Indonesia-Australia aviation market poised for rapid growth and diversification beyond Bali


Indonesia-Australia aviation has traditionally been dominated by inbound traffic to Bali. The resort island accounts for over 80% of capacity in the market and Australian visitors to Indonesia currently outnumber Indonesian visitors to Australia by a more than six to one ratio. But the market is slowly starting to diversify with more flights linking Australia with the capital Jakarta and secondary Indonesian destinations.

Australia is well positioned to benefit from Indonesia’s booming economy as its growing middle class starts to have the income and desire to holiday overseas. The geographic proximity of the two countries means several routes are within the range of narrowbody aircraft, opening up a huge range of new options for LCCs and full-service carriers from both countries.

This is the third report in a series of reports on the Asia-Australia aviation market. The first report looked at the Malaysia-Australia market and the rapid growth of AirAsia X. The second report looked at the Philippines-Australia market and bilateral limitations which are blocking the launch of services from Cebu Pacific. This report looks at the larger Indonesia-Australia market, which has seen significant growth this year and has potential for continued rapid growth over the medium to long-term.

Indonesia is the second most popular international destination for Australians after NZ

There are currently about 62,000 weekly seats between Australia and Indonesia, making it the fourth largest international market for Australia after New Zealand, Singapore and the UAE. As transit passengers account for a majority of passengers to Singapore and the UAE, Australia-Indonesia is the largest local market after Australia-New Zealand.

Australia international capacity (seats) by country: 19-Aug-2013 to 25-Aug-2013

Indonesia was the second largest destination country for short-term Australian resident departures in the year ending 30-Jun-2013 with 910,000 departures, an 11% increase over the prior year. Only New Zealand, with 1.141 million departures, was a bigger destination for Australians in FY2013, according to Australia Bureau of Statistics data.

Australia however recorded only 145,000 short-term visitor arrivals from Indonesia for the year ending 30-Jun-2013. Indonesia is not yet a top 10 source country for Australia’s tourism sector but this will almost certainly change over the next few years.

Transit traffic will start to push up Australia-Indonesia numbers

Australia-Indonesia is almost entirely a local market as Indonesian carriers have not yet started to aggressively pursue fifth freedom traffic from Australia. This will also change as Garuda starts to expand its European network and target the kangaroo route between Australia and Europe.

Garuda originally planned to launch services to London Gatwick in Nov-2013 with same plane service from Sydney using its new fleet of 777-300ERs. The carrier has had to push back the launch of Gatwick to May-2014 and also has adjusted plans to increase capacity on Jakarta-Sydney as it was expecting approximate one quarter of its London passengers to fly onwards to Sydney.

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But the strategy is still in place to make a major push in the Australia-Europe market, with services to Paris to be launched after London and later to Germany and Italy. Garuda is confident demand in the local Jakarta-Australia market will increase but sees this as growing gradually as more Indonesians start to travel to Australia. In the meantime it believes it can fill up a large portion of the additional seats to be offered from Australia to Jakarta by offering a competitively priced one-stop product to Europe.

The strategy works two ways as Garuda also sees the local Jakarta-Europe market building up gradually and the need to initially turn to fifth freedom markets to fill up a relatively large portion of seats on its new European flights. Australia is a natural fifth freedom market given Indonesia’s geographic position and the large local demand in Australia for services to Europe – although it is a market with stiff competition and economy class yields that are typically below cost.

Bali continues to dominate Indonesia-Australia market – for now

Traditionally the Indonesia-Australia market has been dominated by Bali, an extremely popular holiday destination for Australians. Even Garuda has historically had most of its Australia capacity from Bali rather than its hub in Jakarta, where it can offer more connections and cater to the Indonesian outbound market.

Bali currently accounts for about 52,000, or 84%, of the 62,000 weekly return seats in the Indonesia-Australia market, according to CAPA and Innovata data for the week commencing 19-Aug-2013. Over the last year the total Indonesia-Australia market has grown by about 12% with about 7,300 weekly return seats added compared to Aug-2012 levels.

Indonesia to Australia total one-way seats per week: 19-Sep-2011 to 9-Feb-2014

Bali once again accounted for most of the seats added over the last year, about 6,100. Jakarta accounted for the remaining additional 1,200 seats.

Bali to Australia total one-way seats per week: 19-Sep-2011 to 9-Feb-2014

Sydney starts to see inbound Indonesian growth

But Australian airports are starting to see growing interest for flights to Jakarta, driven by growing inbound Indonesia demand. For example Sydney Airport CEO Kerrie Mather recently told CAPA that the airport has seen 30% growth in Indonesian national arrivals to Sydney over the last few years. “It’s a significant market with significant potential,” she told CAPA TV on the sidelines of the 7-Aug-2013 CAPA Australia Pacific Aviation Summit.

