Indonesia: Structural Reform in Air

Transport Service

APEC Policy Support Unit

May 2017
Prepared by:
Titik Anas and Christopher Findlay

Asia-Pacific Economic Cooperation Policy Support Unit

Asia-Pacific Economic Cooperation Secretariat
35 Heng Mui Keng Terrace
Singapore 119616
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Email: [email protected] Website: www.apec.org

Produced for:
Economic Committee
Asia-Pacific Economic Cooperation

APEC#217-SE-01.9

This work is licensed under the Creative Commons Attribution-NonCommercial-

ShareAlike 3.0 Singapore License. To view a copy of this license, visit
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This paper was first published in the APEC Economic Policy Report 2016, under publication
number APEC#216-EC-01.1.

The views expressed in this paper are those of the authors and do not necessarily represent
those of the APEC Member Economies.
 TABLE OF CONTENTS

1. BACKGROUND ............................................................................................... 1

2. LITERATURE SURVEY ................................................................................ 2

3. THE INDONESIAN DEREGULATION ....................................................... 4

4. AIR TRANSPORT IN INDONESIA .............................................................. 9

5. AIR TRANSPORT VALUE CHAIN IN INDONESIA .............................. 11

6. AIR TRANSPORT AND GLOBAL VALUE CHAIN................................ 13

7. THE IMPACT OF DEREGULATION ........................................................ 15

7.1 MARKET STRUCTURE ....................................................................................... 15
7.2 AIR TRAFFIC ......................................................................................................... 16
7.3 AIR FARES ............................................................................................................. 18

8. NEW ISSUES .................................................................................................. 20

8.1 CONGESTION ........................................................................................................ 20
8.2 AIR TRANSPORT SAFETY ................................................................................. 22
8.3 FLOOR PRICE VS. SAFETY ............................................................................... 24

9. ASEAN OPEN SKY POLICY AND INDONESIA’S PARTICIPATION ... 25

10. LESSON LEARNED AND POLICY RECOMMENDATION FOR

STRUCTURAL REFORMS ................................................................................. 27

REFERENCES ....................................................................................................... 29

APPENDIX ............................................................................................................. 32
 LIST OF TABLES

Table 3.1 Indonesia Airline Categories ..................................................................................... 5

Table 3.2 Floor Price from Time to Time .................................................................................. 6
Table 3.3 Foreign Equity Limits ................................................................................................ 7
Table 4.1 Air Transport: Domestic Demand and Output, 1995, 2005, 2010 ............................. 9
Table 4.2 Indonesia Air Transport: Multiplier and Linkages .................................................. 10
Table 7.1 Scheduled Airlines, 2016 ......................................................................................... 15
Table 7.2 Average Airfare for Economy and Middle Class .................................................... 19
Table 8.1 Airport Expansion .................................................................................................... 22

LIST OF FIGURES

Figure 3.1 Policy Changes, 1990-2016 ...................................................................................... 8

Figure 4.1 Contribution of Transport and Air Transport in GDP (in percent) .......................... 9
Figure 4.2 Indonesia: Air Transport, Exports and Imports, 1996-2010................................... 10
Figure 5.1 Aviation Value Chain ............................................................................................. 11
Figure 5.2 Air Transport Value Chain ..................................................................................... 12
Figure 6.1 Indonesia: International Cargo, 1990-2014 ............................................................ 14
Figure 7.1 Market Share, 2012 ................................................................................................ 16
Figure 7.2 Air Traffic (Domestic & International Flights) 1990-2014 (in million person) ..... 17
Figure 7.3 Number of Routes in 13 Airports, 2001-2014 ........................................................ 18
Figure 8.1 Total Airport in Indonesia by Operators ................................................................ 20
Figure 8.2 ICAO USOAP Safety Audit Results 2014: Indonesia ........................................... 23
 1. BACKGROUND

The nature of Indonesia’s geography with 6000 inhibited islands makes air and
maritime transportation its main modes of transport. Maritime transport continues to be
the main mode of transport of non-perishable goods while air transports is more suitable
for business and tourist travellers and perishable goods as well.

Following economic growth in general and the growth of its tourism sector in particular,
the demand for air travel in Indonesia has increased significantly, both by domestic and
international travellers and shippers. Indonesia has also undertaken steps to deregulate
its air transport sector, transforming the sector gradually from being a state-dominated
sector to a more hybrid model where state-owned enterprise competes with private
providers. Foreign participation is also allowed. Airfares were allowed to float. Entry
requirements for new airlines were eased. However, air transport infrastructure and its
management, such as airports, has remained the domain of the government.

The effect of these changes has been dramatic. For example, back in the 1990s, air
transport was regarded as a luxury, due to its relatively high price. With the reforms
outlined, airfares have substantially declined. Damuri and Anas (2005) found that the
airfare for the Jakarta-Surabaya route (about 90 minutes air travel) was as high as USD
90 at the low season before the reforms. Currently, the same distance can be as low as
USD 20.

What has been the impact of the deregulation on the industry, on other industries, and
on the economy at large? Has the deregulation been sufficient to improve the efficiency
of the sector? This study aims at assessing the impact of air transport deregulation in
Indonesia. The analysis will focus on the impact of the deregulation on the industry’s
performance.

The study will also examine the implications of the key reforms in the air transport
sector for other industry sectors, backward and forward in associated value chains. In
this study we will map the industry linkages, using the Indonesian Input Output Table
for the purpose of this assessment.

This paper will begin with a review of a sample of recent literature on this topic,
followed by a comprehensive discussion on the regulatory changes in the sector, a
description of the sector, its value chain and the analysis of the impact of the
deregulation to the sector and the economy in general. The paper will conclude with a
discussion of new issues relevant to the sector, lessons learned and some policy
recommendations related to structural reforms of the air transport.
 2. LITERATURE SURVEY

Air transport is highly regulated and relatively restrictive for foreign investment.
Walulik (2016) examined airline investment regime in 121 states and territories and
showed that airline investment rules worldwide is restrictive. Nevertheless, a large
number of studies on air transport show that liberalization of the sector contributed to
the improved performance of the sector.

There have been few recent analyses of Indonesia’s air transport sector and its reforms.
Saraswati and Hanaoka (2013) examined aviation industry policy in Indonesia as well
as its preparedness for the ASEAN Single Aviation Market (ASAM). The authors
presented an extensive overview of Indonesia’s aviation policy, emphasizing the
evolution of the industry from operating in a relatively restricted regime to a more
dynamic and market-oriented one. The authors also noted the challenge of
infrastructure capacity and quality. The OECD (2014) also reviewed the extent of
competition in the airline industry in Indonesia and highlighted the capacity shortage
and infrastructure bottlenecks impeding growth of the sector.

Studies of liberalisation in other economies or regions generally find positive results.

For example, Hanaoka et al. (2014) show that the liberalization of air transport has
increased competition in the Low Cost Carriers (LCCs) markets. LCCs have become
the main type of airlines in ASEAN and have begun to take over the market share of
the FSCs on the intra-ASEAN and domestic routes. However, Bowen (2016)
emphasizes that the fast growth of LCCs in South East Asia has not done much to
improve Southeast Asia's spatial inequality as LCCs are also concentrating in well-
served markets.

Zhang et al. (2009) also examined the impact of deregulation and liberalization in
aviation industry in the United States, Canada, and the EU. The authors argued that the
deregulation and liberalization has eliminated the less efficient airlines and led to the
emergence of LCCs such as Southwest, JetBlue, Ryanair, and Westjet. The study
concluded that there are three major obstacles faced by LCCs in Asia, namely: (1)
obstacles found in domestic policy; (2) lack of open-skies agreements among Asian
economies, which makes it difficult for LCCs to increase their operational range; (3)
lack of secondary airports in the major metropolitan areas.

Zhang and Findlay (2014) showed that air transport liberalization is significantly and
positively associated with the extent of the movement of people. In another study,
Cristea et al (2014a) assess the impact of US Open Sky Agreements (OSAs) on the
performance of the sector. They use a ‘difference in difference’ model to compare
outcomes pre and post the application of OSAs and finds that liberalizing economies
see expansions in route offerings and reallocations of carrier capacity. They find that
consumers enjoy lower prices and more direct flights, and leading to large increases in
passenger numbers.

