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AirAsia: Battling for the Indonesian Market
To dominate Southeast Asia, Indonesia AirAsia — headquartered in Malaysia — needs a strong foothold in the region's biggest market, Indonesia. It is having a tough time there, facing hardened competitors, jammed airports and powerful travel agents.
It may get tougher. Deep-pocketed rivals are sniffing around too. Qantas Airways has been weighing its options with a view to investing in an Indonesian carrier, which would benefit its low-cost subsidiary, Jetstar Asia.
Qantas has talked to a number of airlines, including low-cost Indonesian carrier AdamAir. Singapore government investment fund Temasek, which has a stake in Singapore’s Tiger Airways, is also understood to have met with AdamAir and Lion Airlines, Indonesia’s largest private carrier.
Indonesia’s main attraction for air carriers is that it boasts Southeast Asia’s largest population, marooned on thousands of islands. Carriers that do well in Indonesia will have the profits to expand elsewhere in the region.
Of Indonesia’s 220 million people, it is estimated that between five and seven million only travel within the 3,000 mile-wide archipelago by airliner. In 2005, they took about 29 million trips. That is likely to grow by 20 percent this year, as it has every year since deregulation became a reality in 2000. At this rate, the market will equal 60 million trips by 2010 if the economy holds up.
It may grow even faster if more people realise they can afford to fly. Many Indonesians simply do not believe the prices advertised by airlines. “Most people earning 2,000,000 rupiah (US$215) a month are probably not flying yet, but they should be able to afford to fly once a year. It is about making them realise they can afford to fly. Mostly now it is people at manager level and the middle class,” said Sendjaja Widjaja, Indonesia AirAsia’s president director.
Widjaja claims to have increased market share to 3 percent since starting operations in Dec. 2004 after entering a joint venture to take over Air Wagon International (Awair), a defunct carrier that still held an air operator’s certificate. A year later, after hurdling legal and regulatory challenges from some other domestic carriers, Awair became Indonesia AirAsia.
Competitors, particularly Lion, AdamAir, Batavia, Srivijaya and the national carrier, Garuda Indonesia, will not surrender market share or passengers easily. They have been battling fiercely and have the know-how to win in the Indonesian market.
“A big challenge is to increase our market share to 5 percent this year. In order to do that we cannot be passive. We have to build our reputation by putting a lot of money into advertising. We are spending 7 to 10 percent of our budget on advertising,” said Widjaja, who has been friends with AirAsia founder, Tony Fernandes, since their days at Warner Music.
Part of that increase in market share might come easily at the expense of the dozen or so barnstormer airlines that pinch crumbs from the big boys. But taking market share from the likes of Lion and AdamAir will prove that Indonesia AirAsia can compete in a really tough market. Malaysia was easy. Thailand was not so difficult. However, in Indonesia it is a no-holds-barred, 'street-fight' competitive environment.
“We should not spread our wings too wide, because the competition is very keen [in Indonesia]. If you only add one flight on a route, you could be dead meat because other airlines can dump seats and cause a lot of damage,” said Widjaja.
AirAsia has a fighting chance. It enters the arena with plenty of experience from Malaysia and Thailand, plus that of investors and advisers from Europe, including Conor McCarthy, the brains behind Ryanair.
Picking the right routes is another means to add passengers and expand the market. Few airlines comprehensively cover the entire country, which means some routes are being serviced by small carriers which AirAsia should easily beat.
“There are so many routes we have not explored yet. We have not even started the eastern part of Indonesia. There is still a big opportunity there,” said Widjaja.
To support the expansion, AirAsia is considering hubs — in addition to Jakarta — in Solo, Surabaya, Bali, Sumatra and Kalimantan. “If we have hubs in Kalimantan and Sumatra we can go up to China. There is a huge demand for flights to China — people are not only going to see ancestral lands and history, but also for tourism and medication,” said Widjaja.
