Indonesia's airline industry flying turbulent skies

Tantri Yuliandini, The Jakarta Post, Jakarta

"Don't build an airline. It is a capital intensive business with a very slim profit margin and high risks".

These are what Wahyu Hidayat, chairman of the Indonesian Air Carrier Association (Inaca) preaches almost every time he is invited to talk in a seminar on the Indonesian airline industry.

"The margin is from about minus 6.1 percent to 2.8 percent for the airline industry compared to between 4 percent and 5 percent for other industries," he said, adding that as of 1997 more than 120 airlines in the world had gone bankrupt.

Yet, despite his pessimistic words of caution, Indonesian skies are becoming more and more crowded with new airlines coming into business.

Last year alone saw six new airlines entering the industry, which adds to the already established five -- Garuda Indonesia, PT Merpati Nusantara, Mandala Airlines, Bouraq Indonesia, and Dirgantara Air Service.

The six are Lion Mentari Airlines, Bayu Indonesia Air, Awair Internasional, Pelita Air Service, Airmark Indonesia, Indonesia Airlines Avi Patria and Internusa Air.

While waiting for the latter two companies to start flying, two other airlines have begun operations this year; they are Kartika Airlines and Star Air that began operations in May and July this year respectively.

Who knows how many more airlines are going to spring up in the near future ... but then again, maybe not.

The Sept. 11 attacks on the United States have surely opened people's eyes to the volatility of the airline industry.

Made on two hijacked commercial airplanes, the attacks have driven fear into the hearts of even the bravest air passengers.

Subsequent to the attacks, major airports in the U.S. suspended operations leaving hundreds of planes and thousands of passengers stranded and causing millions of dollars in losses.

Also, facing extravagant amounts in claims, insurance companies hiked their premium charges while lowering their coverage. Airlines around the world struggled with the increased insurance premiums, with many turning to their respective governments for help.

Planes that needed about an 85 percent load for the flight to break even, now only saw about a 60 percent to 70 percent load factor. The consequence is that the airlines were forced to cut down on employees, Canada 3000 airline was even forced to shut down completely.

In Asia, the impact was not so profound. Those bearing the brunt of the crisis were airlines whose major market was the U.S. and so far, Indonesian airlines do not service the Americas.

This however does not mean that Indonesian airlines are off the hook.

Although Indonesian airlines does not serve the U.S. market as yet, incoming traffic from Europe and especially the United Kingdom has always been important for Indonesia's tourist industry and airlines.

This market, comprising about 15 percent of the total foreign visitors to Indonesia compared to the U.S.'s 5 percent, is sensitive to issues regarding security.

It does not help a bit that Indonesia has the largest Muslim population in the world and that travel warnings advising foreign nationals against visiting Indonesia have been issued by various governments, including the British government, due to the loud voices of a small group of Muslim radicals.

So in the near future, travel to Indonesia from Europe and the U.K. will probably slacken, leaving local airlines to focus and intensify marketing efforts toward domestic and regional flights.

However, there are potholes for airlines solely serving domestic flights as many of the new airlines are doing, not least the issue of U.S. dollar-based operating expenses against a rupiah income.

Dollar operating costs comprise 40 percent of the total airline expenses, including aircraft leases, insurance and spare parts. In the meantime, the airlines charge their services in rupiah, which doesn't account for much considering today's exchange rate.

"Either they are very bold or not so smart," Singapore Airline's general manager for Indonesia Raja Segran once remarked about the owners of new airlines.

The best chance for survival for many of these new airlines is to start flying regional routes to bring in dollar revenue.

However, new airlines with a limited budget usually opt for older types of aircraft for their initial operations, which would not pose a problem when all the players are using the same types of aircraft.

But, "psychologically people would refuse to fly on older planes if they had the choice," Segran said, raising concerns that Indonesian airlines with their older planes would not compete well with others such as Singapore Airlines.

This does not bode well for the future of the industry if Indonesia intends to further open up its skies and embrace globalization in the next two or three years.

A recent alliance between Mandala Airlines, Pelita Air Service, Bouraq Indonesia, and Dirgantara Air Service, however, is a step toward a restructuring of the Indonesian airline industry.

An alliance was the only way the airlines could provide new destinations without adding more planes, or killing off other airlines in competition, head of Mandala's development division Kus Winarko said.

The airlines in the alliance would complement each other's routes so that passengers could have more destination choices, flights, and schedules, resulting in an increased load factor as passengers would take connecting flights using the partner airlines.

Joining an alliance would also cut costs as expenses such as ground handling are borne together.

It would not be a bad thing then if Indonesian airlines could establish alliances such as the internationally acclaimed Star Alliance or Oneworld Alliance.

And perhaps instead of foreign airlines directly operating in Indonesia, local airlines could cooperate with them to form a domestic extension of a global airline alliance.