A day in the sun: Changes to the tourism offering could see big gains in the medium term

Boasting some of the world’s greatest biodiversity and dynamic landscapes, Indonesia has long been a popular destination amongst tourists. The appeal lies in experiencing life on one of the country’s 17,000 islands, sampling the famous South-east Asian gastronomy, or seeing the orangutan and Komodo dragon in their natural habitats.

After oil and natural gas, palm oil, coal and rubber, tourism is the sixth-largest contributor to Indonesia’s national economy, and received a 27% increase to $6.7bn in foreign direct investment in the first quarter of 2013. With the implementation of the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), the administration of President Susilo Bambang Yudhoyono has prioritised the tourism sector, one of the six corridors in focus under the plan.

Foreign Arrivals

In 2013 the ASEAN region as a whole saw a 12% increase in tourist arrivals since 2012, having received 90.2m visitors. June 2013 saw a record for the number of foreign tourist arrivals in Indonesia that month. With a 13.52% growth, foreign arrivals hit 789,594, breaking the December 2012 record of 766,966 by a large margin.

According to the Jakarta Tourism Board, Malaysia, China, Japan, Singapore and South Korea provided the most visitors to the capital in 2013; as of August 2013 foreign visitors from those markets arriving via Soekarno Hatta Airport topped off at 298,255, 294,674, 197,590, 387,889 and 123,543, respectively. Beyond Asia, Indonesia also saw an increase in foreign arrivals in the past two years. Expansions among Middle Eastern carriers, international promotion activities, and the draw of Muslim tourists to the world’s most populated Islamic nation resulted in arrivals from the UAE and Saudi Arabia increasing 122.4% and 34.2%, respectively.

European tourist numbers also rose, a positive sign amid the economic crisis, with arrivals from Russia up 25%, and visitors from the Netherlands and Germany up 15% in June 2013. In order to accommodate the increase of tourism traffic, the government has said it will tap into its $43bn infrastructure budget to build 19 new airports and 10 new cruise ship ports by the end of 2015.

E-commerce brought in $1bn to the travel industry in 2011 and the integrated tourism company Panorama Group predicts that it will account for 20% of total revenue by 2017, as internet usage increases across Indonesia, and firms are able to reach more customers through social media advertising. With 60m Indonesian internet users spending at least three hours per day online, Panorama expects e-commerce growth in the domestic market to become apparent by 2016.

Domestic Consumption

Having the fourth-largest population in the world and a growing middle class, Indonesia possesses a domestic market that is already a major source of revenue, and is forecasted to grow. The government, as well as the private sector, is eager to further tap into the domestic market, as outbound tourism is projected to have a 9% increase between 2013 and 2017.

The middle class comprises approximately one-third of the population and is the major source for domestic and outbound tourism. Middle-class spending priorities have shifted, notes Panorama Group; the number-one goal for most consumers is saving money and number two is travel. With low-cost carriers and the increased availability and accessibility of online business, Indonesians are travelling more.

For Indonesians, peak travel times are June and July, and during Muslim holidays like Ramadan, which changes each year according to the lunar calendar.

Local tourism companies are making efforts to boost tourism in the off-season by offering discounted packages and all-inclusive holidays.

While the leisure tourism market is reaping the benefits of the growing domestic middle class, business tourism has slowed. Donni Mahendro, traveller and transaction services manager at Carlson Wagonlit Travel, told OBG that, “Business travel today is slightly down. We hope that 2014 will be better, but the situation will likely continue through the short term. Business travel throughout the Asia Pacific region has experienced an approximately 10% decrease, and business travel to Europe and the US has decreased by approximately 20-30%. This is mostly due to the economic crises in Europe and the US, and to rising fuel prices.” These factors may be encouraging domestic business executives to conduct meetings via telephone or internet, rather than travelling while expenses are high.

