Indonesia: international aviation. Rapid growth and strong competition

Summary

• Indonesia's international market grew by 12% in 2017 and has grown by 28% since 2013.
• Tourism has been the main growth driver as visitor numbers to Indonesia have increased by 49% over the past four years, including an increase of 21% in 2017.
• Bali has increased in popularity and now accounts for about one third of Indonesia's international market.
• Indonesian airlines improved their share of the the international market in 2017, but foreign airlines still dominate.
• Garuda and Indonesia AirAsia/Indonesia AirAsia X are the market leaders, accounting for 39% and 36% of all international passenger traffic carried by Indonesian airlines in 2017.

Indonesia international increased by 12% in 2017 as visitor numbers surged by 21%

Total international passenger traffic at Indonesia's airports increased by 12% in 2017, to 34.2 million, according to Indonesia DGAC data.

International passenger traffic grew by slightly less than 10% in 2016. However, the market had contracted slightly in 2015 and only grew by 5% in 2014. In the four-year period from 2013 to 2017 international passenger traffic was up 28%.

Growth in tourism has accounted for nearly all the growth in Indonesia's international market in the past four years. Visitor numbers to Indonesia have increased by 49% over the past four years, from 9.4 million in 2014 to slightly more than 14 million in 2017. Visitor numbers surged by 21% in 2017, representing the fastest growth in more than a decade.

Annual visitor numbers to Indonesia and year-over-year growth: 2008 to 2017

Source: CAPA - Centre for Aviation & BPS Statistics Indonesia.

Indonesia used to have inbound and outbound markets of broadly equal size, but its emergence as a popular tourist destination has changed the mix considerably.

In 2017 visitors accounted for approximately three quarters of total international passengers. An exact figure cannot be calculated as the 14 million visitors include some visitors arriving by ferry from Malaysia and Singapore, but the vast majority of visitors to Indonesia, an archipelago, arrive by air.

Jakarta and Bali dominate Indonesia's international market

There are 29 international airports in Indonesia. However, several of these airports only handle charter or VIP flights. The 34.2 million international passengers handled by these 29 airports in 2017 include charters and VIP flights.

There are currently 19 airports in Indonesia with scheduled international flights, according to CAPA and OAG data. Jakarta and Bali dominate Indonesia's international market, accounting for approximately 44% and 34% of the current total international seat capacity respectively.

Based on 2017 passenger data from the DGAC, Jakarta's Soekarno-Hatta Airport accounted for 43% of total international passengers and Ngurah Rai Airport on Bali accounted for 32%.

The Jakarta and Bali markets are vastly different. Jakarta, one of the world's biggest cities, is a large business market and also attracts significant outbound leisure and ethnic traffic. In Bali the market consists almost entirely of inbound leisure passengers.

Bali grows rapidly

International traffic at Bali has grown rapidly, doubling since 2009 and growing by approximately 60% over the past four years, whereas international traffic at Jakarta has grown by less than 20%.

Bali has long been a popular destination for Australians and Europeans and in recent years has also emerged as a popular destination for Chinese tourists. China is now Indonesia's largest source market. Bali-China seat capacity has broadly tripled over the past two years, driven by expansion from both Indonesian and Chinese airlines.

There is now almost as much capacity from Bali to China as to Australia, which has historically been the largest source market for Bali's tourism industry. Although Australia is a much more mature market, Australian visitor numbers to Indonesia have continued to increase rapidly over the past two years.

Australia overall is Indonesia's fourth source market after China, Singapore and Malaysia. India and Japan, the next largest source markets, are much smaller but both have been growing. There has been particularly fast growth in the India-Bali market over the past two years.

Bali's proportion of total Indonesia international passenger traffic was only 26% in 2013, compared to 32% in 2017. This is another indication of the fast-expanding role of tourism in Indonesia's international market.

Secondary cities in Indonesia have limited international traffic

Surabaya and Medan, the second and third largest cities in Indonesia, are mainly outbound markets but are relatively small. Medan currently accounts for only 7% of international seat capacity and Surabaya accounts for 6%.

Medan and Surabaya both handled approximately 2 million international passengers in 2017, accounting for 6% of total international traffic. There is huge potential for international growth from both these cities, given their large size and Indonesia's expanding middle class population. Medan also has tourism potential as it is the gateway to Sumatra, where Lake Toba is located. Lake Toba is one of Indonesia's most popular tourist spots.

Bandung is the fifth largest international airport in Indonesia, handling 600,000 international passengers in 2017 and accounting for less than 2% of current international seat capacity. There were no other airports in Indonesia that handled more than 500,000 international passengers in 2017.

Indonesia international weekly seat capacity by airport: 7-May-2018 to 14-May-2018

Source: CAPA - Centre for Aviation & OAG.

