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Incheon Airport to build infrastructure and operate Batam Hang Nadim Airport with Indonesian partner

Analysis

Slowly but surely Indonesia is privatising some of its smaller airports.

Indonesia is a country where some foreign operators and investors are wary to tread for a variety of reasons. But with the Lombok Airport deal having attracted a large number of interested parties, the conclusion of a 25-year concession to operate, maintain and extend the Batam Hang Nadim Airport on the Riau Islands, close to Singapore, will give more hope to the two state airport operating companies that they can find more takers Especially where a local and largely state-owned minority partner can be found, as in this case.

That partner will provide engineering resources to the major one, Incheon International Airport Corporation.

On the surface, other reasons why the airport needs to be extended quite so quickly are hard to identify. It may signify a change in emphasis which seeks to put smaller regional airports like this that are advantageously located into a position where they can help relieve the pressure on the creaking Jakarta Soekarno-Hatta Airport.

And that might be realistic, or fanciful.

Summary

  • It took a long time to be finalised, but the concession contract to operate a small but ambitious Indonesian airport has been executed involving IIAC (Korea) and a local partner.
  • Within a USD500 million package a new terminal will be built.
  • The Batam Hang Nadim Airport, very close to Singapore and Malaysia, is viewed as a potential reliever for Jakarta’s capacity-crunched airport, even though it is 850km away by air.
  • But an over-reliance on LCCs and lack of alliance-affiliated airlines counts against that.
  • Traffic growth did not appear to have demanded new infrastructure urgently, but the effect of the pandemic has been less severe than at the capital’s main airport.
  • Over the course of a decade IIAC has pitched for many concessions and ownership offers – and still continues to do so – but has landed few of them; the reasons are not evident, but there are clues.  

A 25-year contract awarded to IIAC and Indonesian partner to construct, expand and operate Batam Hang Nadim Airport 

Towards the end of Dec-2021 PT Angkasa Pura I, one of the two Indonesian state airport operators, signed a management cooperation contract with Korea’s Incheon International Airport Corporation (IIAC) and Wijaya Karya, an Indonesian company that is involved in engineering and construction work in both Indonesia as well as abroad. The contract was for the construction, expansion and operation of Batam Hang Nadim Airport over a 25-year period.

Batam Hang Nadim is the ninth busiest airport in Indonesia and 316th biggest in the word (out of 3782) as measured by seat capacity.

Location of Batam Hang Nadim airport

Previously, in Mar-2021 IIAC's consortium with PT Angkasa Pura I and Wijaya Karya had won the tender to expand, improve and operate Batam Airport under a 25-year contract. It is reported that most of the bidders had requested a 50-year concession term.

Responsibilities include existing and new passenger terminals; cost is USD530 million

This new cooperation will include maintenance of the airport's existing passenger terminal and new passenger terminal, as well as management of its new cargo terminals and a master plan for a logistics ‘aerocity’. The airport will also be developed to become a wider aviation destination hub and a logistics and cargo hub in western Indonesia.

IIAC president and CEO Kyung Wook stated that the cooperation agreement was South Korea's first long term public private cooperation project overseas.

The project will require an estimated investment of KRW600 billion (USD530.3 million) and initial works should be completed by 31-Dec-2023. Current capacity is five million passengers per annum and is expected to increase to eight million, then eventually to reach 20 million per annum.

Took five years to complete the deal

These works have clearly been delayed pending a deal with a foreign company with the required expertise.

It was almost five years ago in May-2017 that the airport revealed less ambitious plans to launch an IDR5.9 billion (USD448 million) expansion project in Jun-2017.

Works would include:

• Expanding terminal 1 to raise capacity from five million to eight million passengers p/a;

• Develop a second terminal with capacity for 10 million passengers p/a;

• Develop a cargo terminal.

In March of 2017 the airport had opened a newly expanded apron, measuring 240m x 150m. The IDR70 billion (USD5.2 million) expansion provided capacity for five additional wide bodies, allowing the airport to accommodate up to 23 widebody aircraft.

And in 2016 the airport’s management had stated that the expansion was considered “urgent” due to increasing passenger traffic. It appears that it took an inordinate length of time to prepare the tender contract.

Even before that though (in 2015) it had become evident that IIAC was willing to use internal capital to fund Batam Hang Nadim Airport’s redevelopment project to suit its agenda. At that time IIAC presented a proposal covering its operational and financial management programme for the airport. IIAC was then seeking to manage the project jointly with BP Batam (Batam Free Trade Zone Authority, the airport’s operator), an organisation which was the first to propose the terminal extension in its own right.

Indonesia’s airlines had considered building a terminal

Even before then there had been discussions about a new terminal, dating back to early 2015 when both Garuda Indonesia and Lion Air Group submitted expressions of interest to construct one. At that time the government was specifically issuing requests for EoIs to airlines operating at the airport to participate in the project.

Indeed the project can be dated back as far as 2014.

The airport has been considered an alternative solution to congestion at Jakarta!

At the time, Batam Airport was being promoted as a "far more economical" solution to addressing traffic congestion at Jakarta Soekarno-Hatta Airport, the philosophy being that the airport “could serve flights to Indonesia without going through the middle and east of Jakarta, and vice versa". There was also talk at the time of building a second runway after the number of passengers exceeded 15 million per year.

It is not evident why this project should have taken so long to come to fruition other than the observation that IIAC is quite particular about which contracts it agrees (see comments at the end), and that Indonesia is one country that operators and investors from other countries are sometimes wary of.