Runways & Skies

The year 2013 was a successful one for low-cost carriers, which were credited for boosting Indonesia’s domestic market growth in recent years. Despite Batavia ceasing to operate, top remaining low-cost carriers (LCCs), including Tigerair Mandala and Garuda affiliate Citilink, kept up the pace of growth, which reached 20% in 2012, up from 16% in 2011, 18% in 2010 and 17% in 2009. The number of air travellers in Indonesia continues to rise annually; 2012 showed a 15% climb with 72.6m passengers and 83.4m were projected for 2013. While LCCs are driving domestic market growth, Indonesian national airline Garuda, as well as a number of foreign carriers, are seeing the benefits of the expanding market internationally. Garuda Indonesia announced in November that, by 2025, it will add 250 new planes to its fleet. For short-haul routes, the airline will seek single-aisle planes, like the Boeing 737 Max and the Airbus A320 Neo, but will require larger vessels, such as the Boeing 787 and 777 or the Airbus A350, for its long-haul flights.

Garuda spread its wings further in 2013 by opening a new daily route between Jakarta and Tanjung Pinang, the capital of Indonesia’s Riau Islands. Mandala, a private LCC, also opened a new international route, this time between Surabaya’s Juanda International Airport and Bangkok’s Suvarnabhumi Airport. Indeed, during the first quarter of 2013, foreign arrivals to Juanda increased by 15.73% and the East Java Branch of the Central Statistics Agency (BPS) found Thais to be the top group of visitors. By opening this route, Mandala is poised to gain from the steady increase that brought 70,374 foreign arrivals to Juanda during the first quarter of 2013.

International carriers are also looking to take advantage of increased air traffic in Indonesia. British Airways, Air Niugini (Papua New Guinea), as well as Middle Eastern carriers Egypt Air, Jordan Aviation and Oman Air have begun non-stop flights to Jakarta’s Soekarno Hatta airport.

Highlighting Needs

The rapid industry growth indicates promising opportunity for airlines, but they also face the challenge of meeting the demand for qualified crews. On April 13, 2013 Indonesian LCC LionAir experienced a blow to its safety reputation when one of its planes crashed into the ocean after attempting to land on a Bali runway. All passengers and crew survived, but the incident raised awareness to the concern that the quickly expanding airlines of the region are struggling to meet their human resources demands. As air travel is projected to continue its steady increase in Indonesia, the shortage of skilled aviation professionals must be addressed in order to insure that the sector expands safely.

Infrastructure is the second challenge to the industry, and is regarded as the most formidable. As more routes open and passenger numbers climb, airports are struggling to accommodate. One project under way to address this issue is the $7.8trn expansion of Jakarta’s Soekarno-Hatta. Due to finish in the fourth quarter of of 2014, the expansion will bring airport capacity to 66m passengers annually. With the implementation of the ASEAN single market in 2015, more infrastructure development will be vital if Indonesia is to keep up with the increased air traffic and logistical demands on the region’s horizon.

Business Offering

The meetings, incentives, conferences and exhibitions (MICE) segment is a consistently successful one for Indonesian tourism. In 2013 Bali hosted a number of globally publicised conferences and events, including the Asia-Pacific Economic Cooperation (APEC) summit, Miss World, and a World Trade Organisation Ministerial Conference. With an APEC guest list that included Xi Jinping, President of China, Shinzo Abe, Japanese Prime Minister, Russian President Vladimir Putin, and Prime Minister Tony Abbott of Australia, the event placed Indonesia more prominently on the world’s stage, serving as a successful international tourism promotion activity. MICE tourists are estimated to spend triple the $1333 per trip that leisure spent in 2012.

According to Mahendro at Carlson Wagonlit, Bali is the top destination for business travel in Indonesia. Jakarta, which lacks the leisure tourism draw that Bali, Lombok and similar resort-style locations have to offer, is more popular with MICE. However, infrastructure headaches and cheaper prices elsewhere in the ASEAN region often drive business tourists to choose other locations. Mahendro noted that “infrastructure development is the most important task in boosting the sector. Connectivity issues are leading business tourists to fly elsewhere in Asia and avoid Indonesia. A five-star hotel in Thailand is almost the same price as a four-star in Bali and this makes Bangkok a more popular host for business events.” Though MICE is a breadwinner for the tourism industry and had a successful 2013, the sector could grow more if Indonesia receives much-needed infrastructure development and if accommodation prices become competitive among ASEAN destinations.


