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Last year, Indonesia’s aviation sector bucked international trends and came up trumps. While carriers the world over suffered heavy losses as travel demand slumped, local airlines continued to gain altitude, navigating their way out of the global turbulence.

PT Garuda Indonesia, the nation’s flagship, posted a healthy $109 million profit in 2009, its best in years. Garuda’s result came on the back of a local market that expanded an estimated 20 percent against a worldwide contraction. With penetration levels still low, total passenger numbers are predicted to grow another 15 percent this year.

Congratulations are in order. A little more than 18 months ago, a spate of air accidents in Indonesia put further growth in the sector at risk. Since that time, the government has made serious strides to increase safety and restore confidence in the sector. Garuda has also restructured all of its historic debt and will soon be ready to attract new investment in an initial public offering.

Such positive change is vital for the local aviation sector, because the already robust competition in Indonesia is looking set to get even tougher.

New competition is likely to come from regional budget carriers, which are switching their focus to developing markets. Recent studies indicate that the stellar growth budget airlines once experienced has been permanently curtailed by the global recession. With the good old days unlikely to return, these airlines are shifting their attention to more promising emerging markets.

They will also be positioning themselves for a deregulated future. The 2015 Asean Open Skies Agreement will open up hundreds of new routes to competition. While this means greater competition for such carriers as Garuda and its rival PT Lion Mentari Airlines, it also provides them with opportunities to expand in new markets.

But to survive and prosper in a deregulated environment, carriers will likely have to deal with increased costs. Taxes on airlines are likely to rise as governments around the world make airlines pay for carbon emissions. Burning one ton of jet fuel produces 3.1 tons of carbon dioxide, and European nations are already charging airlines for their CO2 emissions. Others are set to follow. These charges will be levied as the price of aviation fuel continues to track upward. Avgas has already increased 80 percent from lows last March, and is expected to rise further as the world’s economy continues to recover.

To cope with a more competitive, higher-cost future, local airlines will have to find ways to reduce costs that don’t alienate passengers or, most important, risk their safety. And solutions do exist that are safe, green and cost-effective.

Results from an ongoing study by the US Federal Aviation Administration and the European air-traffic organization SESAR show that savings can be made if improvements are made to how pilots communicate with the ground.

According to the study, by more carefully planning flight paths and improving communication between carriers and airports, airlines can reduce flight times and cut total fuel consumption by up 2 percent. This doesn’t sound like much, but it can represent significant savings to airlines operating on tight margins.

One way to do this is by improving flight-management systems. Despite the myriad advances in aviation technology, the way pilots and control towers communicate has changed relatively little in the past two decades. Pilots still use many separate devices and processes to plan their flights and communicate with the ground, rather than one integrated system.

Newer flight-management systems combine all the important information into one screen and use satellite technology to send flight data to control towers. They are already being installed by some carriers on long-haul routes and they can also be used effectively on short-haul ones.

These systems are often as little as half the price of the older data-link communications devices they replace.

Another vital way to decrease costs is by improving navigation infrastructure on the ground. Older technology gives less accurate information to pilots, making navigation errors more likely and increasingly the frequency of cost overruns. When equipment is faulty it can also put passenger safety in danger.

Such modernization is especially important if Indonesia wants to compete with other countries in the region, which are also improving their airports. New airports must continue to be built and older ones should be extended or revamped. A 2008 law allows private-sector management of airports in the country, and the government should make the most of this legislation.

A deregulated future does imply more competition, but it is also a window for such carriers as Garuda and Lion Air to spread their wings into lucrative new markets. We have already seen the positive effects of such deregulation in the budget sector. More Indonesians fly now than ever before, and this increased mobility has had multiple social and economic benefits. Such increased connectedness is vital to a sprawling archipelago nation such as ours. To succeed, all airlines have to do is fly greener and smarter.

In short, deregulation should be seen as an opportunity, and not a threat. Garuda is well on track to become a more competitive flag carrier, but further reforms on the ground are necessary.

 

Ricky Budhrani is director of The Practice Consultants and heads its Investment and Asset Management Group.