Indonesia AirAsia

Business Summary

In 2012, AirAsia was planning to take over Batavia Air, an ailing (debt ridden) Indonesian airline that ceized operations due to bankruptcy in 2013. The take over met resistance in Indonesia's House of Representatives (DPR) which pointed to trade laws that disallow majority ownership by a foreign company. Therefore, Air Asia wanted to purchase a 49 percent stake, while its local unit Indonesia AirAsia would purchase the remaining 51 percent. However, in the end Air Asia decided not to purchase Batavia Air and instead use the money to invest in a pilot training center in Indonesia.

As of December 2012, Indonesia AirAsia had a total fleetsize of 34 airplanes, with an average fleet age of 22.6 years. The AirAsia Group stated to continue injecting USD $500 million per year into its Indonesian unit in the years ahead. In 2013, ten more airplanes are expected to be brought to Indonesia, and another eight in the following year.

Overview Future Outlook of the Indonesian Aviation Business

The aviation industry in the Asia-Pacific region has shown robust growth in recent years. This region is one of the world's fastest growing regions regarding air travel. In the next 20 years, an average annual seven percent growth of air traffic is expected. Indonesia, the current engine of economic growth in Southeast Asia and one of the largest economies in the Asia-Pacific, contains a burgeoning middle class that is increasingly using airplanes for domestic and international transport. Being the world's largest archipelago (containing thousands of islands), air travel is a logical option for fast travel across the country. Moreover, Indonesia's investment grade status makes it cheaper for domestic companies to finance expansion.

	2010	2011	2012
Airline Passengers Indonesia	58.3	66.0	72.5
- Domestic (in million)	51.7	58.8	63.6
- Foreign (in million)	6.6	7.2	8.9

^{Source: Ministry of Transportation}

Moreover, a political development will provide new opportunities in Southeast Asia's aviation sector from 2015 onwards. The establishment of the ASEAN Economic Community, which aims for the member countries to become a more cohesive political and economic unity, stipulates the liberalization of air travel between its member countries starting from 2015. As other ASEAN countries contain competitive airline companies, such as Malaysia's AirAsia and Singapore Airlines, it will be vital for Indonesian airlines to be fully prepared to meet this competition.

Matters that are frustrating efficiency of Indonesia's aviation business are shortages of human resources (for example pilots), inadequate air traffic management as well as lacking facilitating infrastructure for air travel. The latter includes the lack of appropriate sized airports (including runways) and tollways/railway tracks to and from airports.

Another stumbling block is that tough competition has seriously reduced profit margins for the airlines, while capital investments remain high. In combination with poor management, this has taken a few victims in recent years: Mandala Airlines (a takeover by private equity firm Saratoga Capital and Tiger Airways eventually saved the company), Pacific Royale, and Batavia Air.

Top Ten Largest Indonesian Airlines by Air Passengers in 2012:

	Domestic     Passengers	International      Passengers
Lion Air	23.94	1.24
Garuda Indonesia	14.07	3.18
Sriwijaya Air	8.10	0.18
Batavia Air	6.02	0.41
AirAsia	1.72	3.19
Wings Air	2.09	0.09
Merpati	2.12	0.06
Citilink	1.44	-
Trigana Air	0.70	-
Kalstar Aviation	0.40	0.01

^{in millions
all airlines in the table above - except for Garuda Indonesia and Indonesia AirAsia - are banned from flying to the Eurozone due to safety concerns
Source: Investor Daily}