The Strategic View - Aviation 2017
Anggia Rukmasari highlights the steps Indonesia is taking to implement the ASEAN Open Skies policy, and outlines the challenges facing the country around airport capacity and aircraft financing
- Currently, what are the main issues (strategic and political) affecting those in the aviation sector in your jurisdiction?
The early implementation of the ASEAN Open Skies policy in the region, the 2011–2025 connectivity programmes for Indonesia as stipulated in the Master Plan for Acceleration and Expansion of Indonesia's Economic Development, and a presidential instruction to develop some potential tourism destinations in the country, are the principal strategic and political drivers behind the Government’s current priority to develop Indonesia’s aviation sector.
ASEAN, or the Association of Southeast Asian Nations, was founded in 1967 “to strengthen further the existing bonds of regional solidarity and cooperation.” The 10 Member States of ASEAN are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Unlike Open Skies in the EU, Open Skies within ASEAN Member States are still limited to the liberalisation of the 3rd and 4th freedom of the air.
Meanwhile, the Master Plan, which was issued by the Coordinating Ministry for Economic Affairs and the Ministry of National Development Planning / National Development Planning Agency, in 2011, provides the building blocks to transform Indonesia into one of the 10 major economies in the world by 2025. To achieve this real economic growth, a strengthening of the transportation system is inevitable. To support the Open Skies policy, the connectivity programmes and the presidential instructions under the current Government, particularly the Ministry of Transportation (“MoT”), are focusing on the development of airport infrastructure, airport and air carrier safety and security, human resources, as well as the granting of incentives for the related stakeholders.
- Where has your jurisdiction seen the most growth in the aviation sector over the past 12–18 months? And, if any, where do you anticipate growth coming from during the next 12 months?
The airport and maintenance repair and overhaul (“MRO”) sector has shown improvement over the past two years. In the airports sector, since the issuance of the long-awaited MoT Regulations on Airport Business Operation (Regulation No. 56 of 2015) and the Concession and other Cooperation Schemes between the Government and Private Sector for Airport Service Operation (Regulation No. 193 of 2015), the development of new and existing airports has become clearer and the possibility has been opened up for operators in the private sector to use a public-private partnership scheme through a competitive tender process. Meanwhile, in the MRO sector, there has been stimulation and development of some areas (the West, Central, and Eastern areas of Indonesia) in order to put Indonesia at the centre of the MRO industry in the Southeast Asia region. Tax incentives have also been introduced in relation to this sector, showing the Government’s commitment to building this sector for the country’s future aviation business.
Almost simultaneously, awareness of the development of general aviation is rising; gradual deregulation in this sector is bringing optimism to the respective stakeholders, meaning more opportunities are likely to open up in this sector in the coming years.
- Does the GDS distribution model continue unchallenged as the most popular model for flight distribution?
For international flights, the model remains relatively unchallenged; however, for domestic flights, the trend shows that heightened consumer demand for more “non-generic” ways of travel may pose a threat to GDS and offer greater opportunities for tailor-made style travel accommodators, despite their much lower volume.
- In your jurisdiction, does airport capacity require boosting and, if so (and even if not), what plans and/or processes are in place to address this (or increase or re-organise airport capacity, as the case may be)?
Whereas worldwide the number of air passengers is growing at a pace of nearly 7%, Indonesia’s air passenger growth is estimated at about 15% (International Air Transport Association Passenger Forecast – Indonesia Country Report). With the current airport capacity, for example, Indonesia's busiest airport, Soekarno-Hatta International Airport in Jakarta, was originally designed to handle only around 26 million passengers per year. However, in recent years, more than 60 million air passengers have passed through the airport each year and the airport is clearly over capacity, causing many problems such as slot congestion, flight delays, etc. Now, the airport is undergoing a serious upgrade; building a new terminal and carrying out renovations to its existing terminals, as well as construction of a third runway. Anticipating such growth, other airports in the country are also preparing to develop their current facilities; even the MoT plans to build new airports in some areas of Indonesia. The development of either existing or new airports will be conducted using public-private partnership schemes through competitive tender.
- Does the national "flag" carrier carry the most passengers into and out of the national airports and: (a) if so, what competition exists and how significant is it?; and (b) if not, what are your thoughts on the reasons for this, and why do competing airlines have higher load factors?
For international flights, the “flag” carrier is still dominating the domestic market; however, for domestic flights, it is not. It is quite difficult for the “flag” carrier to compete with the second-tier carriers, considered as budget carriers, in domestic flights. To compete with each other, the flag” carrier recently established a low-cost carrier (“LCC”) subsidiary; and vice versa, to compete in international flights, the second-biggest carrier in the country which is a low-cost carrier, recently established a full-service carrier subsidiary. In Indonesia, price, safety, and flight frequency are still the main factors which sway passenger choice.
- What trends, in terms of regulatory intervention and involvement, has your jurisdiction observed over the past 12–18 months in relation to airline acquisitions and alliances? Do you anticipate a change in the regulatory environment of your jurisdiction during the coming 12 months, and if so, how?
There has not been any change, nor is any change planned in the near future, with regard to the airline acquisitions and alliances regulations in Indonesia. Foreign share ownership of aircraft operators remains limited to a maximum of 49%.
- What trends are being observed in relation to new technologies – such as UAVs/drones – and what impact are these technologies having on the aviation regulatory environment?
