2010 2025 AAGR Indonesia Domestic Passengers (mn) 87 255 7.5% Indonesia International Passengers (mn) 19 67 8.9% Indonesia Domestic Aircraft Movements (000) 781 1,848 5.9% Indonesia International Aircraft Movements (000) 127 390 7.8% Indonesia Domestic Air Cargo (tons 000) 480 2,070 10.2% Indonesia International Air Cargo (tons 000) 286 1,380 11.1% Jakarta Domestic Passengers (mn) 32 107 8.4% Jakarta International Passengers (mn) 10 37 9.5% Jakarta Domestic Aircraft Movements (000) 247 679 7.0% Jakarta International Aircraft Movements (000) 62 202 8.2%
Benefits from implementation of ASEAN Open Skies likely to significantly outweigh the costs, in terms of capital costs and any lost profits for Indonesian carriers.
Net flow of costs and benefits to Indonesian users is positive. NPV of IDR 21.9 trillion and BCR of 5.4.
Majority of benefits will accrue to Jakarta and to a lesser extent Indonesia’s other larger airports (these airports experience the largest impacts in terms of demand growth).
Need for better understanding of linkage between air service development and economic growth, informed by more in depth analysis to support policy development.
Benefits could be even greater in regional economic development terms, by extending the scope of Open Skies to include more gateways and to achieve greater synergy with the strategy for development focussed on six Economic Corridors.
To support modernisation of the Indonesian economy and assist with the aim of Indonesia raising its economic status globally, strong case for a more liberal approach to be taken towards the development of air services with other world regions.
ASEAN Open Skies Policy does not create a fully liberalised market for air services between ASEAN states.
Comparisons with other regional open skies regimes of limited assistance as they are not the same.
Current Aviation Law reflects the Government of Indonesia’s inclination to intervene in the market to seek to secure certain broader national transportation objectives.
Whilst some very limited government intervention can be legitimate, it otherwise prevents a liberalised market working.
The Aviation Law, as primary legislation, should establish only principles, leaving the detail to secondary legislation and policy which can respond to developments over time.
Experience in more liberal markets than ASEAN Open Skies, e.g. European single aviation market (where regulation, other than Competition Law, affords carriers little protection), has been very positive for consumers and generally positive for all stakeholders.
Note: the review has been conducted without sight of any applicable Ministerial Regulations or Government Regulations.
The 2009 Aviation Law should be amended in relation to economic licensing of air carriers:
to establish general principles that will endure rather than impose a blue print on the industry which will not be appropriate in the future
regulation needs to develop flexibly and primary legislation is too inflexible an instrument (takes too long to change and allows Minister and regulator too little discretion); detailed regulation needs to be left to secondary legislation and policies and procedures published by the Minister and the aviation regulator
Secondary legislation and regulatory policies and procedures can be more readily adjusted in line with developing market and industry conditions (but still line with principles of primary legislation)
to rebalance the present emphasis away from size and high capital investment (which will stifle Indonesian carriers’ ability to compete internationally) towards prudent financial fitness regulation.
Informs the Airports study: understanding future airport infrastructure requirements.
Informs the Airspace study: understanding future airspace infrastructure requirements.
Informs the airlines paper: understanding the size of the market and the impact on airlines.
Informs the socio economic study: understanding and quantifying the benefits of Open Skies.
Indonesia in ASEAN Source: World Bank most recent statistics Country Population (millions) GDP Real Growth (2010) Indonesia 245.6 $540.3bn Singapore 4.7 $182.2bn Thailand 67.8 $263.8bn Malaysia 27.5 $193.1bn Cambodia 14.8 $10.5bn Brunei 0.4 $11.5bn Laos 6.3 $5.9bn Vietnam 87.3 $97.2bn Myanmar 50.0 Not reported Philippines 92.0 $161.2bn
Top 10 Countries by GDP Growth Source: Citigroup Rank Country Average Annual GDP Growth 1 Nigeria 8.5% 2 India 8.0% 3 Iraq 7.7% 4 Bangladesh 7.5% 5 Vietnam 7.5% 6 Philippines 7.3% 7 Mongolia 6.9% 8 Indonesia 6.8% 9 Sri Lanka 6.6% 10 Egypt 6.4%
Major Asian Airports: Passenger Traffic Trends Millions 2005 2006 2007 2008 2009 2010 AAGR 2005-2010 2010 vs. 2009 JAKARTA 28.3 29.0 30.9 32.5 37.3 44.0 9.2% 17.8% SINGAPORE 32.4 33.4 35.2 37.7 37.2 42.0 5.3% 13% KUALA LUMPUR 23.3 23.7 26.1 27.6 29.7 34.1 7.9% 14.8% BANGKOK 39.0 41.0 44.3 43.6 40.5 42.8 1.9% 5.6% DELHI 15.1 19.1 23.1 23.2 25.2 28.5 13.6% 13% BEIJING 41.0 48.7 53.6 55.9 65.4 73.9 12.5% 13% HONG KONG 40.3 43.3 46.3 47.9 45.6 50.4 4.6% 10.6%
Comprises scheduled passenger, scheduled cargo and non-scheduled airlines: providing capacity to meet strong demand for domestic & international passenger and air cargo services.
