Indonesian market watchers upbeat despite Adam Air's collapse

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Indonesia's third largest carrier has shut down but its domestic market remains healthy and promising.

Indonesia's domestic airline market is again in the spotlight with the country's third-largest operator, Adam Air, falling into serious financial difficulty and being shut down for safety violations.

But industry watchers say while the country's airlines are facing new growing pains in a market that is still in its relative infancy, Adam's problems were unique to that carrier and its trouble is not necessarily an indication that there are more high-profile failures to come.

Once one of the fastest-growing airlines in Indonesia, Adam Air halted all operations on 18 March after the government ordered it to ground its remaining aircraft for safety violations. A week earlier one of its Boeing 737-400s was damaged in a landing incident - the latest in a string of incidents and accidents that the airline had faced over the previous 15 months.

In ordering the airline to stop flying, the Indonesian government said it was due to shortcomings in operational, training and maintenance procedures. Adam Air was told it could seek permission to operate again within three months after addressing the concerns.

But in reality Adam was already headed towards collapse, after falling into severe financial trouble and in the days before its shutdown having had nearly half of its fleet of more than 20 737s grounded by lessors for missed lease payments.

President director Adam Suherman also admitted the airline was likely to have to shut down anyway as a result of its failure to make insurance payments.

He told Airline Business that it is not clear whether a re-launch of operations will be pursued, saying: "That is for all the shareholders to decide."

Indonesia's top eight domestic carriers  

 

 Weekly departures

Garuda

1,502

Lion Air

1,400

Adam Air

1,008

Merpati

1,006

Batavia

928

Sriwijaya

630

Mandala

600

AirAsia Indonesia

364


SOURCE: Innovata, Lion Air and Mandala 

Adam Air was established in 2003 by Suherman's family and last year a consortium headed by Indonesian investment group Bhakti Investama acquired 50%. In the weeks before its shutdown, the Suherman family and Bhakti Investama were in dispute about putting additional funds into the airline.

Most industry watchers say Adam Air's problems were unique, however. They say it is true that there have been recent financial troubles for some Indonesian carriers, as most operate older aircraft and with fuel prices high they are suffering. Fuel surcharges are also having an impact on demand in a market that is particularly price-sensitive. In addition, for several months last year demand was depressed due to safety problems.

But longer-term, the Indonesian air transport industry should still have a good future, say most observers. There has been strong growth since 2002, when new players entered the market following deregulation. Until then only a few million passengers travelled by air annually but that has grown at an average rate of roughly 20% each year.

Secretary general of the Indonesian National Air Carriers Association (INACA), Tengku Burhanuddin, says an estimated 38 million passengers travelled domestically last year. He says growth was somewhat slower in 2007, at about 10% over 2006, but this was largely due to several accidents that temporarily scared people away from flying. And he believes there is much more growth to be had for the strong players, despite the fact that Indonesia now has nearly 20 scheduled airlines and many more charter operators.

"In Indonesia we have 220 or 230 million people, so if you compare this to the 38 million who travelled in a year there is a lot of room for growth," he says.

"And it is probably less than 10 million people actually flying, because they are flying four or five times a year each."

He adds of Adam Air's collapse: "They have their own problems with their shareholders. With most of the airlines in Indonesia the shareholders have majority, but Adam Air was 50-50 so that created the problem. They cannot make decisions. The other airlines do not have this problem."

Rusdi Kirana, president director of Lion Air, the country's biggest domestic carrier, also sees strong continuing growth: "We hope that we can grow 20-30% this year. We hope we can have 20-30% growth for every year for the next five or 10 years. The market has very much potential."

Lion is so confident that it has ordered 178 Boeing 737-900ERs, nine of which have already been delivered. And despite the recent attention on Adam's troubles, Rusdi believes the market is getting to a new positive stage of development, where airlines will be adding new aircraft after so many years of relying on much older aircraft for domestic services.

"Indonesia itself has had 20% growth each year for the past five years. Hundreds of old aircraft will be gone in the next 5-10 years and that will be for growth and for replacement," he says.

"Garuda is going to have new aircraft from 2009, Mandala will have new Airbus A320s, AirAsia Indonesia is going to have new A320s and we have new aircraft. It is a big benefit with the high fuel prices."

Warwick Brady, who heads Mandala Airlines, agrees that the market has plenty of potential and that many of Adam's problems were unique. But he sees more consolidation as "inevitable purely because of fleet structures of airlines".

He adds: "The market is healthy. The demand is high," with GDP still growing at 6%. Most trade is within Asia and Indonesia is not dependent on the USA. "There is a very positive outlook for airlines with efficient modern fleets."

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