Cristea et al (2014b) examine the impact of more liberal policies in the Middle East.
They find that more liberal policy is associated with greater passenger traffic between
 Chapter 2: Literature Survey 3

economies. This result is driven primarily by larger numbers of city pairs being served,
rather than by more passengers traveling along given routes.
 3. THE INDONESIAN DEREGULATION

The major milestones in air transport policy are summarised in Figure 3.1. In the 1990s,
the air transport sector was controlled by the state, as stated in Law No. 15/1992
regarding Air Transport. Article 31 of the law stipulated that the government regulated
the use of facilities and services at airports, which also provided the basis of powers to
regulate prices. This power was delegated to the Ministry for Transport. However, in
1997, the Minister for Transport in Decree No. 25/1997 delegated the rights to set
scheduled passengers airlines’ ticket prices to the airlines association (the Indonesian
National Air Carrier Association (INACA)) which set a floor price (the decree did not
specify a floor price but the rationale for that format of regulation was to limit predatory
behaviour).

Indonesia deregulated its transport sector, including the air transport sector after the
1998 Asian Financial Crisis. The momentum for reform in the air transport sector was
provided by the enactment of the Competition Law in 1999. The Law granted the
authority to supervise competition to The Supervision Commission for Business
Competition, the KPPU. Price fixing by INACA was among the first cases that the
KPPU oversaw.

The KPPU decided that the price setting by INACA violated (Article 5, point 1) of the
Competition Law. The KPPU then required the Minister for Transport to revoke the
decree that granted INACA the right to set tariffs. The Minister of Transport later issued
Decree No. 9/2002 amending the Decree No. 25/1997. The new decree regulated only
a ceiling price for economy class travel on scheduled passenger airliners.

In 2001, Minister for Transport eased entry requirements to set up airlines companies
by issuing Decree No. 11/2001, allowing new scheduled airlines to obtain a license to
operate by operating only two aircraft (previously the requirement had been 5 aircraft).
As a result, the total number of scheduled airlines increased from only 7 in 2000 to 27
in 2004. New airlines companies established following the issuance of this new decree
including Adam Air, Celebes Air, Sriwijaya Air, Bali Air, Batavia Air, Star Airlines,
Air Paradise, Kartika Airlines, Papua Air and Air Asia. However, the industry
consolidation later drove out some scheduled airlines from the market, for example,
Adam, Celebes, Batavia and Indonesian Airlines. A number of new airlines were also
established in 2013 and 2014: Batik Air (2013), NAM Air (2013), and Indonesia
AirAsia X (2014).

In 2009 Indonesia enacted a new air transport law, Law No. 1/2009, replacing the Law
No. 15/1992 which was no longer compatible with the dynamics of the sector. The new
air transport law also rules regarding tariffs and licensing. On licensing, the 2009 law
was more restrictive than the Transport Minister Decree No. 11/2001. The Law required
all civil airlines registered in Indonesia to have at least 5 units of aircraft (for scheduled
airlines) and at least 1 unit of aircraft (for unscheduled airlines and cargo airlines).

On tariffs, the law set new guidelines for a maximum tariff (ceiling price) for economy
class of travel on scheduled passenger airlines. The law originally did not mention a
floor price. The new law allowed tariffs for non-economy class of travel on scheduled
 Chapter 3. The Indonesian Deregulation 5

passenger airlines and commercial cargo to float. Since then however floor prices have
been re-introduced. Carries are classified into different types (full service, medium
service, and no frills) and are allowed to charge up to different fractions of the ceiling
price (100 percent, 90 percent and 80 percent respectively). The Centre for Asia Pacific
Aviation (CAPA)1 provides the following graphic (from the Directorate General of
Civil Aviation) to illustrate the classifications:

Table 3.1 Indonesia Airline Categories

Full Service Medium Service No Frills
Services and optional Some services covered Only essential services
requirements covereed by the fares (limited covered by the fares
by the fares (maximum services)
services)
Provide free baggage Limited free baggage Baggage Fee
(30kg for international Implemented
20kg for domestic)
Provide full inflight Provide limited inflight Inflight service is
service services available on charged bases
Source : Directorate General of Civil Aviation – Ministry of Transportation Republic of Indonesia

CAPA reports that of 14 airlines currently certified for scheduled passenger services,
 two are classified as full service – Garuda Indonesia and Lion Group full-service
subsidiary Batik Air
 five are in the no frills category – Garuda budget subsidiary Citilink, Indonesia
AirAsia, Lion Air, Lion regional subsidiary Wings Air and Susi Air.
 seven airlines are in the middle service category include Aviastar, Kalstar,
Sriwijaya, Transnusa, Trigana, Xpress Air and Sriwijaya subsidiary NAM.

Indonesia also introduced a price floor of 30 percent of the ceiling price (see Table 3.2).
CAPA reports that in practice Indonesia has routinely provided exemptions for LCCs
to offer fares well below this floor but that the Transport Ministry then decided to stop
allowing any exemptions to the floor and raise the floor from 30 percent to 40 percent
of the ceiling. More recently, the floor has been dropped again to 30 percent of the
ceiling. Although the government reintroduced the floor price in 2005, the requirement
was never effectively implemented until 2014.

1
http://centreforaviation.com/analysis/indonesias-price-floor-for-airlines-is-misguided-a-bad-
precedent-and-will-be-counterproductive-204752
6 Indonesia: Structural Reform in Air Transport Service

Table 3.2 Floor Price from Time to Time

Year Regulation in Floor Price Contents
2002 Ministerial Decree 9, 2002 Article 1 : the enactment of the basic
tariff and distance rate
2005 Ministerial Decree 36, 2005 Article 5 : the enactment of the reference
tariff
2006 Ministerial Decree 11, 2006 Article 5 : the enactment of the reference
tariff
2010 Ministerial Decree 26, 2010 Article 12 : the enactment of the ceiling
price
2014 Ministerial Decree 51, 2014 Article 15 : the enactment of the ceiling
Ministerial Decree 59, 2014 price
2014 Ministerial Decree 91, 2014 Article 1 : air transport enterprises in
setting normal rates minimum 40
percent of the upper limit according to
the group of services provided
2015 Ministerial Decree 126, 2015 Article 9 : air transport enterprises in
setting normal rates minimum 30
percent of the upper limit according to
the group of services provided
2016 Ministerial Decree 14, 2016 Article 9 : air transport enterprises in
setting normal rates minimum 30
percent of the upper limit according to
the group of services provided
Source : Indonesia’s regulations for air transport

While the new air transport law of 2009 continued to limit foreign equity in the
commercial airline business. It was not clear about foreign investment in other
subsectors. For this, the negative list of investment, often referred as DNI (Daftar
Negatif Investasi), is the reference. The current negative list of investment lists foreign
equity limits on air transport (Table 3.3). The foreign equity limit on supporting
services, including computer-based reservation system, passenger and cargo ground
handling, and aircraft leasing is 67 percent. Similarly, foreign equity in freight
forwarding services, airport support services and general airlines sales agencies is
capped at 67 percent. The subsectors, which are closed to foreign investment, are cargo
condition survey services and survey of air transport facilities.
 Chapter 3. The Indonesian Deregulation 7

Table 3.3 Foreign Equity Limits

Foreign
Sector Subsector Equity limits
(in percent)
Scheduled and non-scheduled domestic air
49
transport services
Scheduled international air transport services 49
Supporting services, include computer-based
Air reservation system, passenger and cargo ground 67
Transport handling, and aircraft leasing
Airport services 49
Air expedition freight forwarding services 67
Airport support services 67
General airline sales agent 67
Cargo condition survey service 0
Services Survey of land, sea, and air transportation 0
Auxiliary facilities
to All Supporting business in terminals 67
Forms of Freight forwarding services 67
Transport Warehousing 67
Multimode Transportation 49
Source. Presidential Regulation No. 44/2016.
8 Indonesia: Structural Reform in Air Transport Service

Figure 3.1 Policy Changes, 1990-2016

 4. AIR TRANSPORT IN INDONESIA

The transport sector, on average contributed about 4 percent to GDP (at constant price)
in the past 10 years. In the year 2000, the contribution of the sector to GDP was only
3 percent and from 2003, the sector’s contribution to GDP increased to 4 percent. Air
transports was about 25 percent of transport sector. Its contribution to the GDP
increased from very small in the year 2000 to about 1 percent since 2004 (see Figure
4.1).

