Indonesia: Structural Reform in Air Transport Service
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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 Tel: (65) 6891-9600 Fax: (65) 6891-9690 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 http://creativecommons.org/licenses/by-nc-sa/3.0/sg/. 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