Airlines already operate in a very liberal domestic and international market environment.
16 scheduled passenger airlines: 7 likely to be impacted by the ASEAN Open Skies Agreement: subject to detailed study.
The 7 scheduled airlines include 3 airlines already heavily involved in provision of international and domestic air services, namely Garuda Indonesia; Lion Air and Indonesia Air Asia.
Garuda Indonesia + Indonesia AirAsia = 78% of international scheduled passengers carried by all Indonesian airlines in 2010.
The other 4 airlines, Sriwijaya Air, Batavia, Wings Air and Merpati strongly focused on the domestic passenger market - international passengers < 5% of each airline’s total passengers in 2010.
3 scheduled cargo airlines: small aircraft fleets and available capacity. Air freight services already liberalised within ASEAN (agreement has not been ratified by the Indonesian government).
The non-scheduled airlines mainly perform niche operations: not impacted by the ASEAN Open Skies Agreement.
Characteristics of Successful Airlines in Liberalised Environments (1)
Appetite for international expansion appears limited in a number of airlines, corporate culture and adopted business model impact on airline growth potential
Young and appropriate fleets.
Some airlines are acquiring modern regional aircraft for new route opportunities, some are standardising/simplifying their fleet structures, some are focusing on single aircraft type, some still have complex fleet structures
High aircraft utilisation.
To achieve lower total seat costs and crew efficiencies
Maximising the use of the capital equipment, a number of carriers remain concerned of Indonesian airports reducing aircraft turn-round times
Characteristics of Successful Airlines in Liberalised Environments (2)
High load factors.
Load factors of some Indonesian carriers on international services are much lower than on domestic services, new entrant carriers with low cost model achieving higher load factors
New entrant carriers better placed to achieve lower cost base, use of regional subsidiaries being used by some carriers to improve cost base
Distribution and yield management controls.
Indonesian market hasn’t fully embraced the low cost model of direct sell distribution: use of credit cards, mobile phone payment. Some carriers are still without internet selling capability
Traffic Performance of Major Airlines (2010) Source: DGCA 0.0 5.0 10.0 15.0 20.0 25.0 Lion Air Garuda Sriwijaya Air Batavia Air Indonesia AirAsia Merpati Wings Air Passengers (millions) Domestic International
Most bilateral Air Service Agreements between Indonesia and ASEAN member states have capacity and frequency limitations applied through Confidential Memorandum of Understandings (CMOU).
All but one of the airlines interviewed regarded limits as necessary to protect Indonesian carriers from capacity and frequency increases by the larger (and more successful) ASEAN hub-carriers, particularly Singapore Airlines.
Indonesia to Singapore and, to a lesser extent, Indonesia to Kuala Lumpur city pairs are the most capacity constrained; airlines of both sides operating close to the maximum permitted by the CMOU.
The Jakarta to Singapore route is the city pair most likely to see immediate capacity growth once the Open Skies agreement is implemented.
Singapore Airlines and Thai Airways operate aircraft of much larger average size than Indonesian carriers - their operations are primarily long- and medium-haul.
Indonesian airlines already find it difficult to compete against carriers such as Singapore Airlines – viewed as the airline most likely to benefit from Open Skies - by enabling it to feed more international passengers over its hub.
Existing connecting passenger traffic currently using domestic services offered by Indonesian airlines will be impacted as more international capacity is added, passengers will transfer from indirect routings over Jakarta to direct routings to other Indonesian cities
The nature of the Indonesian marketplace and airport infrastructure are constraints to obtaining maximum benefits from Open Skies.
Combination of currency restrictions, limited use of credit cards by the consumer and extended credit facilities offered by the travel trade will impact on the speed of development of web (on-line) sales.
Airport capacity, particularly at Soekarno-Hatta, Jakarta, is very constrained.
The restricted opening hours of most other Indonesian international airports impacts negatively on airline schedule development and operating efficiency.
Most Indonesian carriers consider that the opportunity for profitable growth will come from domestic expansion
Seek to delay international route access and capacity expansion until their domestic growth has matured.
Most Indonesian airlines would like to see a gradual introduction of an Open Sky agreement across Indonesia to ASEAN markets, with a gradual removal of capacity and frequency constraints currently applying on a bilateral basis, so they can concentrate on domestic growth in the short to medium term.
Primary impact is in and around Jakarta. However, there are significant gains elsewhere, particularly in Bali and East Java.
Employment Impacts – Open Skies Effect by Province Province Direct Own Indirect & Induced Other Indirect & Induced Total Jakarta 10,600 10,100 500 21,200 Bali 2,100 1,200 0 3,300 East Java 1,100 600 0 1,700 North Sumatra 700 400 0 1,000 South Sulawesi 500 100 0 600 East Kalimantan 300 200 0 500 North Sulawesi 100 0 0 100 Yogyakarta 100 100 0 200 Riau 100 0 0 100 South Kalimantan 0 0 0 100 Papua 200 100 0 300
Variety of assumptions made to make the assessment.
Key issue was impact on Indonesian airlines. Concerns exist as to whether Indonesian airlines will be ready to take advantage of the opportunities offered by Open Skies in 2015.