Figure 4.1 Contribution of Transport and Air Transport in GDP (in percent)
5% 4% 4%
4% 4% 4% 4%
4% 3% 3%
4% 4% 4% 4% 4%
3% 4% 4%
3%
Share

3%
2%
2% 1% 1%
1% 1% 1% 1%
1% 0% 0%
1% 1% 1%
1% 1% 1%
0% 0% 0%
2000 2002 2004 2006 2008 2010 2012 2014**

Share of air transport to GDP(%) Share of transport to GDP (%)

Source. Indonesia Statistics (BPS)

Air transport in Indonesia has been in excess demand. The first indicator is from the
Indonesia’s Input Output (IO) Table. First, the ratio of domestic demand to domestic
output shows that the domestic demand for air transport has been higher than domestic
output.2 However, the gap is decreasing over time.

Table 4.1 Air Transport: Domestic Demand and Output, 1995, 2005, 2010
(in percent)
No Indicators 1995* 2005** 2010***
1 Domestic Demand/ Domestic Output 117.9 114 105.1
2 Share of Export to Domestic Product 20.5 18.03 13.4
3 Share of Import to Domestic Demand 38.4 28 17.6
Source. Author’s calculation based on Indonesia’s Input Output Table
Notes. * 172 Sectors ** 175 sectors *** 185 sectors

Second, the World Bank Trade in Services Database (Figure 4.1) shows that
Indonesia’s exports of air transport services are smaller than its imports. The deficit in
absolute terms increased from USD 7.8 million in 1996 to USD 652 million in 2010.
However relative to the total sales, the trade data also shows a declining trend in the
deficit, due to the rapid growth of the domestic market. The ratio of imports to domestic

2
IO table 1995 comprises 172 sectors, IO Table 2005 comprises 175 sectors, and IO Table 2010
comprises 185 sectors.
10 Indonesia: Structural Reform in Air Transport Service

demand in Table 4.1 has fallen (alongside a fall in the ratio of exports to domestic
output).

Figure 4.2 Indonesia: Air Transport, Exports and Imports, 1996-2010

US$millions

1000
900 Export Import
800
700
600
500
400
300
200
100
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source. World Bank Trade in Services database

Using the IO table, we can calculate an output multiplier and indicators of various
linkages of the air transport sector. Table 5 shows that the sector has high multiplier
effect to the economy. The output multiplier is relatively similar among the three IO
Tables. Based on IO 2010 for example, a 1million increase in final demand and
therefore sector output will increase the total output of the economy by 2.37million.
The extent of linkage is also strong: air transport has a Backward Linkage (BL) of 1.22
(ranked 34th for BL) and a Forward Linkage (FL) of 0.82 (ranked 80th for FL) in 2010.
If BL or FL is greater than 1, it indicates the sector has high linkage. Air transport has
a stronger backward linkage that forward linkage that its growth affecting more the
input suppliers (sectors) than its users (sectors).

Table 4.2 Indonesia Air Transport: Multiplier and Linkages

1995* 2005** 2010***
No Indicators
Value Rank Value Rank Value Rank
1 Output Multiplier 2.29 39 2.37 33 2.37 34
2 Backward Linkage 1.20 39 1.21 33 1.22 34
3 Forward Linkage 1.16 36 0.93 57 0.82 80
Source. Author’s calculation based on Indonesia’s Input Output Table
Notes. * 172 Sectors ** 175 sectors *** 185 sectors
 5. AIR TRANSPORT VALUE CHAIN IN INDONESIA

The main inputs of the airline business are fuel, aircraft and its maintenance. Apart from
those main inputs, the airline business also relies on other services, such as food and
beverages services, insurance, trade and other services. ICAO (2013) in its review of
the aviation value chain to include airport and air navigation services, aircraft leasing
services and manufacturing, maintenance repair and overhaul services, fuel supply,
ground handling and systems for selling tickets including online systems. Tretheway
and Markhvida (2014) provide the following graphic of the aviation value chain which
distinguishes clearly between airlines and their input suppliers.

Figure 5.1 Aviation Value Chain

Source: Figure 1 in Tretheway and Markhvida (2014)

We try to map out the value chain of the air transport based on Indonesia’s Input Output
(IO) Table (see Figure 5.1).

Although, the proportions differ across time, the input elements of the airline business
are the same: fuel, aircraft and maintenance, infrastructure and other services related to
air transport. Based on the 2010 IO table, the largest input is e fuel, about 44.5 percent,
followed by aircraft and maintenance (13.8 percent), services allied to air transport, i.e.,
ground handling (5.3 percent), food and beverage (5.3 percent), rental and business
services (5.9 percent), telecommunication (2.6 percent), insurance (1.6 percent), trade
(1.8 percent) and other services (7.9 percent). We compare IO Tables of 2010 to 2005
and 1995 Tables. Based on the 2005 IO Table, fuel was about 30 percent of total input
of the sectors listed (see Appendix 1 for a complete comparison).
12 Indonesia: Structural Reform in Air Transport Service

We also try to map the main users of the sector based on the IO Table. Figure 5.2 shows
that the largest users of air transport services are general government services (28.1
percent), followed by trade services (13.9 percent), air transport itself (6.2 percent),
services allied to transport (5.9 percent), professional services (4.1 percent), oil and
mining sector (6.9 percent), rental services and business support system services (2.8
percent) and other services (27.7 percent). We also compare the IO tables of 2010 to
2005 and the 1995 IO Table. Based on the 2005 IO Table, the largest sector remains
the government sector (23.6 percent) followed by the trade sector (17.3 percent), air
transport itself (11.8 percent), and business services (9.9 percent). Appendix 1 contains
a complete comparison.

Figure 5.2 Air Transport Value Chain

Source. Authors’ calculation based on Indonesia’s IO Table

 6. AIR TRANSPORT AND GLOBAL VALUE CHAIN

Although sea transport remain to be the main important modes of transport for raw
material and intermediate inputs, air transport shows an increasing role in the global
value chain. Live animals and perishable inputs from agriculture and fishery sectors for
restaurants worldwide are often transported by air. Air cargo also holds an important
niche in the transport of lightweight, high-value commodities (Popescu, et al, 2010).

In Indonesia, international air cargo, loaded and unloaded, increased from about
117,000t in 1990 to 389,000t in 2014. The average growth for the period of 1990-2014
was about 6 percent per annum. Figure 6.1 shows that the volume of loaded cargo is
always higher than unloaded cargo except for 2012. Apart from fresh products,
international cargo also delivers parts and components.

In Indonesia, there are 4 cargo airlines, with 3 scheduled cargo airlines (PT Cardig Air,
PT TRI-MG Intra Asia Airlines, PT MY INDO Airlines) and 1 non-scheduled cargo
airlines (PT Asialink). See the Appendix for details of cargo airlines. We describe the
activities of each airline to provide a picture of the areas of specialisation of air transport
in the cargo sector.

 Cardigair delivers fresh tuna, aircraft engines, live animals, and car parts. It
serves Jakarta –Singapore, Jakarta – Balik Papan, Balikpapan –Singapore and
Wamena Jayapura regularly but also serves other routes on a charter basis,
including Hongkong and Thailand.

 PT TRI-MG Intra Asia Airlines operates cargo aircraft on scheduled routes for
contract charters and non-scheduled routes for ad-hoc charters. The company
serves the oil and gas industry, computer, electronic and spare parts businesses.
It serves Jakarta - Singapore (JKT - SIN), Balikpapan - Singapore (BPN – SIN,
Jakarta - Balikpapan (JKT - BPN).

