SINGAPORE/JAKARTA Feb 7 Indonesia's economic
boom should be a bonanza for airlines clamouring for a slice of
the world's fourth-most populous country. But the bankruptcy of
its No. 4 airline, Batavia Air, shows how smaller operators are
finding it hard to survive.
Batavia became the second budget carrier to run into debt
problems in Indonesia in the past two years - a victim of the
extremely tight operating margins that exist in what is a
And more are likely to go bust.
Transportation ministry data shows there are 22 active local
commercial airlines, not including cargo and charter airlines.
In one of the world's fastest growing but most competitive
aviation markets, Lion Air, Malaysia's AirAsia Bhd,
flag carrier PT Garuda Indonesia, and PT Mandala
Airlines, part-owned by Tiger Airways Ltd, are all
But smaller operators such as 11-year-old, loss-making
Batavia, a nascent international carrier that was declared
bankrupt by a court last week after struggling to repay its
debts, are feeling the strain.
The low-cost carriers are being forced into selling tickets
at a price far below break-even.
"Competition has intensified and the weak will be weeded
out," said Shukor Yusof, Singapore-based aviation analyst at
Standard & Poor's Capital IQ division. "Smaller players will
find it increasingly tough to stay solvent."
Yet, Indonesia presents clear opportunities: by 2030, a
further 90 million people will have entered its consumer class,
more than any other country except China and India, according to
research by consultants McKinsey & Co.
Lion Air controls a little less than half of the market,
followed by Garuda with about a quarter, Sriwijaya Air with
nearly 12 percent and Merpati Nusantara 3 percent.
However, smaller airlines lack the huge cash flow required
to sustain loss-making fares, stump up money to acquire coveted
landing slots and fund new aircraft.
"The market is very fragmented and highly competitive in
Indonesia, so you can also say that if there is one less
carrier, that is actually healthy for the industry," said
Brendan Sobie, the Singapore-based chief analyst at the Centre
for Asia Pacific Aviation, an industry consultancy.
"Just because one of the smaller airlines goes bankrupt, it
doesn't mean that there's not going to be growth."
COMPETITION IS JUST TOO TOUGH
Both Lion Air and AirAsia have placed record plane orders
worth billions of dollars with Boeing Co and Airbus
over the last two years.
On the surface, Batavia was full of promise, operating 34
planes in a country with a booming economy and 240 million
people spread over 17,000 islands. In July, Southeast Asia's top
budget carrier, AirAsia, announced plans to buy Batavia for $80
But by October, AirAsia pulled out, citing risks to the
What went wrong?
"The main problem for us is that the competition is too
tough," said Sukirno Sukarna, the former commercial director at
Batavia. "Our fleets were old, so we can't really sell our
tickets at the top-end price limit set by the government while
other airlines have newer planes and set the higher prices."
Its books revealed an airline under enormous stress.
Although its load factor, the proportion of seats occupied by
paying passengers, was between 70 and 80 percent, near the
industry average, it was unable to cover costs and sold tickets
at prices far below break-even, Sukarna said.
On its busy three-hour route from Jakarta to Ambon in
eastern Indonesia, Batavia needed to sell tickets for at least
1.5 million rupiah ($155) each to turn a profit. But facing
cut-throat rivals, tickets sold for under 1 million rupiah
Losses piled up, reaching 310 billion rupiah ($32 million)
on revenue of 4.2 trillion rupiah ($434 million) last year,
Sukarna added. Total debts swelled to 1.2 trillion rupiah ($124
million), according to a bankruptcy lawyer who handled its
assets and declined to be identified by name.
"This (Batavia's bankruptcy) indicates how tough the market
is now, but the growth is there," Arif Wibowo, chief executive
of Garuda's low-cost carrier Citilink said on the sidelines of
an industry event in Singapore. "The growth is always followed
by fierce competition."
Batavia, which captured 11 percent of Indonesia's total
market in 2011, mainly served local routes with some
international destinations including Guangzhou in China and
Mandala suspended flights in early 2011 as it struggled with
debt. It was taken over by private equity firm Saratoga Capital
and Tiger Airways and is flying again.
"This current environment basically allows bigger airlines
to get bigger, while smaller airlines will go bust," said Toto
Nursatyo, chief commercial officer at Sriwijaya Air. "Those who
have bigger capital and bigger market share will thrive while
those who just come in and try their luck will struggle."