Budget airlines bank on Indonesian boom

Tony Fernandes, the flamboyant Malaysian founder of Asia's biggest budget airline by fleet size, has never met Liana Agustin, a secretary from Jakarta, but he is moving his headquartes to the Indonesian capital because of people like her.

Ms Agustin, 38, took her first overseas flight last year, using Mr Fernandes' AirAsia to visit Malaysia and Singapore on a holiday that would have been prohibitively expensive on a full-service carrier.

"Now I get paid more than I did five years ago, so I can afford to travel overseas," she says.

More and more middle class Indonesians like Ms Agustin can afford to fly because of the continuing economic boom, with gross domestic product growing by an average of almost 6 per cent over the last five years.

Indonesia, already the world's fourth most populous country, will also become the world's sixth-largest economy by 2030, up from 16th place at present, according to Standard Chartered. The middle class, defined by World Bank criteria as those with daily incomes of $2-$20, will expand to 244m people from 131m in the same period.

More than 8m Indonesians flew internationally last year, up 23 per cent on 2010, with 60m domestic air travel passengers, up 16 per cent on 2010. By 2016, the government is forecasting 15m international passengers and 120m domestic passengers.

To tap this growth, airlines old and new are expanding in this nation of 240m people, defying the dark clouds that hang over the industry elsewhere in the world.

While carriers are expanding in other Asian emerging markets such as the Philippines and Vietnam, Indonesia is particularly attractive because its people live on 6,000 different islands that stretch 5,000km from east to west, offering significant potential to develop air travel, domestically and internationally.

"Malaysia is a maturing [aviation] market, but Indonesia is growing fast so Tony [Fernandes] is moving here to raise our Profile," says AirAsia which is planning an the initial public offering of its Indonesian subsidiary by the first quarter of next year.

Besides AirAsia, which plans to add to its modest fleet of 17 planes in Indonesia, other budget carriers, full-service airlines and private jet operators are buying aircraft and adding routes.

Ambitious low-cost operator Lion Air, which earlier this year signed on for Boeing's biggest-ever single order - 230 planes, worth $22bn - recently unveiled plans to buy 10 wide-body Boeing 787s for the launch of a new full-service, medium-haul airline called Batik Air.

A new full service domestic airline called Pacific Royale, an Indian-Indonesian joint venture, started flying this month while Garuda, the revamped listed national carrier, is spinning off its own low-cost airline, Citilink. Debt-ridden low-cost Mandala Airlines has been re-launched with fresh investment from Singapore's Tiger Airways and Saratoga Capital, a local private equity firm.

"Jakarta's main Sukarno-Hatta airport is the fastest growing non-Chinese airport in the Asia Pacific region," says Devin Wirawan, an investment manager at Saratoga Capital, which owns 51 percent of Mandala Airlines.

Like Indonesia's four other main international airports, tired-looking Sukarno-Hatta is struggling to cope with the surge in passenger numbers. It currently handles about 37m people a year and that will rise to 60m by 2015, says Mr Wirawan.

In recent years the government and airlines have worked hard to improve Indonesia's woeful air safety record, persuading the EU to partially lift a ban on Indonesian carriers in 2009. However, industry executives are concerned that the breakneck expansion will test the limits of the country's out-of-date aviation technology and limited human resources which accounts for a shortage of experienced pilots and air traffic controllers.

"There's a risk that safety standards will be eroded if growth is too quick," says Rigan Wong, an air industry analyst at Citigroup in Hong Kong. "It could come from insufficient pilot training, poorer quality air traffic controllers, less well defined regulations or poor operating structures in airlines."

The other significant challenge is profitability, with seven sizable airlines already operating in Indonesia, two of which - Lion Air, which has more than 40 per cent of the domestic market, and Garuda with more than 20 per cent - have major cost advantages.

"There will be new players looking to enter the market," says Mr Wong. "It's easy to enter the industry but difficult to make a lot of money without scale."

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