 PT MY Indo Airlines delivers airmail, dangerous goods, live animals,

perishable cargo (vegetables, seafood, chilled meat, flowers and spare parts),
artwork cargo, and heavy weight cargo (including extremely large, heavy or
non-standard shipments, such as pipes, generators, pumps and other drilling or
off-shore equipment). PT MY Indo Airlines serves Halim Perdanakusuma-
Balikpapan, Halim Perdanakusuma-Singapore and Balikpapan-Singapore.

 PT Asialink Cargo Express3 delivers fresh products (fruits and vegetables),

marine products (crab, salmon, shrimp, and lobster), dangerous goods,
automotive products (pistons, gaskets, bulbs, brake pads), electronics, and oil
gas.

3
http://www.asialinkcargo.co.id/
14 Indonesia: Structural Reform in Air Transport Service

Figure 6.1 Indonesia: International Cargo, 1990-2014

in 000 tons
500
Loading Unloading Total
400

300

200

100

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source. Indonesia Statistics (BPS)

Grosso and Shepherd (2011) examine the response of cargo traffic to changes in
regulatory regimes. The find that air transport matters more for some sectors than
others. In particular, they find that liberalisation of air transport regulation is associated
with larger effects on cargo volumes of time sensitive products and of parts and
components. They conclude that ‘economies seeking greater integration in
international production networks could greatly benefit from a more liberal aviation
policy regime’. (p. 203).
 7. THE IMPACT OF DEREGULATION

A significant growth of the air transport sector follows the series of deregulations on
the sector. We will discuss each element in the Structure Conduct Performance
framework. Several aspects are considered, including output and price.

7.1 MARKET STRUCTURE

The number of airlines increased significantly following the reopening up of the sector
for new entrance in 2001. Before entry was eased, there were only six scheduled airlines
in Indonesia.4 The state-owned enterprises, Garuda Indonesia and Merpati Nusantara
dominated the industry. In 1992, both captured about 90 percent of the market. In 1996,
however the share of these two dropped to 68 percent (ADB, 1997). In 1993, the
government temporally closed the industry for new entry. However, the moratorium
was lifted in 2001. As a result a number of new airlines emerged. By 2004, 28 new
airlines were licensed. By this time, Merpati Nusantara and Garuda Indonesia captured
about 38 percent of Indonesia’s air travel market, while the new entrants captured 35
percent of the market (Damuri and Anas, 2005).

In the past ten years, the industry has consolidated. After the euphoria of having a large
number of air transport providers, naturally some of the new entrants closed down,
either due to lack of capacity for managing airlines or financial difficulties. Scheduled
airlines declined to only 17 in 2014 (OECD, 2014) and only 12 this year as in Table
7.1. Adam Air for example, established in 2003, after experiencing a number of fatal
accidents ended up with its license revoked in 2008. Some other airlines also went
bankrupt including Batavia Air, which filed for bankruptcy in 2013. Merpati Nusantara,
the state-owned airline, ceased operation in February 2014.
Table 7.1 Scheduled Airlines, 2016
No. Airlines
1 PT Garuda Indonesia
2 PT Mandala Airlines (AOC REVOKED May , 2015)
3 PT Indonesia AirAsia
4 PT Lion mentari Airlines
5 PT Wings Abadi Airlines
6 PT Sriwijaya Air
7 PT Kal Star Aviation
8 PT Travel Express Aviation
9 PT Citilink Indonesia
10 PT Transnusa Aviation Mandiri
11 PT Batik Air Indonesia
12 PT Asi Pudjiastuti Aviation
13 PT Aviastar Mandiri
14 PT Sky Aviation (Revoke)
Source. Ministry of Transport, accessed March 30, 2016

4
Two states owned enterprises: Garuda Indonesia, Merpati Nusantara. Four private companies: Sempati
Air, Bouraq Indonesia, Mandala Airlines and Dirgantara Air Service.
16 Indonesia: Structural Reform in Air Transport Service

While Garuda was the dominant player in the industry back in 1990s, the largest
domestic carrier in Indonesia now is the Lion Air, with a market share of 42 percent
(Figure 7). Meanwhile, international routes were dominated by Indonesia Air Asia and
Garuda Indonesia with total share of more than 75 percent (Saraswati and Hanaoka,
2013). While Garuda serves international routes from the largest hubs, i.e., Soekarno
Hatta and Denpasar, Indonesia Air Asia serves international routes from smaller
international airports.

Figure 7.1 Market Share, 2012

Domestic Garuda International
Indonesia
3.37% 1.10% 1.43%
2.12% 1.81% Lion Air 3.22% Garuda
3.59% 0% Indonesia
2.64% 2.25% Lion Air
Indonesia
10.25% Air Asia Indonesia Air
22.82% Asia
Sriwijaya Sriwijaya Air
Air
37.03%
Batavia Air*
Batavia
41.59% 40.58%
Air*
Merpati
Merpati Nusantara*
12.20% Nusantara Wings Air
* 10.80%
2.20%
Source. Saraswati & Hanaoka, 2013

7.2 AIR TRAFFIC

Air traffic grew very fast in the past 15 years. During the period of 1990-2014, domestic
passenger departing from any airports in Indonesia increased by 11 percent p.a on
average. Meanwhile, international passengers departing from Indonesia increased by
about 8 percent p.a. In 2014, total domestic passengers (departing and arriving) in any
airports in Indonesia were about 152.5 million, almost 4 times the traffic in 2003 of
only 42.2 million. Total international passengers were about 27 million, more than three
times the quantity in 2003.

Domestic cargo also shows a significant increase, from 370,500t in total for 2003 to
935,500t in 2014. The need for faster inter-city and inter-island transport of perishable
goods is among the reasons for the increase. Similarly, international cargo also
increased, although the increase was not as big as that of domestic cargo. In 2003, the
total international air cargo was only 230,300t which increased to 389,300 ton in 2014.

Figure 7.3 shows the changes in passenger numbers and cargo volumes, alongside key
milestones in the reforms of policy. Passengers and cargo departing from Indonesia’s
airports during the 1990-2014 follow an increasing trend. However, a significant
increase took place after 2002, following the price and entry reforms.
 Chapter 7. The Impact of Deregulation 17

Figure 7.2 Air Traffic (Domestic & International Flights) 1990-2014 (in million person)

Source. Indonesia Statistics (BPS), 2016

The number of routes has also increased, particularly at secondary airports. Figure 7.4
shows that total number of routes for 13 airports increased from 139 in 2001 to 333 in
2014. The significant increase took place in secondary airports, such as Bandung
(BDO). Meanwhile, big airports, particularly in Jakarta (CGK) demonstrate their
operating constraints, since no significant increase in the number of routes was possible.
18 Indonesia: Structural Reform in Air Transport Service

Figure 7.3 Number of Routes in 13 Airports, 2001-2014

Airports Total
80 400 BDO

BTJ
70 350
CGK
60 300
TNJ

50 250 MES

PKU
40 200
PLM
30 150
PNK

20 100 TABI
NG
HLP
10 50
DJB
0 0
2001 2003 2005 2007 2009 2011 2013
Source. Adapted from Setiawan et al, 2016

7.3 AIR FARES

Although, price data is relatively difficult to get, especially for a long timeframe, some
indications are available from earlier studies. The removal of floor price in early 2000
has resulted in a competitive price, in economy class travel in particular. Ministry of
Transport (2005) provides indicator that price had significantly decreased during the
period of 2000-2004 following this change. As shown in Table 7.2, the average price
for all routes in the year 2000-2001 and 2002 were much higher than the price in 2003.
Price continued to drop in 2004.
 Chapter 7. The Impact of Deregulation 19