Drones have been used in many aspects of life in the country; from recreational to military use. Therefore, it has been brought to the attention of the MoT to seriously regulate the technology. During the period of 2015 to 2016, the MoT amended the drone regulations three times and these might keep changing following updates and compliance with the technology’s regulations at the international level (with the International Civil Aviation Organisation, the U.S. Federal Aviation Administration (“FAA”) or the European Aviation Safety Agency).
- Legal issues in the “lease-to-part out” market. A major market development is the interest of investors purchasing mid–end life aircraft on lease for the purposes of making returns on a lease tail and component margin model. What challenges are inherent in this segment of the aviation finance market, and what techniques and disciplines are required to manage the risks involved?
Since 2007, following a series of incidents and accidents in the first few years of the millennium, the Indonesian government has imposed the “10/30 year” rule on air carriers, with the airlines and cargo operations taking the biggest toll. The rule prohibits aircraft under the transport category bearing more than 10 years since their year of manufacture, from being imported into Indonesia; with a maximum operating allowance in the country of 30 years. In 2015, the regulation was reinforced to include smaller transport aircraft, including turboprops serving rural areas.
While this condition, in essence, could easily trigger turmoil in the market, it prompts air carriers (especially LCCs and charter companies) to find alternative solutions to meet the age limitation without being overwhelmed by the extraordinary expenditures they would face from buying new aircraft. In purchasing mid-life aircraft, the preference over the past few years has tended towards, for lack of a better term, ‘making do’. However, this does pose great challenges, not only for operators and suppliers, but also secondary stakeholders such as financing companies and insurance providers. Confidence in safety and risk management within Indonesia’s air operations has not yet recovered completely since the EU ban in 2007, followed by the measures taken by the FAA, and subsequent effects from the 2008–2011 global market decline. In addition, very few operators have shown the ability to make ends meet and fulfil their financial obligations to third parties including financiers, which has not helped the industry to regain the confidence of global stakeholders any faster. In such cases, legal actions have been brought; more often than not, against operators whose aircraft may become subject to repossession and salvage.
With regard to the legal issues in the ‘lease-to-part out’ market, in particular the Indonesian market, to date, Indonesia does not have a specific aircraft and/or its components’ security institution. However, Indonesia has ratified the 2001 Cape Town Convention on International Interests in Mobile Equipment; thus, to anticipate difficult aircraft or a difficult repositioning process for their components, security over aircraft registered in Indonesia and/or their components must be secured through the International Registry.
- Manufacturer support in the new cycle of new OEM products, e.g. MRJ, E2, C-series, etc. In an increasingly sophisticated and competitive environment, in what way is the type of OEM financial and product support for this new era of aircraft more complex and far-reaching than in previous cycles?
Aircraft manufacturers and original equipment manufacturers (“OEMs”) play equally important roles in keeping up with increasing market demands and variety. Today’s Next-Gen aircraft require not only a wide selection of support services (MROs), but also the availability of spares, since the nature of flight operations has changed significantly in the past decade. Remote operations, low-emission technology, lighter materials, low aircraft-on-ground turnover, higher payload over a trimmed-down basic empty weight – these are just examples of some of the demanding factors that manufacturers and OEMs need to deal with in order to stay competitive. Tactful players should always have a holistic view towards not only the shifts in the aviation industry but also the global market trends and up-and-coming policies; which can only be tackled through sharp intelligence, continuous research, and intense discussion with users.
- The advent of cheaper oil and the knock-on effects. What are the consequences that arise as a result of the unexpected purchasing power of a number of third/fourth-tier airlines? What will challenge lessors and suppliers in particular as they are faced with speculative judgments on an airline's longer-term financial viability?
One of the consequences of cheaper oil is that strong and in-depth due diligence is now required towards operators and their respective affiliates, looking not only at historic financial performance, but also future projections, implementation of regulations in day-to-day operational culture, and extensive knowledge of the geopolitical climate of each respective operator’s base State. An increase in buying power among third/fourth-tier operators should only signal to lessors and suppliers to take preventive measures and not to overlook, for the sake of short-term profit, the potential hazards linked to success which may lurk around the corner. Collaboration with financial institutions and government authorities, as well as strong legal documentation, should provide lessors and suppliers with enough tools to minimise and even eliminate speculation.
- Iran and the market return. What remain as barriers, including sanctions-related issues to navigate, where Iran and aerospace and aircraft transactions are concerned? What sort of jurisdiction is Iran from a risk perspective, and what techniques from a supply perspective are likely to be needed so that Iran's potential and promise for OEMs, lessors, suppliers and service providers is realised and does not become the latest example of a disappointing gold rush?
Despite Iran’s shortcomings earlier in 2016, with weak deliverables despite the country’s aggressive commitment following the lifting of international sanctions, reflected through its relatively low oil exports shy of one-third of what it promised, and a declining oil price resulting from a weakening currency, recent poor performance at the Tehran Stock Exchange (“TSE”), and the nation's lack of flexibility towards a production freeze, there are strong indications that Iran will evolve into using creative market tactics which could yield a positive impact on the world market at a later stage. However, we cannot rely on Iran’s performance alone and place too much hope in a “safer” investment premise for the future. Global stakeholders including banks and financial institutions, manufacturers, and nations’ leaders, especially of fellow OPEC Member States, should maintain and embrace their newly-awakened relationship with Iran. This strategy would put in place not only good faith, but also a “check and balance” mechanism, as well as a mutual relationship that could prevent hasty judgments and the traditional “gold rush” syndrome.
|AUTHOR||The Strategic View - Aviation 2017|
Bahar & Partners