Indonesia’s hotel industry has long been a successful one, as the steady stream of visitors drawn to the country’s diverse cultures, nature and landscapes has kept demand high and rising. The expanding middle class is also travelling more, and, with the upcoming transition to the ASEAN single market, hotel expansion across the region has become a theme for local players. For example, in 2013, Santika Indonesia Hotels and Resorts opened a branch in Singapore, making it the group’s first foreign establishment. Santika looks to expand further before 2015, when the ASEAN single market of 600m people is set to open. Tauzia Hotel Management, a four-star hotel brand based in Jakarta is also setting its eyes on the wider ASEAN market, with plans to expand first in Malaysia, the Philippines and Vietnam.

On the domestic front, top foreign players, including Swiss-Belhotel, Best Western and Hilton have made steps to tap into the expanding market by kicking off projects in Balikpapan, Tangerang and Jakarta, respectively. Swiss-Belhotel will target the business traveller market after having opened its 34th Indonesian property near the Sepinggan International Airport in December. In Tangerang, West Java, Best Western also looks to reap benefits from the increase in business travel, with the opening of its latest seven-story contemporary hotel in the fourth quarter of 2013. Beyond Java, the Best Western group plans to open a minimum of seven properties in Jakarta within the next few years, part of an effort to quickly multiply its group of leisure and business hotels around the country while demand is high. Hilton, which previously did not have a significant foothold in Indonesia, will build its five-star Waldorf Astoria along with its DoubleTree and Hilton Garden Inn brands across the capital, expanding beyond Bali.

In Jakarta alone, according to Poul Bitsch, the general manager of Hotel Borobudur and chairman of the Jakarta Hotels Association, 34 hotels are to be built between 2014 and 2017, 16 of which are five-star hotels. By October 2013 occupancy rate in the city had risen to 69% and average room rates had increased by 15%, as opposed to Bali, where, despite the increased number of visitors, hotel oversupply caused a decrease in occupancy rate.

Human Resources

While this implies a promising opportunity for Jakarta tourism, it also presents a major challenge: establishments will face a shortage of qualified workers.

Bitsch told OBG that “one of the biggest challenges of the hospitality industry is maintaining standards of well-educated people” and the ability to retain qualified workers. Many hotels are already experiencing high employee turnover due to the fact that highly trained workers are often being offered higher salaries and new opportunities by rival hotel companies. Furthermore, a lack of sufficient training programmes make it a challenge to hire locally and many establishments are recruiting foreign workers to fill the roles that require significant training and experience.

To mitigate this challenge, Bitsch told OBG that the focus needs to be at the vocational level in local educational institutions, which can produce young professionals qualified for the middle management level. From there, hotels could further develop their skills during on-the-job training. Indeed, hotels keep growing and if there is no balance with human resources, then operators will face a big problem with providing quality and maintaining high standards. In order for the surging hotel industry to be able to sustain its success in the future, “we have to put in a lot of effort and invest a lot of resources to address this major problem,” Bitsch said.

Overcoming Past Challenges

A range of watershed events, including threats of disease and episodes of violence, have had pronounced effects on the industry in recent decades. Following the SARS scare in the early 2000s, average occupancy fell from 70% to 17%. A recent series of severe volcanic eruptions also shut down tourism in the popular destinations of Java and Sumatra, after many lives were lost, hundreds of thousands were displaced and a massive amount of property was damaged. In 2003 the JW Marriott Jakarta was bombed, and a second bombing attack in 2009 targeted both the Marriott and the Jakarta Ritz Carlton. Bali also suffered a similar tragedy, when hundreds were killed and hundreds more were injured during a 2002 attack on the tourist district. These events resulted in a temporary but serious decline in tourism activity, and also hurt investor and builder confidence.