Table 7.2 Average Airfare for Economy and Middle Class

1996-
2000-2001 2003 2004
No Route 1999 % 2002 (Rp) % % %
(Rp) (Rp) (Rp)
(Rp)
CGK- - - -
1 356,000 1,382,000 288 1,037,250 494,174 396,092
BPN 25 52 20
CGK- - - -
2 189,000 1,059,000 460 791,950 456,791 324,600
BDJ 25 42 29
CGK- - - -
3 256,000 974,000 280 684,750 434,159 348,724
BTH 30 37 20
CGK- - - -
4 251,000 1,138,000 353 733,933 542,420 386,872
DPS 36 26 29
CGK- - -
5 189,000 719,000 280 914,600 27 305,281 245,785
DJB 67 19
CGK- - - -
6 143,000 566,000 296 456,950 270,654 236,080
JOG 19 41 13
CGK- - - -
7 377,000 1,572,000 317 1,085,889 549,487 422,500
UPG 31 49 23
CGK- - - -
8 368,000 1,550,000 321 1,060,350 519,332 436,255
MES 32 51 16
CGK- - - -
9 276,000 1,070,000 288 797,000 364,299 332,447
PDG 26 54 9
CGK- - - -
10 144,000 550,000 282 451,000 292,143 260,704
PLM 18 35 11
CGK- - - -
11 597,000 2,275,000 281 1,250,988 629,029 598,477
MDC 45 50 5
CGK- - - -
12 143,000 544,000 280 453,475 296,611 272,807
PGK 17 35 8
CGK- - - -
14 122,000 465,000 281 377,250 299,799 290,312
SRG 19 21 3
CGK- - - -
15 144,000 591,000 310 443,200 334,338 296,119
SOC 25 25 11
CGK- - - -
16 206,000 804,000 290 602,756 290,504 265,831
SUB 25 52 8
Note: Pink: increase, Green: decrease
Source. Ministry of Transport (2005).
20 Indonesia: Structural Reform in Air Transport Service

8. NEW ISSUES

Since the introduction of the policy reforms outlined a number of new issues have
emerged which we review in this section.

8.1 CONGESTION

Indonesia has 296 airports economy wide, with 26 of them commercially operated by
state owned airport management, Angkasa Pura I and II. Angkasa Pura I is managing
13 airports in the eastern part of Indonesia, while Angkasa Pura II is managing the other
13 airports in the western part of Indonesia.5 The remaining are managed by the unit
under Ministry of Transport, the Air Force or regional government (see Figure 8.1).

Figure 8.1 Total Airport in Indonesia by Operators

Airports total: 296

4% PT. Angkasa Pura I
4%

15% PT. Angkasa Pura II

20% TNI

Ministry of Transport
(Airport Unit)
Regional Government
57%

Source : Indonesia Statistics (BPS)

Congestion has been a feature of the last few years. The Soekano Hatta (Soeta)
International Airport in Jakarta, which has a capacity for 22m passengers,
accommodated 53.8m passengers in 2015 (Jakarta Post, 2016). Several other airports
are also reported to operate beyond their capacity, such as Husein Sastranegara
International Airport in Bandung. This has resulted in delays. To address the issues, AP

5
AP II manages Soekarno Hatta, Halim Perdana Kusuma International Airport, Sultan Mahmud
Badarudin International Airport, Supadio Airport, Kualanamu International Airport, Minangkabau
International Airport, Sultan Syarif Kasim II International Airport, Husein Sastranegara International
Airport, Sultan Iskandar Muda International Airport, Raja Haji Fisabilillah International Airport, Depati
Amir Airport, Sultan Thaha Airport and Silangit Airport. AP I manages Ngurah Rai International
Airport, Juanda International Airport, Sultan Hasanuddin International Airport, Sultan Aji Muhammad
Sulaiman Sepingan International Airport, Frans Kaisiepo Airport, Sam Ratulangi International Airport,
Adisucipto International Airport, Adisumarmo International Airport, Syamsudin Noor International
Airport, Achmad Yani International Airport, Lombok International Airport, Pattimura Airport and El
Tari International Airport
 Chapter 8. New Issues 21

II had increased its runway capacity from 72 per hours to 86 per hour in the second
semester of 2015.6

The state-owned airport management (AP I and AP II) had also started the expansion
of their airports to keep up with the fast growing demand. Major airports currently
either had expanded or undergone massive expansion. Soekarno-Hatta Airport will
soon have a new terminal adjacent to Terminal 3. The new terminal is about 422,804
square meters with a commercial area of 70,000 sq m. It will host around 180 tenants
and will be able to accommodate 15 million passengers in the first phase and 25 million
passengers in the second phase. It will also have at least seven baggage conveyor belts,
206 check-in counters and 24 self check-in and bag drop counters to avoid long lines
(Jakarta Post, 22 April 2016).

Soekarno-Hatta International Airport absorbed Rp10 trillion for the first phase of its
expansion. The expansion was funded partly by the state budget (PMN) and partly by
corporate loans from state banks and internal AP funds. AP II is on progress to expand
Soeta third runway and phase 2 and 3 of the terminals. The next phase of expansion
will be additional runway and further expansion of Terminal 3. Given that Soekarno-
Hatta International Airport accommodated 53.8m passengers last year, the expansion
remains to be too limited. The pressures for Soekarno-Hatta International Airport need
to be addressed.

AP II also built a new terminal building at Husein Sastranegara International Airport in

Bandung. The new terminal is about 17,000 square-meters which can accommodate
about 3 million people per year. The new terminal began operation in April 2016. The
current air traffic to Bandung stood at 10000 passengers per day with 70-80 flights per
day. The old terminal building can accommodate only 500,000 passengers per year.
This airport also shifted some burden for to Husein Sastranegara, as Jakarta and
Bandung are about 170kms apart.

The cost of airport revitalization is not small. Table 8 shows the list of expansion
projects and expansion that had already finished and the estimated cost. With the
growing tourist destinations, there is demand for airport upgrading outside those
airports managed by AP I and AP II.

6
https://m.tempo.co/read/news/2015/06/04/090672027/pergerakan-pesawat-di-bandara-soekarno-hatta-
jadi-86-per-jam
22 Indonesia: Structural Reform in Air Transport Service

Table 8.1 Airport Expansion

Total
Airport Expansion Cost (IDR
Trillions)
Soekarno Hatta Ongoing 4.7
Halim Perdana Kusuma International Airport
PLN Sultan Mahmud Badarudin International Airport Ongoing
Supadio Airport 2015
Kualanamu International Airport 2013
Minangkabau International Airport
Sultan Syarif Kasim II International Airport 2012
Husein Sastranegara International Airport 2016 0.139
Sultan Iskandar Muda International Airport
Raja Haji Fisabilillah International Airport
Depati Amir Airport
Sultan Thaha Airport 2016 0.3
Silangit Airport Ongoing 0.119
Ngurah Rai International Airport 2014 3.1
Juanda International Airport 2014 1.1
Sultan Hasanuddin International Airport
Sultan Aji Muhammad Sulaiman Sepinggan
International Airport 2014 2.1
Frans Kaisiepo Airport
Sam Ratulangi International Airport
Adisucipto International Airport 2015 5.0
Adisumarmo International Airport
Syamsudin Noor International Airport
Achmad Yani International Airport Ongoing 2.0
Lombok International Airport Ongoing 2.3
Pattimura Airport
El Tari International Airport
Source: Angkasa Pura I and Angkasa Pura II