Indonesia AirAsia serves Padang, Medan, Kuala Lumpur, Batam, Surabaya, Denpasar, and Balikpapan from Jakarta. Medan-Penang and Kuala Lumpur-Surabaya were added in March with plans for Penang, Solo and Pekanbaru. It intends to operate 64 flights daily by December, up from 32 last January.
Singapore services are in limbo after the airline's permit was suspended by Singaporean authorities. AirAsia indicated that it is being used as a pawn in a dispute between Indonesia and Singapore over air traffic rights.
Indonesia AirAsia operates six B737-300 airplanes. Around 15 aircraft should bear the bright red livery by the end of 2007, providing 130 flights daily. In 2008, the fleet will switch to Airbus A320s, of which parent, AirAsia, has ordered 60 plus 40 on option. Garuda holds the maintenance contract.
Finding flight crews for those aircraft is not a problem yet, although that may change. Widjaja said NAS, a Saudi Arabian outfit, and Malaysia Airlines are recruiting in Indonesia with attractive packages.
As in Malaysia and Thailand, Indonesia AirAsia is aiming for a 25-minute turnaround. That is not always possible — one flight in five departs late. “There are problems regarding traffic, missing passengers, and late fuelling by Pertamina. Problems on the aircraft also cause delays,” said Widjaja.
“Every week we have a meeting of all departments related to on-time performance to discuss what is happening and improve it. The captains play a part, the flight crew plays a part, the ground crew plays a part, and the handling agent, a third party, also plays a part,” he added.
Delays add costs. As do travel agents. Unlike Malaysia and Thailand, agents remain kings of the market in Indonesia. “Eighty percent of the market now uses travel agents. By adapting our system to link up with Galileo (the global travel distribution system), agents will be able to access our system. The costs will be passed back to the passengers in the ticket price,” said Widjaja. This is part of an arrangement in which Galileo, distributes information for AirAsia globally via its Flight Integrator platform.
Widjaja claimed only one in 10 tickets Indonesia AirAsia sells now is through an agent. Online and telesales account for 70 percent of AirAsia ticket sales. Agents survive because most people who fly are wealthy, and are accustomed to the service that agents provide. Some routes are in the grip of grey market syndicates that provide door-to-door service for passengers.
“They will deliver tickets to your house. They will help you check in at the counter. They treat people like valued customers. With a lot of airlines, they have more flexibility in finding flights to match people’s schedules. If you want to go to Surabaya, there are 52 flights,” said Widjaja.
Agents are not the only problem. Obtaining payment is also a big headache. Most South Asians do not have credit or debit cards. However, unlike in Malaysia or Thailand, paying through ATMs is not convenient. There are also no widespread modern convenience store chains like 7-Eleven that can handle bills.
“It is different because of the infrastructure. We are looking into payment through banks like people do with telephone bills. People in the countryside, believe it or not, still keep their money under the mattress,” said Widjaja.
Reaching those people is essential to increasing the market for airline flights. Without agents and their commissions, that may prove to be a tough task. In some towns it even makes sense to open offices, although Widjaja played down the costs. “We are going to open sales offices in small towns like Padang, far from the airport. It does increase costs, but compared to the potential loss of revenue it is not that much,” he said.
Despite the delays, additional offices and agents’ bills, Widjaja reported a 70 percent load factor, exceeding breakeven by 5 percent. “At the moment we expect a yield of between 5 – 7 percent. Average fares have been going up along with load factor,” he said.
However, balance sheets still match the color of AirAsia’s red livery. In February, the AirAsia Group revealed that Indonesia AirAsia lost 2.1 million ringgit (US$0.56 million) for the last three months of 2005. That was an improvement, though, on the three million it lost in the previous quarter.
Success is not coming easily for in Indonesia for AirAsia, and becoming a major player, as it has done in Malaysia and Thailand, may prove elusive. But if the airline can turn a profit while holding a reasonable piece of the market, it may have the foundation it needs to eventually become dominant in the Southeast Asian market.