AirAsia and Garuda account for most international traffic

Foreign airlines have typically dominated Indonesia's international market and they currently account for more than 60% of international seat capacity in Indonesia.

Local airlines do not have well known brands in overseas markets, making it difficult to grow in the inbound segment, and are generally focused on domestic services. The only exception is Indonesia AirAsia, which leverages the AirAsia brand and international distribution network. Indonesia AirAsia and its sister airline Indonesia AirAsia X also focus mainly on the international market.

Indonesia AirAsia and Indonesia AirAsia X accounted for 36% of total international passenger traffic carried by Indonesian airlines in 2017. However, AirAsia's share of the much larger Indonesian domestic market share is only 2%.

See related report: Indonesia domestic airline market: rapid growth, rivalry intensifies

Garuda accounted for a market-leading 39% share of total scheduled international traffic carried by Indonesian airlines in 2017, according to Indonesia DGAC data. Lion Air was the third largest local competitor, accounting for 17% of all scheduled international passengers that were carried in 2017 by Indonesian airlines.

Garuda is the largest international airline, but AirAsia as a group is bigger

Garuda reassumed the top spot from Indonesia AirAsia in 2015. Indonesia AirAsia initially surpassed Garuda in 2010 and held this position through 2014.

The AirAsia Group is still the market leader, when affiliates or subsidiaries based in other countries are included. Malaysia AirAsia is the largest foreign airline in the Indonesian market. AirAsia, as a brand, currently accounts for 22% of total international seat capacity in Indonesia, according to CAPA and OAG data.

Garuda Indonesia currently accounts for 14% of international seat capacity. The Garuda Group's capacity share is 15% when the small international operation of its LCC subsidiary Citilink is included.

Citilink, Lion and Batik expand from low base

Citilink carried only 46,000 scheduled international passengers in 2017, according to Indonesia DGAC data. However, Citilink is pursuing international expansion in 2018.

In late Mar-2018 Jakarta-Penang became Citilink's second international route after Jakarta-Dili, which was launched in 2017. Citilink is planning to launch services from Jakarta to Bangkok and Singapore within the next couple of months.

See related report: Jakarta-Singapore route: highly competitive; competition intensifies

Lion Air is the largest domestic airline but has always had a relatively small international operation. However, Lion Air has been growing its international operation over the past year, primarily with new flights to China.

The Lion Group is also now using its full service subsidiary Batik Air in the international market. Batik accounted for 4% of total Indonesian airline international traffic in 2017, giving the Lion Group a 21% share of total Indonesian airline international traffic. Batik plans to expand its Indian and Chinese networks in 2018, tapping into surging demand from Indonesia's two fastest growing source markets.

The Lion Group currently accounts for a 13% share of total international seat capacity in Indonesia, according to CAPA and OAG data. This includes a 3% share for the group's Malaysia-based affiliate, Malindo Air, which operates several routes from Malaysia to Indonesia and also has two fifth freedom routes from Indonesia to Australia. Malindo is one of the largest foreign airlines presences in the Indonesian market, behind Malaysia AirAsia and Singapore Airlines.

Indonesian airlines improve their market share

Rapid growth in the inbound segment would generally make it hard for local airlines to increase international market share. Foreign airlines are typically better positioned to fly in visitors as they have the advantage of strong brands and distribution networks in their home markets. Foreign airlines currently account for nearly two thirds of seat capacity at Bali, which is the main gateway for tourists.

However, Indonesian airlines were able to increase their international traffic by 20% in 2017, driven by rapid growth at the Lion and Garuda groups. Total international passenger traffic for Indonesian airlines has more than quadrupled since 2006, reaching a record 12.5 million passengers in 2017.

Scheduled international traffic (millions of passengers) for all Indonesian airlines and load factor: 2005 to 2017

Year	Passengers (millions)	Average load factor
2005	3.364	61%
2006	2.963	68%
2007	3.189	75%
2008	4.102	74%
2009	5.004	72%
2010	6.615	72%
2011	8.152	73%
2012	9.938	74%
2013	10.965	69%
2014	10.252	62%
2015	9.534	72%
2016	10.377	73%
2017	12.494	74%

Source: CAPA - Centre for Aviation & Indonesia DGAC.

Indonesian airline groups are keen to continue expanding in the international market, recognising the opportunities as Indonesia emerges as a popular tourist destination. However, foreign airlines are also expanding and will continue to make it challenging for Indonesian airlines to achieve profitable growth.

Historically Indonesian airlines have struggled to achieve decent load factors on international routes. In 2017 their average international load factor was only 74%, although this was a slight improvement compared to 2016 and was the highest load factor since 2007 and 2008.

The Indonesian international market has the potential for rapid growth over the next several years, driven by tourism and an expanding middle class. However, local airlines will have to grapple with intensifying competition, both between themselves and with foreign airlines.