8.2 AIR TRANSPORT SAFETY

Air transport safety is one of the crucial issues related to Indonesia aviation business.
A number of global ratings indicate concern over Indonesia’s air safety monitoring
quality. First, the ICAO USOAP7 indicates Indonesia’s safety rating is below the global
average (http://www.icao.int/safety/Pages/default.aspx). Core areas audited by the
USOAP are: primary aviation legislation and civil aviation regulations; civil aviation
organization; personnel licensing and training; aircraft operations; airworthiness of
aircraft; aircraft accident and incident investigation; air navigation services; and
7
The ICAO USOAP is the safety audit to determine the status of States’ establishment of safety oversight
measures and resources, as well as relevant ICAO Standards and Recommended Practices (SARPs),
associated procedures, guidance material and safety-related practices. The USOAP was expanded in
2005 to cover provisions contained in all safety-related Annexes to the Convention on International Civil
Aviation (Chicago Convention).
mentation Kits (iKITs)
y/Implementation/Pages/iKITs.aspx)
CMA Forum (/safety/CMAForum/Pages/default.aspx)
nce Documents
y/Implementation/Pages/Resources.aspx)

of Action
Chapter 8. New Issues 23
y/scan/Pages/Plans-of- Effective Implementation
aspx)

n Safety Implementation aerodromes and ground aids. The rating is between 0 to 100 percent, with 0 percent
nce Partnership (ASIAP)
y/scan/Pages/Aviation- being "Not Implemented" and 100 percent being "Fully Implemented". Based on 2014
Implementation- audits, the ICAO USOAP for Indonesia was below the global average (Figure 8.2).
nce-Partnership.aspx)

Collaborative Assistance
k (SCAN) Figure 8.2 ICAO USOAP Safety Audit Results 2014: Indonesia
y/scan)

Fund (SAFE)
y/scan/Pages/Safety-
100
SAFE.aspx)
90
Effective Implementation (%)

s and PIRGs 80
y/Implementation/Lists/RASGSPIRGS/AllItems.aspx)
70
APs and RSOOs 60
y/Implementation/Lists/COSCAP_RSOO/AllItems.aspx)
50
cal Cooperation Bureau 40
tariat/TechnicalCooperation/Pages/default.aspx)
30
eneration of Aviation 20
sionals (NGAP)
10
y/ngap)
0
d Measure

S
n

ns

ss

es
ce
io

tio

in

io
ne
tio

om
at

at
ns

i
za

y/iStars/Pages/default.aspx)

rv
i
ra
sl

tig
th
ce

dr
Se
ni
gi

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es

ro
Li
a
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rg

rw

n
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Ai

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ig
y/iStars/Pages/API-Data-

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rN
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e.aspx)

al Performance
Global average Indonesia Ai
oards
y/Pages/Regional-
Source. ICAO

Second, the US Federal Aviation Authority (FAA) also issued its international aviation
safety assessment (IASA) in 2015. Following the ICAO audit, US FAA downgraded
Indonesia to Category 2, which means that Indonesia does not meet the ICAO
standard.8

Third, following the ICAO audit result, the European Union banned all air carriers
certified by the authorities with responsibility for regulatory oversight of Indonesia,
with the exception of Garuda Indonesia, Airfast Indonesia, Ekspres Transportasi
Antarbenua, Indonesia Air Asia, Citilink, Lion Air and Batik Air.9

Straits Times (2015) reported 40 fatal air crashes in Indonesia since 2001 in contrast to
only 6 in Britain over the same period: a passenger on board an Indonesian carrier was
estimated to be 25 times likelier to die in a crash than one in an American airliner.

Related to air safety, other concerns in the aviation business in Indonesia are the quality
of air traffic controller. Tempo (2013) argued that the combination of heavy traffic and
shortage of air traffic controllers at Soeta International Airports put air traveller at risk.
Tempo reported that an air traffic-controlling supervisor at Soeta Airport also has to
handle daily traffic control due to a shortage of human resources. At the time of Sukoi
Superjet 100 demo airplane crashed on Mount Salak in Indonesia in 2012, the Safety
Investigation Committee (KNKT) pointed out three major causes of the crash, which
included the failure of the air traffic control at Soekarno Hatta to provide indication of
the height of Mount Salak.

8
https://www.faa.gov/aircraft/air_cert/airworthiness_certification/
9
http://ec.europa.eu/transport/modes/air/safety/air-ban/doc/list_en.pdf
24 Indonesia: Structural Reform in Air Transport Service

Based on our discussion with air transport stakeholders, the shortage of quality human
resources is the main impediments to meet the ICAO safety standards. The number of
inspectors at the DG Air Transport could not keep up with the growth of the sector.
Stakeholders, however, have been discussing how to fill the gap in the short run. One
of the solutions was to lend some of their experienced pilots as inspectors to the DG’s
safety directorate. The longer run solution requires systematic improvement of the
human resources, recruitment and training.

8.3 FLOOR PRICE VS. SAFETY

Responding to the recent accident of AirAsia flight QZ8501, Indonesia’s government

reintroduced floor price. Ministerial Decree 59/2014 requires air transport providers
who set their tariff less than 40 percent of the upper bound of related services categories
to obtain approval from related Director General. The Director for Air Transport at the
Ministry of Transport argues that the floor price is used to ensure airlines do not lower
safety levels. The concern is that price competition drives airlines for predatory pricing
and neglect safety standards. As the Minister said, ‘="We want the aviation sector to
be healthy, not cheap. If it's cheap, there are many things that might not be done.”10

The argument, however is unconvincing since the ICAO audit referred to earlier was
actually pointing at the weakness at the regulatory side rather than in the airlines. The
government needs to improve its capacity in monitoring airworthiness of airlines,
quality of the airlines crews and controlling air traffic. Ministry for Transport should
also work closely with the Competition Commission to prevent predatory pricing and
ensure airlines comply with safety standard.

Setiawan et al (2016) assessed the impact of the floor price on airfare using difference
in difference on a travel agent’s air ticket prices for the period 2013-2015. They found
that the floor price increased the average ticket price by Rp 75,368 (US$ 6). The authors
argue that the floor price only affects pricing of the low cost carriers. Garuda Chief
Executive Arif Wibowo also said that "in fact, it means that we will not be attacked by
competitors that have predatory pricing. It's still far from Garuda's average price," 11

Tony Fernandez of AirAsia did ask the government to lower the floor price to 30
percent (Jakarta Post, April 25, 2016). The Ministerial decree no. 14/2016 then revised
the floor price back to 30 percent of the ceiling price. But even so, Indonesia has shifted
back towards a 1990s air transport regulatory regime on pricing and licensing.

10
http://www.reuters.com/article/us-indonesia-airplane-regulations-idUSKBN0KH0O620150108
11
See the previous footnote.
 9. ASEAN OPEN SKY POLICY AND INDONESIA’S
PARTICIPATION

ASEAN Open Skies Policy (AOSP) [also known as the ASEAN Single Aviation
Market (ASAM)] is one of the key pillars to support the establishment of the AEC via
facilitating the free, efficient, safe, and secure movement of people and goods within
and potentially beyond ASEAN. There are economic and technical elements of the
ASEAN Single Aviation Market. Economic elements are those of market access,
charters, airline ownership and control, tariffs, commercial activities, competition law
and policy/state aid, consumer protection, airport user charges, dispute resolution, and
dialogue partner engagement. The technical elements include aviation safety, aviation
security, and air traffic management.

The operationalization of ASEAN Open Skies comprises of three agreements: the

ASEAN Multilateral Agreement on the Full Liberalisation of Air Freight Services
(MAFLAFS), the ASEAN Multilateral Agreement on Air Services (MAAS), and the
ASEAN Multilateral Agreement on the Full Liberalisation of Passenger Air Services
(MAFLPAS). Ratification of those three agreements will allow any airlines designated
by an ASEAN Member State to operate both passenger and cargo scheduled services
between its home economy and a point with international airport in another Member
State, and then to a point with international airport of a third Member State, without
limitations on capacity and schedule.

The ratification of the protocols under the three agreements has not been smooth.
Indonesia was among the late signatory members to ratify the agreement. It was only
April 2016 when Indonesia together with Laos signed the agreement (see Appendix 3
for Indonesia’s schedule of ratification of protocols under ASAM agreements).

With ASAM in place, does it not mean that ASEAN carriers are free to fly across
ASEAN sky? Unfortunately not!

