The aviation industry in South-east Asia suffered an unprecedented number of fatal tragedies in 2014. March saw the mysterious disappearance of Malaysian Airlines Flight 370, followed by the shooting down over Ukraine of another Malaysia Airlines plane in July, and then, closer to home, the crash of Indonesia Air Asia’s Flight 8501 in December. These events rocked passenger confidence and led airlines across the region to redouble their efforts to ensure the safety of their flights. Even so, the local aviation sector continues to expand dramatically, on the back of steady economic and population growth, combined with bottlenecks and logjams in other modes of transport.
Reach for the Skies
The country’s main aviation authority, the Directorate General of Civil Aviation, which comes under the Ministry of Transport (MoT), groups airlines into three classes: no frills, medium service and full service. No frills airlines include Indonesia AirAsia, Citilink – the national carrier Garuda’s low-cost subsidiary – Lion Air, Lion’s regional subsidiary Wings Air and the now-suspended Mandala Airlines. These low-cost carriers (LCCs) carried an estimated 56m passengers in 2014, up from 52.8m in 2013 and almost twice 2010’s 29.9m. Lion Air has held the largest market share during this time, carrying an estimated 36m passengers in 2014, or 64% of all LCC passengers, a share that rises to 71% when Wings Air is included.
Other categories of airlines also reported hikes in numbers, with the main local player, Garuda, stating it had carried 30m passengers in 2014. The MoT reported that when all types of airlines are taken into account, some 100m passengers were carried in 2014. The Indonesian National Air Carriers Association has forecast a 10% rise on this figure in 2015, with Garuda alone expecting numbers to rise to 36m. For the airlines, falling oil prices are likely to help reduce costs, although some of this may be offset by the depreciation of the rupiah, given that fuel costs are in dollars.
The growth trend seems likely to be largely unaffected by the recent set of air tragedies, too, as it reflects underlying fundamentals of the Indonesian economy. After the losses of the Asian financial crisis in the late 1990s, the economy began to recover in the early 2000s, reaching GDP growth of 5% by 2004 and 6% by 2008, according to World Bank figures. While the global downturn slowed this to 4.6% in 2009, the economy returned to growth of 6.5% by 2011. This has slowed again since, but GDP expansion remained at 5.8% in 2013 and 5% in 2014, and growth is forecast at 5.2% in 2015 and 5.5% in 2016, according to the IMF.
Moreover, per capita incomes have also risen in line with this: Indonesians’ average income was just $680 in 1999, the year after the Asian crisis, but had reached $3475 by 2013, with the average for Jakarta’s fast-growing middle class significantly exceeding this. The enormous expansion in recent years of the middle class and the rise in disposable income levels have made Indonesia a vibrant aviation market.
Further to this, its geography means that flying is by far the fastest and most efficient way to travel from island to island. The expansion of air travel is a trend in South-east Asia as a whole. According to The Wall Street Journal, annual passenger numbers have jumped by two-thirds in the Asia-Pacific region over the last five years, surpassing Europe and North America and accounting for 33% of all global air traffic by 2013. In addition, the ASEAN open skies policy is due to take effect in 2016, as part of the ASEAN Economic Community (AEC). This will likely see a further increase in competition between regional airlines, and an initial rise in air traffic.
More Planes
Catering to this demand is an expanded fleet, with 565 planes operating in Indonesia’s skies at the start of 2015, 390 of them jets. More planes, more crowded skies and increasing demand will undoubtedly put pressure on airlines. The safety record has improved in recent years, although more needs to be done. According to the National Transportation Safety Committee, the aircraft accident rate fell to 0.82 per million flights in 2014 from a high of 2.94 in 2007. The global average in 2013 was 0.41 on Western-built jets.
The year 2007 was a bad one for Indonesian aviation, as the EU and the US placed the country on a blacklist, banning local airlines from using EU and US airports because of safety concerns. The ban had a salutary effect on the country’s aviation industry, leading to the adoption of more stringent safety standards and a major reequipping of some airline fleets with more modern, safer planes. A number of the smaller operators have also either exited the market or merged with larger airlines, while those that remained in operation faced more regular inspections, with operating licences now up for review every six months. These improvements led to a lifting of the ban on Garuda in 2009, while Indonesia AirAsia and Airfast Indonesia were also exempted.
Clearly though, there is still work to do. The US Federal Aviation Authority continues to rate the country as noncompliant with the standards laid down by the International Civil Aviation Organisation. This assessment covers not only individual airlines, but also encompasses the safety oversight of carriers by national authorities. Improving this rating is a major task for local carriers as they seek to expand services beyond the region.
One significant way in which these standards can be improved is through higher standards of training for pilots, dispatchers and operations managers. At present, given the rapid growth of airlines, many are compelled to hire overseas staff as they have little time for extensive training of new local recruits. The costs of flight simulators and other technological equipment are extremely high, and newly trained Indonesian pilots are sometimes recruited by foreign airlines that are able to offer them higher salaries and shorter working hours. According to recent estimates, Indonesia needs 1000 new pilots a year, yet there were facilities to train only around half this number in 2014, which is a serious constraint that needs to be addressed.
In the aftermath of Flight 8501, MoT officials launched a major investigation into sector procedures, particularly for the issuing of permits for routes, while also ordering airlines to provide pilots with up-to-date weather information before take-off. Previously, it had often been down to the captain and co-pilot to research weather conditions. The Anti-Corruption Commission has also been detailed to look at procedures in an ongoing effort to crack down on any irregular practices.
Opportunities
Training – in the form of schools for pilots, engineers, traffic controllers and technicians – remains a necessity. Currently, foreign investors are permitted to participate in the non-formal education sector as partners with a local entity. The foreign stake in such a partnership may not exceed 49%, however. In addition, for a specialised training institute, such as a pilot school, a special licence is also required.
Spending on maintenance, repair and overhaul (MRO) services – also a vital aspect of aircraft safety – is likely to grow to around $2bn in 2015, according to GMF AeroAsia, from $950m in 2013. This also suggests a major opportunity for foreign firms specialising in MRO activities, given the capacity constraints of local outfits.
Finally, the construction of new airports is under way, alongside upgrades to existing ones. A change in foreign investment regulations will allow foreign firms to take a 49% stake in airport management companies and give investors opportunities to develop safety strategies with Indonesian partners (see overview).
Safety will remain a major focus in 2015, with government and private investors keen to improve the record. In the longer term, improved safety means more efficient and cheaper flights too, as insurance premiums fall, enabling carriers to compete more effectively once ASEAN open skies has been fully implemented.
Read More from OBG