Sydney is the biggest Australian market from Jakarta, accounting for about 47% of the nearly 5,000 one-way seats currently in the Jakarta-Australia market.

Jakarta to Australia capacity by carrier (one-way seats per week): 19-Sep-2011 to 9-Feb-2014

Garuda is adding a sixth weekly frequency from Jakarta to Sydney in late Oct-2013, according to Innovata data. The carrier is also up-gauging its Jakarta-Sydney flight on 8-Nov-2013 from the 228-seat A330-200 to 314-seat 777-300ER. Garuda plans to return to using the A330-200 on this route from 18-Dec-2013 but this is seen as a temporary move until the London flights begin in May-2013, at which point the carrier intends to go back to its original plan of offering same plane 777-300ER service from Sydney to London.

A daily Garuda 777-300ER service to Sydney, which is expected sometime in 2014, would provide 2,198 weekly one-way seats in the market across three classes – economy, business and first. Qantas also serves the Jakarta-Sydney market but only four times per week with A330-300s in two class configuration.

Garuda launches Jakarta-Peth and considers Jakarta-Brisbane

Garuda also launched flights from Jakarta to Perth on 28-Jun-2013, which is operated daily using 156-seat 737-800s. The new flight provides a huge boost to the Jakarta-Perth market, which was previously only served by one carrier – Jetstar – with just two weekly A320 flights.

Brisbane Airport is confident Garuda will next look to launch Jakarta-Perth. The carrier re-entered the Brisbane market on 1-Aug-2013 with daily 737-800 service from Bali.

The new Bali-Brisbane service supplements Garuda’s daily A330 services from Bali to Melbourne and Sydney and double daily 737-800 service from Bali to Perth. A Jakarta-Brisbane service would cater to a different sector of the market, primarily Indonesians interested in holidaying in Queensland and kangaroo route traffic to Europe.

Garuda plans to serve all its future European destinations from Jakarta rather than Bali, which will require Brisbane passengers heading to Europe to transit in both Bali and Jakarta unless a direct Brisbane-Jakarta flight is added. As Garuda continues to build up its European network and responds to increasing Indonesian demand for Australia, Jakarta-Brisbane will likely be launched.

“We would love to see a non-stop to Jakarta,” Brisbane Airport CEO Julieanne Alroe told CAPA TV on the sidelines of the 7-Aug-2013 CAPA Australia Pacific Aviation Summit. “We have spoken at length to Garuda in particular. Garuda has come back into the market but it is a Bali-Brisbane service. We are hoping to mature that service and so we can have both a direct Bali and a direct Jakarta service with Garuda.”

Melbourne expects inbound Indonesian sector to be growth driver

Melbourne Airport also expects growth in the Jakarta market, which is currently only served by Garuda with five weekly A330-200 frequencies. Melbourne Airport CEO Chris Woodruff is confident Melbourne will also see in the coming years the launch of new routes from Indonesian cities other than Bali and Jakarta.

“I think the Indonesian strategy which is beyond Bali will play out in the next few years. You just have to look at the socio-economic growth and the number of people entering the can travel economic group or middle class,” Mr Woodruff told CAPA TV on 8-Aug-2013 at the CAPA Australia Pacific Aviation Summit.

Melbourne Airport CEO Chris Woodruff talks international capacity and Asia's travel potential
at CAPA's Australia Pacific Aviation Summit, 8-Aug-2013

Jakarta and Bali are currently the only destinations in Indonesia served from Australia with scheduled flights. While Jakarta-Melbourne is served by just the one carrier, the Bali-Melbourne market is currently served by three carriers – including Garuda with daily A330-300 service, Jetstar with five weekly A330-200 frequencies and Virgin Australia with daily 737-800 flights.

At about six hours, Melbourne-Bali is one of the longest narrowbody flights in the Virgin Australia network. This shows the potential of new routes from Melbourne or Sydney to Indonesian secondary cities which can be opened using narrowbody aircraft, thereby significantly reducing risk. Virgin Australia also uses 737-800s to operate daily services from Sydney to Bali, a route as in the case with Melbourne-Bali is also operated daily by Garuda and five times per week by Jetstar using A330 widebodies.

Melbourne or Sydney to Jakarta is just outside the range of current generation narrowbody aircraft but other destinations in central or eastern Indonesia such as Lombok are within narrowbody range. New generation narrowbody aircraft such as the A320neo, 737MAX and Bombardier CSeries will open up essentially any possible Indonesia-Australia route. Perth is already within narrowbody range of virtually all of Indonesia.

Perth-Lombok launch highlights the potential of new types of Australia-Indonesia routes

Perth will see the first non-Jakarta or Bali Australia-Indonesia route on 24-Sep-2013 as Jetstar launches four weekly A320 flights to Lombok. The Perth-Lombok route is a significant development as it represents the opening of direct flights from Australia to alternative Indonesian holiday destinations.