ASEAN members limit the access of other ASEAN carriers to several airports within
their jurisdiction. Indonesia, for example, limits access of ASEAN carriers to five
designated airports - Jakarta Soekarno-Hatta (Jakarta), Medan Kuala Namu (North
Sumatra), Surabaya (East Java), Denpasar (Bali), and Makassar (South Sulawesi). Laos
also limits access to Vientiane and Luang Prabang. The Philippines excludes Manila
from AOSP. The secondary limitation to the access is the availability of slot time at the
designated airports. The problem is some of the airports have slot time constraints for
the next 1-2 years, e.g. Soekarno Hatta airports. Although the new terminal building at
Soekarno Hatta is fully operating later this year, the slot time is constrained by
availability of runways. For the longer run perspective, ASAM will benefit travellers
in Indonesia as Indonesia is currently expanding its major airports, including finishing
the third runway of Soekarno Hatta by the end of 2017. But in the meantime, the
application of policy on access to airports is limiting its impact.

Ahsan et al (2015) also argue that restrictions remain on the rights to fly routes that do
not connect to the carrier’s home economy, on the application of the ‘community carrier
principle’ (where ownership can be accumulated in order to access the benefits of the
26 Indonesia: Structural Reform in Air Transport Service

agreements). They also point to forces in favour of further reform. These include that
they call the ‘growing confidence’ of Indonesian carriers (evident in

Indonesia’s policy change noted above), the pressure for open regimes from interests
associated with secondary cities, and the value of a common approach when dealing
with large non-members such as China. Also Tan (2013) argues that some economies
have more liberal arrangements with economies outside ASEAN than they do with their
ASEAN partners: these agreements could provide benchmarks for internal
commitments.
 10. LESSON LEARNED AND POLICY RECOMMENDATION
FOR STRUCTURAL REFORMS

The reform of air transport policy in Indonesia has led to significant changes in prices
and is associated with a rise in passenger numbers. Partly the growth in load is related
to overall growth in the economy but the capacity in the sector has also expanded. This
has been facilitated by changes in licensing including for foreign carriers. Service
quality has increased with more cities being served more often.

The inter-sectoral effects have been important. The growth of the sector has led into
growth in sectors supplying inputs, including energy and manufacturing sectors. The
better performance of the sector has supported the improved performance of other
sectors, including tourism and business services.

Despite these positive experiences, the reform has been unstable, with a more recent
return to the effective imposition of a floor price and tighter rules on licensing. This
experience is in part a response to the growth of the sector itself and the safety
(including congestion) issues with which growth has been associated. IATA has
presented options for the solutions to these issues, and their proposals do not include
economic instruments like price controls or rules on entry. Instead they involve the
adoption of international standards and systems to improve safety and to manage
capacity (in airports and with respect to air traffic control) more efficiently. Instead,
the response has been to slow down the reform process, rather than deal directly with
the source of the problem.

This outcome leads to the following observations on lessons from the Indonesian
experience.

 One is the value of targets and instruments in the selection of policy. The most
efficient instrument is directly related to the policy problem. As just noted, a
recent example is the use of price controls for the purpose of meeting safety
targets. More effective is the direct application of safety policy for the purpose
of targets in that area. The application of an indirect measure has other side
effects, often not anticipated, impedes the process of competition and the design
of options in terms of quality and price, and risks additional costs for consumers
including exporters of other goods and services.

 Another is the importance of policy and capacity in complementary areas, in

this case, airports. Airport capacity including runway landing slots are a more
important constraint on entry than is policy. Awareness of the linkages between
the sector undergoing reform and the rest of the economy is important to
appreciate. The risk is that the benefits of reform are captured instead by input
suppliers, or absorbed in higher costs associated with other services.
28 Indonesia: Structural Reform in Air Transport Service

o Tretheway and Markhvida (2014) argue that other parts of the aviation
value chain can exercise market power. In that case, liberalisation of the
airline activity would lead to competition among airlines, higher traffic
volumes, greater demand for other inputs and a redistribution of rents
along the chain. Indeed, the authors also report IATA data which shows
relatively low returns on capital in airlines compared to other activities
in the last decade.12 This leads to a case for the application of
competition policy (and reform as well where regulation is the source of
the problem) to those other sectors.

 A third observation is the value of international commitments to continue to

drive reform and provide some guidance to the next steps in reform. While slow
to commit to ASEAN arrangements, Indonesia has now been drawn into the
process of regional integration, having built its own confidence through
domestic reform.

12
https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-
value%20chain.pdf
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 APPENDIX

APPENDIX 1. CALCULATING MULTIPLIER AND LINKAGES

Multiplier Analysis

Multipliers are basically contracted from Leontief inverse (matrix). (For detailed
mathematical steps in composing Leontief inverse (matrix), see Miller and Blair (2009)
∆𝑋 = 𝐴𝑋 + ∆𝑌
∆𝑋 = (𝐼 − 𝐴)−1 . 1𝑌 ………… (2)
∆𝑋 = 𝐿. ∆𝑌 ………… (3)
(1)
X = ([Xi] n x 1), the column vector of the total output changes received of endogenous
variables. A = ([ai,j] n x n), is the matrix of technical coefficient, which is obtained by
dividing each component in any of endogenous variables by its column sum value. This
indicates spending on sector i’s output from sector j as inputs of its total expenditure.
Y = ([Yi] n x 1), is the column vector of final demand or exogenous variable changes. L
= ([li,j] n x n) = (𝐼 − 𝐴)−1 is Leontief inverse matrix.

Output multiplier is the initial unit’s worth of sector j output needed to satisfy the
additional final demand (Miller and Blair, 2009). It can be obtained by the column sums
of Leontief inverse matrix. Mathematically, it follows;
𝑛

OMj = ∑ lij
𝑖=1

Linkage Analysis

A key sector in the economy must have strong interdependency with other sectors,
neither with its input-supplier sector or output-demander sectors. The simplest tools to
measure the interdependency among sectors are backward and forward linkage. Sectors
that have high value backward linkage (BL) can be said that they are important to others
production activities. They buy products of other sectors to a significant extent for their
input production. On the other hand, High value of forward linkage (FL) indicates that
output of particular sector is needed by others. Typical of these sectors would have
input production supplier role in the economy. The rule of thumb for backward and
forward linkage is more than 1 (>1) or less than 1 (<1). BL or FL more than 1 means
have strong interdependency with others and vice versa. The construction of backward
and forward linkage follows;
𝑛
∑ lij
𝑖=1
𝐵𝐿𝑗 = 𝑛
1
𝑛 . ∑𝑗=1 lij
𝑛
∑ lij
𝑗=1
𝐹𝐿𝑖 = 𝑛
1
𝑛 . ∑𝑖=1 lij
 Appendix 33

APPENDIX 2.

Table 1. Cargo Airlines

Number of
Number of Number non-
Aircraft
Type Airlines Status scheduled Scheduled Routes Aircraft of scheduled Chartered Flight Goods
Capacity
routes Aircraft routes
(chartered)
Banda Aceh; Medan; Padang;
Pekanbaru; Batam; Palembang;
Semarang; Surabaya;
Yogyakarta; Denpasar;
Jakarta-Singapore; Maximum Balikpapan; Banjarmasin;
general cargo,
Scheduled Jakarta- 18 tons Makassar; Kendari; Manado;
perishable goods,
and Non Balikpapan; Boeing gross Ternate; Ambon; Kupang;
PT Cardig Air Operate 4 3 31 live animals,
Scheduled Balikpapan- 737-300F payload on Islamabad (Pakistan);
dangerous goods
- Cargo Singapore; 8 to 9 Hongkong; U-Tapao–Pattaya
and aircraft engine.
Wamena-Jayapura pallets (Thailand); Singapore; Dili
(Timor Leste); Darwin,
Christmas Island (Australia);
Port Moresby (Papua New
Guinea)
Jakarta-Makassar; Jakarta-
Boeing
Ambon; Jakarta-Luwuk;
737-300F;
Jakarta-Manado; Jakarta-Berau;
Jakarta- Beechjet
Scheduled Jakarta-Sorong; Jakarta-Timika;
Balikpapan; 400XP and also provide
and Non PT TRI-MG Intra Jakarta-Kualanamu; Jakarta-
Operate 3 Singapore-Jakarta; Super King 11 16 tons 15 medical evacuation
Scheduled Asia Airlines Batam; Jakarta-Kupang;
Singapore- Air B200C services (Medivac)
- Cargo Jakarta-Surabaya; Singapore-
Balikpapan (for
Kualanamu; Singapore-Batam;
medivac
Singapore-Surabaya; Surabaya-
flights), etc
Kuala Lumpur
34 Indonesia: Structural Reform in Air Transport Service

