The number of air passengers in Indonesia will most likely fail to meet its growth target in 2014. Based on government data, the number of air passengers in Southeast Asia’s largest economy reached 47.5 million in the first eight months of 2014, a 5.82 percentage point growth from the same period last year. However, the Indonesia National Air Carrier Association (INACA) initially targeted annual passenger growth in the range of 12-15 percent for 2014. Amid slowing economic growth, people’s purchasing power has declined.
In the second quarter of 2014, Indonesia’s gross domestic product (GDP) growth slowed to 5.12 percent (y/y) amid the sluggish global economy (leading to falling commodity prices and thus impacting negatively on Indonesia’s export performance), as well as the rebalancing of the domestic economy (Bank Indonesia’s higher interest rate environment in a bid to curb the country’s wide current account deficit and to combat accelerated inflation after a subsidized fuel price hike in June 2013 and another possible subsidized fuel price hike later this year).
Sharp rupiah depreciation in 2013 (when the rupiah lost about 26 percent of its value against the US dollar amid speculation about the looming winding down of the US Federal Reserve’s quantitative easing program), has impacted on Indonesian airlines as they had to face higher costs (about 70 percent of airlines’ operational costs are US dollar-denominated and this makes their financial performance seriously vulnerable to currency volatility). In order to support domestic airlines, the government introduced a temporary fuel surcharge and later raised the price ceiling on domestic routes by ten percent. However, higher airline ticket prices also means that people’s purchasing power has been curbed, leading to slowing growth of the number of airline passengers in Indonesia.
Air Passenger Traffic in Indonesia:
| Passenger Numbers
|Domestic Air Passengers||38.5 million||+6.02%|
|Foreign Air Passengers||9 million||+4.95%|
Source: Indonesia National Air Carrier Association
Due to the troubled economy and slowing growth of air passengers, several stakeholders in Indonesia’s aviation sector have requested the new Joko Widodo-led government to improve efficiency of the domestic aviation industry in order to curb operational costs. This includes reducing sharp rupiah volatility, enhancing services (and navigation) at airports, and reducing the import tax for aircraft spare parts. Also infrastructural bottlenecks need to be dealt with. Currently, the price of airplane fuel (avtur) is more expensive in the eastern part of Indonesian then in the western part due to high logistics costs. It is of vital importance to make Indonesia's aviation industry more efficient ahead of implementation of the ASEAN Single Aviation Market (ASAM) in 2015 as this will lead to greater competition.
Lion Air, the largest privately held airline in Indonesia, handled the largest number of air passengers in the January-August 2014 period. This low-cost carrier carried a total of 15.2 million passengers in the indicated period (implying a 41.6 percent market share), followed by national flag carrier Garuda Indonesia with 8.6 million passengers (23.5 percent market share).
The aviation industry is important for Indonesia as the country forms the world’s largest archipelago (consisting of thousands of islands), thus making air travel an efficient choice for traveling across the country. In recent years, Indonesia’s air travel market (as well as the air travel market in the whole Asia Pacific region) grew considerably due to rapidly growing purchasing power (per capita GDP expanded from USD $1,643 in 2006 to USD $3,468 in 2013 according to data from the World Bank).
• Indonesia’s slowing economy leads to people’s declining purchasing power and this translates to slowing growth of air passengers
• Indonesian airlines are hit hard by rupiah depreciation as most operational costs are US dollar-denominated
• Aviation industry in Indonesia needs government support to face increased competition after implementation of the ASEAN Single Aviation Market in 2015