Assumed that Indonesian airlines will only capture 25% of Open Skies growth.
This leads to a significant loss in ASEAN market share from around 39% in 2010 to around 33% in 2025. This does not result in an absolute loss of passenger demand across Indonesian airlines as a whole, although there may be individual winners and losers in terms of benefiting from growth.
Net flow of costs and benefits to Indonesian users is positive. NPV of IDR 21.9 trillion and BCR of 5.4.
Results for All Users are also important. Benefits and costs to non-Indonesian users are not a direct benefit to Indonesia but they do reflect Indonesia’s attractiveness as a place to invest, do business and visit
Cost Benefit Analysis - Results
Cost Benefit Analysis - Results Summary of Discounted Costs and Benefits (IDR Billions) Indonesian Users All Users Benefits Journey Time Savings 1,133 2,220 Air Fare Savings 18,426 31,671 Airport Surplus 1,286 1,286 Airline Surplus 1,177 10,473 Government Revenue 4,903 4,903 Total Benefits 26,925 50,553 Costs Airport Infrastructure -219 -219 ATM Costs -10 -10 Airline Equipment Costs -4,747 -18,557 Total Costs -4,976 -18,786 NPV 21,949 31,767 BCR 5.4 2.7
Currently, the economy is focused more towards primary (extraction of raw materials) and secondary (manufacturing) economic activities, rather than higher added value tertiary (service) activities.
Partly a reflection of the Country’s strength in terms of its natural resources. The country has significant oil and gas reserves, which make a significant contribution towards Indonesia’s GDP, and a range of other resources such as Palm Oil, Thermal Coal, Cocoa and Tin.
Focus is very much on servicing the countries very large domestic markets.
Achieving a step change in economic performance is likely to require an increasing emphasis on high value added activities and those in the ‘knowledge economy’. These are likely to include sectors with a significantly greater need for air transport access, such as:
Target markets within the tourism development strategy will reinforce this pattern – only Philippines from other ASEAN (i.e. not Singapore and Malaysia) is a target.
The Ministry of Culture and Tourism has identified that air seat capacity is relevant to the promotion of tourism and the attraction of additional visitor numbers. However, this is at an aggregate national level and not linked to priority areas for tourism development
Bali is the biggest attraction now and will continue to be a focus for the future. The strategy identifies an objective to see a diversification of tourism destinations, with an emphasis on reducing the disparities in tourism between Western and Eastern Indonesia
Developing air service access is identified as a priority. International experience would suggest direct access will assist in this, particularly in terms of dispersing the tourism product
Therefore, it would seem reasonable that while ASEAN Open Skies can only be helpful in developing tourism but ultimately the main markets for the future are further afield
Indonesia has recently drawn up an Economic Transformation Plan. The aim is to improve economic performance and to see Indonesia move up the ranking of world economies by size from 17 th in 2010 to 12 th in 2025 and 7 th or 8 th in the longer term.
There are three fundamental planks to this economic transformation strategy:
reassessing historical engines of growth;
strategically resolving the lack of infrastructure;
realigning policy to focus on economic strengths.
At the core of this strategy is the prioritisation of development to six strategic corridors, with a focus in eighteen key sectors or economic areas integrated into these strategic corridors.
Ultimately, this strategy would see Indonesia become a globally competitive knowledge based economy at the forefront of innovation and with a skilled labour force.
ASEAN Open Skies will tend to cement the link with Singapore and its importance as an investment partner. It is also likely to cement the importance of ASEAN partners overall as sources of inward investment, building on their existing 44% share.
To that extent, Open Skies can be seen as an important step towards attaining cohesiveness in the region. However, on its own, ASEAN Open Skies may not be sufficient to overcome obstacles to attracting more inward investment globally.
In terms of trade, Other Asian countries are more important trading partners than the countries within ASEAN. This further suggests that ASEAN Open Skies needs to be seen as a first step to opening up improved air service access throughout Asia.
So, whilst ASEAN Open Skies will contribute to the modernisation of the Indonesian economy, the limitation to the ASEAN region alone may constrain the impact it will have, as will the restriction on the proposed opening up to only five main airports from 2015.
Our analysis suggests that the benefits from the implementation of ASEAN Open Skies are likely to significantly outweigh the costs, both in terms of capital costs and in terms of any lost profits for Indonesian airlines. Our assessment of quantified impacts suggests that the majority of benefits will accrue to Jakarta and to a lesser extent Indonesia’s other larger airports. This is unsurprising considering that these airports experience the largest impacts in terms of demand growth.
However, there is a need for greater understanding of the linkage between air service development and economic growth, informed by more in depth analysis to support the development of policy. We believe that the benefits could be even greater than those arising from the current Open Skies proposal, particularly in regional economic development terms, from extending the scope of Open Skies to include more gateways and to achieve greater synergy with the strategy for development focussed on six Economic Corridors.
Furthermore, in order to support the modernisation of the Indonesian economy and to assist with the aim of seeing Indonesia raise its economic status globally, there is a strong case for a more liberal approach to be taken towards the development of air services with other world regions.