To mitigate threats of violence and other safety and security risks, hotels and venues have made major security boosts in the wake of bombings. It is now common for all cars to be briefly inspected by establishment security before nearing the building, and every visitor must pass through metal detectors before entering hotels, shopping malls and other public venues. Meanwhile, travellers are realising that prospects of violence are not specific to Indonesia, and have regained more confidence in the ability to safely travel throughout the country.


After setting a goal to reach 9m foreign tourists in 2013, the Indonesian Tourism Board opened branches in Sidney, Beijing, Taipei, Taiwan and Amsterdam in order to market Indonesia more directly to foreign communities. The government allocated a budget of around $1.53m for marketing efforts abroad in 2013, which also included promotional events in China, India, and Turkey.

The Ministry of Tourism and Creative Economy (MTCE), while promoting MICE and leisure tourism, is overseeing efforts to boost music, architecture, gastronomy and other creative industries so that the tourism sector can benefit from a more vibrant arts culture. The government has also noted the impact that Thai and Malaysian restaurants around the world have had as a tourism recruitment tool, and have identified 30 national dishes that can be used to promote Indonesian gastronomy. No plans are in place as to whether the government will fund restaurants abroad or develop domestic programmes, but research is currently under way to examine how Indonesian cuisine can best be used to draw visitors to the diverse culinary regions of the archipelago.

In early 2014 Indonesia was ranked number four on a list of top halal-friendly tourist destinations, following Malaysia, the UAE and Turkey, according to a survey by Crescentrating, a travel rating service focused on the halal-friendly segment. Praised for its plethora of halal restaurants and the availability of prayer rooms in public spaces, the country is poised to benefit from its halal-certified label, given that the Muslim travel sector is projected to gross $200bn by 2020. While serving Muslim visitors to Indonesia, the expansion of Middle Eastern airlines, namely Qatar Airways, Kuwait Airways, Egypt Air and Jordan Aviation into Jakarta is also set to serve the Indonesian population making the hajj and umrah pilgrimages, as well as other religiously themed trips.

As Panorama Group CEO Budi Tirtawisata told OBG, “People will always come to Indonesia, because we have a rich cultural heritage and natural resources. However, the country’s full potential has not yet been tapped. Thailand is a benchmark for success, especially in the context of medical tourism. If Indonesia wants to catch up to the success rates seen in Thailand, Singapore and Malaysia, the regional leaders, more must be done to ensure that the country’s full potential is reached.” The government is increasingly aware of this and is prioritising accordingly.

New Niches

As the tourism industry had been under-utilised, the government is starting to turn to new niches to increase foreign tourist arrivals. Some 8m foreign tourists arrived in Indonesia in 2013, compared to about 19m in Thailand and 24m in Malaysia. Singapore also had more, with 14m arrivals. The government has set a goal to attract targeting 25m foreign tourists by 2025. To do this, the MTCE has identified nine locations with potential as sharia-friendly destinations: West Sumatra, Riau, Lampung, Banten, Jakarta, West Java, East Java, Makassar and Lombok. Another campaign involves becoming a centre for marathon running in South-east Asia. Hotel occupancy rates reached 80-90% for the Jakarta Marathon in October 2013, according to the Jakarta Post. “We plan to make the Jakarta Marathon an annual event, and we expect it can be one of the world’s major marathon events in the next five years,” Rizki Handayani, the special interest tourism director at the MTCE, told the Jakarta Post.


Infrastructure hurdles and human resource recruitment remain the top challenges, but the government’s prioritisation of tourism as one of the six MP3EI corridors is a good sign. As the nation’s $43bn infrastructure investment budget continues to support projects, tourism is set to benefit from the improved connectivity. With the Indonesian middle class continuing to grow, the domestic market will remain a top source for revenue. And as interest in visiting Indonesia grows around the world, tourism industry can count on the steady increase of foreign arrivals to continue, as long as safety issues and human resource shortages are addressed.

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The Report: Indonesia 2014

Tourism chapter from The Report: Indonesia 2014

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