In the 2018 CAPA Airport Privatisation & Finance Report the following observation was made:

“There seems to be a piecemeal and uncoordinated approach to privatisation in Indonesia, involving the expansion of the two state airport operating companies PT Angkasa Pura I and II (especially II, which is to be privatised itself) and the encouragement of private sector interests, especially those in the southeast Pacific region. Some European and other western investors still tend to be wary of opportunities in this part of the world, where the business culture is quite different and messages about prospects and the procedures to handle their sale or concession tend to be mixed.”

Traffic growth alone at the airport did not merit the rapid addition of infrastructure

Looking at the development of passenger traffic at the airport from 2014, when its expansion was first mooted, there does not seem to be any particular cause for concern that traffic growth was outstripping the infrastructure significantly, and even that the airport is the only international one in the region (Riau Islands).

That traffic did grow notably strongly in 2015 (63%) and 2016 (20%), but in the subsequent three years those gains were lost at an increasingly higher rate: from -2% to -19%.

Batam Hang Nadim Airport: passenger numbers, 2014-2020

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Pandemic impact less severe than it was at Jakarta

The impact of the pandemic in 2020 was severe, with traffic reducing by 47%, but that is 18 percentage points less than what it was at Jakarta’s Soekarno Hatta Airport (statistics for 2021 are not yet available).

With regard to seat capacity trends, though, the situation has deteriorated, and at the end of 2021 the gap in capacity compared to 2019 was greater than it was in 2020 (-37% vs. -25%).

Batam Hang Nadim Airport: weekly total system seats capacity, 2019-2022* (projected)

The airport is entirely domestic presently, which means by consequence that all the airlines are also domestic and local ones, led by Lion Air, which has close to 50% of the capacity.

Batam Hang Nadim Airport: system seats by airline, week commencing 10-Jan-2022

Over-reliance on LCCs and lack of alliance airlines does not help with international gateway ambition

Not unexpectedly, low cost carriers (LCCs) predominate, with almost 90% of seat capacity – something that the management might need to redress by restoring some balance if it is to become a genuine gateway to the Indonesian archipelago. It isn’t unknown for an island or remote peripheral city airport to be used as a gateway into a country by way of a star-shaped hub/spoke network, such as Sal Airport for the Cape Verde Islands (historical and present-day) and Kaliningrad for Russia (historical).

That 90% of capacity easily exceeds the total Indonesian LCC average seat capacity on domestic flights (56%).

Another perceived weakness at the airport is the absence of airline alliance members. Together they account for only 2.5% of capacity, and through only one alliance (SkyTeam).

Turning to how the airport is utilised on a daily/hourly basis, it works within a defined window between 0600 and 1900; limited hours, but capacity is well spread out during those hours with no empty blocks. The chart below is for Thursday 13-Jan-2022.

Batam Hang Nadim Airport: system seats per hour for Thursday 13-Jan-2022

IIAC is selective where airport investment and management is concerned, but its portfolio could be much bigger. Incheon Airport majors on environmental sustainability

IIAC is very selectively active in airport management, development and investment. Apart from Seoul’s Incheon Airport itself, it manages no other airports in South Korea; that task goes to Korea Airports Corporation, which oversees 14 airports, including Seoul Gimpo, which is predominately a domestic airport.

Apart from the Batam Hang Nadim Airport IIAC's activities are limited to Kuwait, where it won a short five-year concession to operate Terminal 4 in 2018 and where it subsequently announced its intent to bid on the Terminal 2 currently under construction; and Khabarovsk Novy Airport in Russia where it acquired a 10% stake in 2011, marking its first equity investment in an overseas gateway.

That is not to say that IIAC lacks ambition.

It has inter alia bid for, or expressed interest in, a range of airports across the world, including Ontario Airport (Los Angeles); Puerto Rico’s Luis Muñoz Marín airport concession; Chicago Midway Airport; New York JFK Airport Terminal 1; Edinburgh, London Stansted and Glasgow airports in the UK; Vladivostok, Kamchatka, Irkutsk and Sakhalin airports in Russia; the (abandoned) New Manila International Airport and Mactan Cebu Airport in the Philippines, also six regional airports there; Hanthawaddy International Airport (Myanmar); Asunción Silvio Pettirossi Airport (Paraguay); a variety of airports across Indonesia; Serbia’s Belgrade Nikola Tesla Airport; the green field Bhogapuram Airport (India); Airports of Montenegro; Bridgetown Grantley Adams International Airport (Barbados); and as advisor on the New Central Polish Airport, as well as a prequalification to participate in the concession of Lombok Zainuddin Abdul Madjid International Airport, also in Indonesia.

The question is: why has IIAC not won more bids out of the many it has pursued?

One clue to that question may come from comments made when it pitched for the Belgrade Airport concession, when IIAC’s CEO commented that the airport needed to improve revenue generated from non-aviation related services, noting that just 20% of revenue was derived from that source. He also referred to the need to make Belgrade more “ecologically minded, in line with global standards.”

Incheon Airport majors on environmental sustainability. Its corporate sustainability report is an extremely comprehensive, professional 66-page document which sets the sustainability master plan within the context of “the arrival of New Normal Era due to COVID-19 and paradigm change in the aviation industry“. The Batam Hang Nadim Airport will no doubt be subject to the same rigorous demands.

The majority government-owned Wijaya Karya would provide local engineering expertise

Wijaya Karya, the minority partner, comes from a quite different background.

PT Wijaya Karya Tbk (Wika) is an Indonesian company that is involved in engineering and construction work in both Indonesia and abroad. Its businesses include civil engineering, building construction, and construction of industrial plants as well as energy facilities. The company is majority-owned by the Indonesian government.

The CAPA Global Airport Investors Database comments that “it is likely only to be involved in Indonesian privatisations, but there could be more of them”. 

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