Lombok is an island next to Bali but is less developed and offers Australians a much different holiday experience. Indonesia has several emerging holiday destinations which could also see service to Australia if the Perth-Lombok route proves successful.

Perth is the logical test market for new Indonesia routes given it closer to Indonesia than Australia’s eastern cities and the fact Perth-Indonesia is such a developed market. After the launch of Perth-Lombok, Perth will have over 28,000 weekly seats to Indonesia. Only Singapore is a larger international market from Perth but the gap between the two largest markets has narrowed as Perth-Indonesia capacity will be up nearly 30% year-over-year in late September. (Qantas also has dropped one of its two daily Perth-Singapore flights but this has been offset by additional capacity from Singapore Airlines, Jetstar Asia and Tigerair Singapore.)

Perth international capacity (seats) by country: 30-Sep-2013 to 6-Oct-2013

In addition to the Jetstar and new Garuda services between Perth and Jakarta, the Perth-Bali route is currently served by four carriers – all with narrowbody aircraft. Indonesia AirAsia is the market leader with four daily flights, Garuda and Jetstar each have two daily flights on the Perth-Bali route and Virgin Australia currently has nine weekly frequencies, according to Innovata data

Lombok from Melbourne, Sydney and Brisbane would also be potential routes for Jetstar or other carriers already in the Bali-Australia market such as Indonesia AirAsia and Virgin Australia. Indonesia AirAsia currently only has two Australian routes, Bali to Perth and Darwin. (Bali-Darwin is served with four weekly Indonesia AirAsia flights and eight weekly Jetstar flights.)

Tigerair and Lion should be next to enter Indonesia-Australia market

The Indonesia-Australia market will also almost certainly see a sixth carrier enter within the next couple of years. While Australia-Bali is the most obvious of markets for a new entrant, Lombok or another secondary destination would offer differentiation and provide a cushion from competition.

Tigerair could serve the Australia-Indonesia market using its affiliates in either or both countries, Tigerair Australia and Tigerair Mandala. Lion Air also has been looking at the Indonesia-Australia market and has become a target for Australian airports given its huge order book of over 600 new 737s and A320s (some of which will be operated by other affiliates or subsidiaries such as Malaysia’s Malindo, which could also potentially launch services to Australia).

Lion is also planning to acquire 787s, some of which could potentially be used Indonesia-Australia markets which are not within range of current generation narrowbodies. But for now the LCC is looking at Indonesia-Australia routes of six hours or less, which is the range of its single-class 737-900ERs. While Lion has ambitions to serve Australia a launch within the next year is unlikely as its short-term focus is on further domestic expansion and new international routes within Asia.

Lion would particularly be well placed to cater to Australia's anticipated growing demand in inbound Indonesian traffic. Lion is the domestic leader in Indonesia and has a strong local brand and Indonesian distribution network. But selling outbound services to Australians would be more challenging as its brand is not yet developed in foreign markets. (Lion at one point was also looking at establishing a domestic subsidiary in Australia – something that could still be feasible given its order book and desire to establish a portfolio of carriers but is now considered highly unlikely. Lion would face a huge uphill battle in establishing itself in the Australian domestic market given the intense competition and its lack of a local brand.)

As Australia-Indonesia becomes a more balanced market with less dependence on outbound traffic, the market dynamics will change along with the mix of carriers. Indonesian carriers will inevitably see their current approximately 52% share of the market, which has already gone up this year driven by the Garuda and Indonesia AirAsia expansion, continue to rise. While Jakarta will see a majority of the growth for Indonesian carriers expanding in Australia, other population centres in the archipelago such as Medan and Surabaya, will likely also be linked to Australia in the medium to long-term.

Indonesia-Australia's aviation market has huge potential

Melbourne Airport’s Mr Woodruff expects Australia will see an annual compound growth rate of 8% to 12% over the next several years in inbound Indonesian traffic. But he warns that while the current Australia-Indonesia air services agreement still has some room for expansion it will need to be expanded: “Are the bilateral settings right for that [expected growth]? No, they are not. We need more. I am expecting now the Garuda, the Lions of the world to really start ramping up their interest in Australia.”

The current Australia-Indonesia air services agreement limits capacity at Brisbane, Melbourne, Sydney and Perth while providing open skies for other Australian airports of which only Darwin currently has Indonesia service. Australia will need to adopt a liberal approach if its airports are to benefit from being at the doorstep of Asia’s third largest country and one of the world’s fastest growing economies.

The potential opportunities are huge as more of Indonesia’s 70-plus million annual domestic passengers start to venture overseas.

Ultimately inbound Indonesians could outnumber outbound Australians – a far cry from the current six to one ratio favouring outbound Australians. Indonesia has more than 10 times Australia’s population and as income levels in Indonesia continue to rise the ramifications are enormous.

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