Indoinesian Airline Industry
Poor management dogs Indonesian carriers
Mar 12, 2013
JAKARTA, Indonesia - With a burgeoning middle class, Indonesia is among the most attractive markets for air transportation in the world, but local airlines are still unable to fully tap into the business potential due to poor management and a lack of a long-term planning.
The International Air Transport Association (IATA) predicts that Indonesia will rank as the world’s ninth-largest domestic market and among the top 10 for international freights in 2014.
Local airlines are aware of the market potential. This year alone, a number of airlines — both well-established and newcomers — have signed contracts to procure new aircraft as part of their expansion plans to tap into the growing market, in which the number of air passengers is expected to reach 88 million by the end of 2013.
National flag carrier Garuda Indonesia is, for example, adding 24 new aircraft comprising wide-body Boeing 777-300 Extended Range (ER) airplanes for long-haul services and Canadian Bombardier CRJ1000 NextGen planes to expand their network in eastern regions of Indonesia.
Meanwhile, the country’s low-cost giant, Lion Air, which held 41 percent market share in 2011, has ordered 18 new B737-900 ERs for itself and its two subsidiaries: the full-service Batik Air and Malindo Airways, which is a joint venture with Malaysia’s National Aerospace and Defense Industries (NADI).
In addition to that, airlines have started to cater to regional routes such as Bandung–Surabaya; Batam–Palembang; Makassar–Manado; and Balikpapan–Pontianak, making trips more efficient as the planes will not have to transit at major hubs like Soekarno-Hatta International Airport in Cengkareng, Banten, or Juanda International Airport in Surabaya, East Java.
Garuda Indonesia and Lion’s feeder, Wings Air, have provided such services since last year, while budget carrier Citilink Indonesia will be penetrating the market this year by putting five out of 50 twin turboprop French-Italian Avions de Transport Regional ATR 72-600s into operation.
Despite the growing market, a number of airlines have not performed well; some have even been forced to quit operating due to their inability to compete. Mandala Airlines ceased operations in 2011, followed by Pacific Royale in 2012 and Batavia Air in January this year.
Mandala survived and resumed operations in April last year after receiving a capital injection from its new owner, the Saratoga Group, and returned to the skies in April last year.
Prominent aviation expert Dudi Sudibyo said that mismanagement was most likely behind the carriers’ downfall.
“Aviation is the most regulated business in the world plus it requires a lot of investment but has only low profit margins. Thus, it needs good management and the ability to see market potential in order to survive because one small mistake or a wrong decision can harm the whole business,” Dudi told The Jakarta Post recently.
In the case of Batavia Air, for instance, he said the airline did not have a good plan when it joined a tender to transport haj pilgrims to Mecca in 2012. The airline failed to win the tender due to its failure to meet some of the requirements set by the Religious Affairs Ministry. This caused a serious setback in the company’s finances as it had already signed a contract to lease two Airbus 330s for the haj transportation.
Batavia was declared bankrupt by the Central Jakarta Commercial Court on Jan. 30 this year after it failed to pay US$4.68 million for the two A330s.
Dudi said that Batavia should have had a backup plan so that it could still use the leased planes if it failed in its bid for part of the haj transportation, which is now solely handled by Garuda Indonesia and Saudi Arabia Airlines.
“Every airline should include several backup plans in their business programs so as to minimize financial risk,” he said, adding that Batavia could have penetrated the Middle Eastern tourist market. Suharto Abdul Majid, the Indonesian Transportation Society’s (MTI) head of aviation, agreed with Dudi, saying that good management was a crucial element in the airline business, besides possessing the necessary capital.
“Airlines are very risky and capital, including human resources, need to be well-managed; otherwise, the business will collapse. This [business] requires solid management in order to create a sustainable company,” Suharto said.
Regarding the market, he said that no airline should gamble when it came to new markets, like the Balikpapan–Singapore route that Mandala launched three years ago.
Separately, Garuda Indonesia president director Emirsyah Satar said that careful business planning and good management were the keys to running a state-owned publicly listed company.
“The airline business is one of safety that is strongly related to fuel prices and political conditions. Good discipline in managing an airline is crucial to survival,” Emirsyah said.
He said the firm’s Quantum Leap 2011-2015 program, which focuses on fleet and network expansion, passenger service, human resource management and aircraft maintenance, was carefully designed to improve Garuda’s performance.
Lion Air’s general affairs director, Edward Sirait, echoed Emirsyah’s comments, saying that good management was paramount in order to continuously maintain the airline’s cash flow.
Edward added that during low season, they sometimes sold some of their tickets below normal prices or reduced flight frequency in order to keep the business afloat.
“If [during off-peak times] we sell tickets at normal prices, the load factor [i.e. passengers] will not be high enough and we may suffer a loss. Sometimes, therefore, we sell [tickets] as promotional fares to simply maintain cash flow. It’s better to break even and make no profit than to suffer losses,” he said.
Both executives, however, said that competition among operators was healthy.
Transportation Ministry spokesman Bambang S. Ervan said that as a regulator, it could not do anything to prevent an airline from collapse.
He said the ministry could only monitor airlines through their annual financial reports as audited by public accountants, provide technical assistance and set benchmark fare rates to prevent a price war.
“When an annual report is worse than in the previous year, we advise the airline to introduce new routes to help improve their cash flow. If they are the first airline to launch a particular route, we will protect them by giving them sole ownership of that route for three consecutive years,” he said, adding that no airline would be allowed to serve the same route during that time.