Indonesian Air Carriers Nose Up, Engines Idle, in Effort to Stall Asean Open Sky

Jakarta Globe, Muhamad Al Azhari, Dec 22, 2014

Residents look at an airplane near Yogyakarta's Adisucipto International
Airport, in this Aug. 3, 2014, file photo. (JG Photo/Boy T. Harjanto)

Jakarta. Indonesia’s aviation industry is not ready to face the Asean Economic Community’s plans for a single market by the end of 2015 unless the government helps reduce airlines’ costs by simplifying tax codes, curbing airport inefficiencies and reducing the cost of jet fuel, executives from airlines operating in the country said.

Under the AEC framework, the Association of Southeast Asian Nations (Asean) aims to create a single aviation market by end of 2015 through an “open sky policy” that would see conciliation of its 10 member states’ varying trade regulations.

Asean’s member states of Indonesia, Malaysia, the Philippines, Thailand, Vietnam, Singapore, Brunei, Cambodia, Laos and Myanmar are collectively home to more 600 million people.

Domestic carriers have resisted fully joining a truly unified regional aviation market by actively lobbying the government to protect or mitigate perceived threats posed by competitors in Singapore, Malaysia and Thailand.

While Indonesia could potentially offer foreign carriers plenty of access points, only five airports have been opened to the open sky policy that the bloc’s members states agreed to schedule for takeoff by the end of 2015.

Those airports are Banten’s Soekarno-Hatta International Airport and airports in Surabaya, Medan, Makassar and Bali.

Airlines have taken recently to remind the government that they are not ready for such liberalization.

Sunu Widyatmoko, the president director of Indonesia AirAsia, the local affiliate of Malaysia-based AirAsia Group, said airlines operating in Indonesia, Southeast Asia’s largest economy, feel over-burdened by many inefficiencies that have weakened their competitiveness and ability to offer cheaper ticket prices compared to regional rivals, especially those from Singapore.

“We are not operating on a level playing field,” said Suno, who has been the chief of IAA since July 1.

“From the cost side, we lose. We are being burdened many factors, including taxes, airport inefficiencies and most importantly higher fuel prices,” he said.

Sunu’s remarks came during a recent informal meeting with the Jakarta Globe at which he was accompanied by Dharmadi, who sits on IAA’s board of commissioners.

Dharmadi, who served as IAA’s president director from Dec. 2007 until handing over duties to Suno in July, highlighted the problem of dangerous ambiguities in Indonesia’s tax system.

He said tax officers in Indonesia often lack understanding about the nature of the aviation business.

Dharmadi pointed to a Ministry of Finance regulation that states airlines can enjoy zero import duties and zero value added tax for imported spare parts.

In practice, however, to secure this benefit, airlines must submit their request to the government beforehand. It then takes the tax office five working days to approve the request.

“Can you imagine if we are forced to do that? We will have our planes not flying for five days. That will hurt our business,” said Dharmadi, who prior to joining AirAsia, had more than 32 years of experience at national flag carrier Garuda Indonesia.

Another issue is that Indonesia still charges airlines an operational lease tax — an excise no longer charged elsewhere in the world.

Dharmadi said the Indonesian National Air Carriers Association (INACA) met with the finance minister and coordinating minister for the economy to discuss these issues. According to Dharmadi, the two ministers promised a quick solution.

“If we can resolve this, it can reduce some burdens,” he said. Others, however, still remain.

According to Dharmadi, the cost of jet fuel in Indonesia is 12 percent higher than that paid by elsewhere by regional rivals such as Singapore.

Airlines operating in the country thus have no other choices but to “squeeze” Pertamina, which holds a monopoly on the country’s jet fuel distribution, on its terms, service conditions, and high fuel prices. “That is not healthy,” said Dharmadi.

Some inefficiencies that may contribute to higher jet fuel prices, including refinery capacity limitations; the cross subsidy system that covers high distribution costs in remote areas and fees the energy company has to pay to regulators, he said.

Dharmadi also called on airport operators — principally the domestically dominant state firms Angkasa Pura I and II — to invite the airline industry’s input whenever they plan to expand some airports.

Indonesia’s airports suffer from capacity problems, both in terms of passenger terminal throughput and aircraft slots.

Indonesia’s busiest airport, Soekarno-Hatta, now handles 62 million passengers per year — almost three times its original design capacity.

The airport is currently expanding its third terminal to serve up to 20 million more passengers annually.

Still, Dharmadi criticized the ongoing development for the third terminal.

“You can build a lavish airport with big terminals, but if you don’t add runways, it will not boost traffic,” he said.

Furthermore, he called on regulators and airport operators to not charge high airport taxes for low-cost carriers, as it deters passengers from flying with them.

Meanwhile, government officials are proceeding to with plans for Indonesia to accept the AEC’s Asean Open Sky.

Hemi Pramuraharjo, a spokesperson with the aviation directorate general at the transport ministry, said the government plans to open more takeoff and landing slots to foreign airlines as part of the country’s commitment to implement the open sky policy under the AEC framework.

“We want to have balanced proportions. If foreign airlines cannot enter Indonesia, then the impact will be that our airlines cannot come to their countries. There is reciprocity issue,” Hemi said on Dec. 18.

He said currently 72 percent of flight slots in the Soekarno-Hatta are filled by domestic flights and the remainder for international flights. Indonesia wants to boost international flight slots to 30 percent and reduce the domestic flight slots to 70 percent, he added.

“The ideal figure should be 35 percent, 65 percent for international flights and domestic [flights, respectively]. We will be pushing there, not only for Soekarno-Hatta, but also for five airports that will be open during the Open Sky,” Hemi said.

However, an INACA executive was furious to hear about the plan.

Bayu Sutanto, who heads the chartered flights division at INACA said the plan to add slots for international flights is a “careless” plan, considering the nation’s airport infrastructure is not supportive.

He also questioned the ability of the government to negotiate with other countries to open their markets.

Bayu, an executive from Trans Nusa, a carrier that offers specialized flight services in Indonesia’s eastern areas, such as East and West Nusa Tenggara, Bali and Makassar, said the transport ministry should involve the local industry whenever they plan to take any major decision.

“We are the ones who know when Garuda Indonesia is blocked from opening flights in other countries, but government turns a blind eye,” he said.

Bayu pointed to Malaysia as an example of a country that, he says, always consults with the aviation industry before opening their airports up to foreign players.

However, former Garuda chief Emirsyah Satar rebutted the accusation that the local airline industry is seeking the government’s protection from the open sky policy.

“We want to have an equal, level playing field with foreign carriers. We just want to be competitive, no more,” Emirsyah said.

With additional reporting from Investor Daily