Number of
Number of Number non-
Aircraft
Type Airlines Status scheduled Scheduled Routes Aircraft of scheduled Chartered Flight Goods
Capacity
routes Aircraft routes
(chartered)
airmail, dangerous
goods, live animals,
vegetables, seafood,
chilled meat or
flowers,
pharmaceutical
goods, valuable
goods (vehicle;
gold, platinum
group metals; legal
banknotes,
travellers’cheques,
Boeing securities, share
Jakarta- 737-300 F coupons, and
Scheduled Boeing
Balikpapan; (16,3 tons) Jakarta-Balikpapan; Jakarta- stamps; precious
and Non PT MY INDO 737-300 F
Operate 3 Jakarta-Singapore; 3 and 3 Singapore; Balikpapan- stones, including
Scheduled Airlines and Boeing
Balikpapan- Boeing Singapore diamonds rubies,
- Cargo 737-200 F
Singapore 737-200 F emerald, sapphires,
(12 tons) opals and pearls;
jewellery, watches
and articles made of
silver, gold and
platinum), shoes,
textiles, and spare
parts, among others,
artworks, antiques
and musical
instruments, pipes,
generators, pumps
and other drilling or
off-shore equipment
Batam-Pangkal Pinang; Batam-
fresh product,
F-27 Palembang; Batam-Jambi;
Non marine product,
PT Asialink Friendship- Batam-Padang; Batam-
Scheduled Operate - - 4 7,06 tons 16 dangerous product,
Cargo Express 500 (3) and Pekanbaru; Batam-Medan;
- Cargo automotive
Fokker 50- Pangkal Pinang-Jakarta;
products,
Pontianak-Balikpapan; Batam-
 Appendix 35

Number of
Number of Number non-
Aircraft
Type Airlines Status scheduled Scheduled Routes Aircraft of scheduled Chartered Flight Goods
Capacity
routes Aircraft routes
(chartered)
Singapore; Batam-Kuala electronics, oil &
Lumpur; Batam-Penang; gas,
Batam-Matak; Batam-Pulau
Natuna Besar; Batam-Kuching;
Batam-Pontianak; Kuching-
Bandar Seri Begawan
36 Indonesia: Structural Reform in Air Transport Service

APPENDIX 3.

Table 1. ASEAN Transport Instruments and Status of Ratification – Air Transport

Indonesia:
Instruments
Date of Ratification
ASEAN Multilateral Agreement on the Full Liberalisation of Air
28 August 2015
Freight Services (MAFLAFS)
Unlimited Third, Fourth and Fifth
Protocol 1 Freedom Traffic Rights among Designated 28 August 2015
Points in ASEAN
Unlimited Third, Fourth and Fifth
Protocol 2 Freedom Traffic Rights among All points 28 August 2015
with International Airports in ASEAN
24 November 2011
ASEAN Multilateral Agreement on Air Services
Unlimited Third and Fourth Freedom
Protocol 1 Traffic Rights within the ASEAN Sub- 24 November 2011
Region
Unlimited Fifth Freedom Traffic Rights
Protocol 2 24 November 2011
within the ASEAN Sub-Region
Unlimited Third and Fourth Freedom
Protocol 3 Traffic Rights between the ASEAN Sub- 27 November 2012
Region
Unlimited Fifth Freedom Traffic Rights
Protocol 4 27 November 2012
between the ASEAN Sub-Region
Unlimited Third and Fourth Freedom
Protocol 5 Traffic Rights between the ASEAN 30 May 2014
Capital Cities
Unlimited Fifth Freedom Traffic Rights
Protocol 6 30 May 2014
between the ASEAN Capital Cities
ASEAN Multilateral Agreement on the Full Liberalisation of
April 2016
Passenger Air Services (MAFLPAS)
Unlimited third and fourth freedom traffic
Protocol 1 April 2016
rights between any ASEAN cities
Unlimited fifth freedom traffic rights
Protocol 2 April 2016
between any ASEAN cities
Air Transport Agreement between the Government of the
Member States of the Association of Southeast Asian Nations and April 2016
the Government of the People’s Republic of China
April 2016
Protocol 1 April 2016
April 2016
Protocol 2 April 2016

Source. Ratification Status Air Transport Agreements (http://www.asean.org/storage/images/2015/December/Air-Transport-

Section/Ratification%20status%20Air%20Transport%20Agreements-151208.pdf)
 Appendix 37

APPENDIX 4.

Table 1. Input Output of Air Transport

1995 2005 2010

Input Output Input Output Input Output
No Sectors Share Sectors Share Sectors Share Sectors Share Sectors Share Sectors Share
Petroleum Petroleum Petroleum General
1 Refineries 17.3% Air Transport 20.5% Refineries 30.8% General 23.64% 44.5% 28.1%
Refineries Products Government
Products Products Government
Aircraft And Its General Aircraft And Its Aircraft And Its Trade except car
2 17.1% 16.1% 16.6% 17.29% 13.8% 13.9%
Repair Government Repair Trade Service Repair and motorcycles
Services Allied Services Allied Services Allied To
3 16.6% Trade 10.6% 14.5% 11.76% 11.8% Air Transport 6.2%
To Trans-Port To Transport Air Transport Trans-Port
Rental Services and
Business Business Services Allied To
4 14.6% 8.3% Air Transport 6.4% Business 9.91% Business Support 5.9% 5.9%
Services Services Trans-Port
Service Services
Banking And
Professional,
Other Finan- Food and beverages
5 Air Transport 12.6% 5.5% 6.3% 2.54% 5.3% Scientific and 4.1%
Cial Restaurant services
Technical Services
Intermediaries Services Bank
Restaurant (Food Business Telecommunication
6 5.4% Crude Oil 2.2% 6.3% 2.10% 2.6% Crude Oil 3.8%
and beverages) Services Coal Service
Services Allied Service allied
7 Insurance 2.8% 1.4% 4.6% 1.59% Air Transport 2.5% coal and lignite 3.1%
To Transport Trade Services to transport
Rental Services
8 Trade 2.3% Coal 3.1% Cigarette Tire 2.2% and Business 2.8%
1.3% Tire 1.22% Support Services
Communication Insurance and Trade except car
9 Cigarette 2.6% Crude Oil 0.12% 1.8% Cigarette 2.4%
Service 1.37% 0.9% pension fund and motorcycles
Professional, Professional,
Scientific and Scientific and Financial Banking
10 Tire 0.0% 1.04% 0.00% Insurance Service 1.6% 2.0%
Technical Communication Technical Services
0% Services Service Services
Other Sectors 10.0% Other Sectors 33.1% Other Sectors 7.9% Other Sectors 29.8% Other Sectors 7.9% Other Sectors 27.7%
Source. BPS, Authors calculation
38 Indonesia: Structural Reform in Air Transport Service

APPENDIX 5.

Table 1. Indonesia Airport Code

Code City Airport

BDO Bandung Husein Sastranegara Airport
BTJ Banda Aceh Sultan Iskandar Muda Airport
CGK Jakarta Soekarno Hatta Airport
TNJ Tanjung Pinang Raja Haji Fisabilillah Airport
KNO Medan Kualanamu/Medan Airport
PKU Pekanbaru Sultan Syarif Kasim II Airport
PLM Palembang Sultan Mahmud Badaruddin II Airport
PNK Pontianak Supadio Airport
TABING Padang Padang/Tabing Airport
HLP Jakarta Halim Perdana Kusuma Airport
DBJ Jambi Sultan Thaha Airport
PGK Pangkal Pinang Depati Amir Airport
DTB Siborong-borong Silangit Airport
Source. Indonesia Directorate General of Air Transportation