is huge scope for demand to grow,
aviation analysts say.
Intense
competition, which has sliced average ticket
prices, has left many Indonesian airliners
struggling to turn profits as they sell seats
below cost to undercut their rivals. "The reality
in Indonesia is that some airlines have managed
their inventory well so they can lower fares, but
there are also many other airlines that are
offering fares that are not sustainable,
especially with high oil prices," said Lim Liang
Song, principal of Indigo Partners, a
private-equity fund that recently invested in an
Indonesian airline.
Half of Indonesia's
estimated 262 airliners are at least 20 years old.
Such aircraft require more maintenance checks to
comply with international safety regulations and
use at least 25% more fuel than new aircraft.
Indonesian safety authorities have banned airlines
from importing any more aircraft more than 20
years old. They have also stepped up inspections
in recent years, worried that airlines may be
cutting corners in maintenance or using fake parts
to keep ticket prices low.
Accident-prone carriers Still,
a string of tragic accidents raises new safety
concerns and questions about whether Indonesia's
airline industry has opened too much, too fast. An
Adam Air Boeing 737 crashed on Sulawesi island on
Monday, killing at least 90 of the 102 passengers.
The plane had reportedly flown 45,371 hours in its
17-year life, according to news reports.
It's not the first time tragedy has
touched Indonesia's airline industry. A Mandala
Airlines Boeing 737 crashed shortly after takeoff
from Medan, killing 143 people; that jet had flown
more than 50,000 hours in 24 years. A similarly
well-used Lion Airlines Boeing MD-82 crash-landed
at Solo, killing 25 of the 141 people on board in
November 2004 after having notched up 43,940
landings in 56,674 flight hours.
While the
Mandala and Adam crashes are under investigation,
weather was blamed for the Lion crash. However,
some independent experts remain circumspect
because corruption is rampant in Indonesia and
government regulatory departments are often
underfunded and understaffed. Airlines, especially
smaller carriers, also face a high turnover of
pilots and engineers who can find better offers
and employment security with larger airlines or
further abroad in India and the Middle East, where
aviation is also booming.
Indonesian
airlines "have used a lot of the older narrow-body
equipment for their expansion. This is very
expensive; to replace their fleets is going to
take a significant investment. How many airlines
can do that? Lion, Garuda? But they're limited in
how much they can take on," said an executive of
aircraft manufacturer Embraer.
Moreover,
Indonesia, like China, has yet to effectively
dismantle a state-sanctioned monopoly on air fuel
that makes prices higher than in other countries
in the region. Rising fuel prices are but one part
of a complex competitive vice squeezing Indonesian
carriers. Breakneck expansion is swamping
Indonesia's major airports, where overcrowding and
delayed departures have become the norm. That has
likewise increased carriers' costs and prevented
some players from opening new routes. Jakarta's
Cengkareng Airport is currently running at 50%
above capacity.
Furthermore, many smaller
airports servicing far-flung provincial islands
are only equipped for day flights by small
aircraft that increasingly are not economic in the
current competitive environment. Airport-capacity
issues are just one reason airliners in Indonesia
typically fly six or seven hours a day, compared
with at least 10 hours low-cost carriers generally
aim to fly daily to make money.
This was
less of an issue three or four years ago because
aircraft lease prices were at rock-bottom after
the industry globally entered a severe recession
triggered by the terrorist attacks on the US in
September 2001. That price plunge came shortly
after the Indonesian government finally began
deregulating the airline industry in late 1999.
Ready for take off With about
230 million Indonesians scattered across a
5,000-kilometer-wide archipelago stuck with slow,
crowded and
