Part one: The evolution of Indonesia’s commercial airline industry
Commercial flights were first established in Indonesia, then known as the Dutch East Indies, during the colonial era in the early twentieth century. On the first day of October 1924 KLM’s first intercontinental flight took off, connecting Amsterdam to Jakarta (then known as Batavia), using the Fokker F-VII aircraft. Later, from September 1929, KLM (Royal Dutch Airlines) commenced regular services between the two cities. This flight route was one of the longest in the world until the outbreak of the Second World War.
To cover domestic routes NILM, or Dutch Indies Airways, was established by KLM on 16 July 1928 and a few months later changed to KNILM with the addition of the koninklijk (royal) title. The company’s inaugural flights started at Halim Perdanakusuma Airport in Jakarta on 1 November 1928 flying to Bandung and to Semarang. Gradually, it expanded its services to other cities outside Java, such as Palembang and Medan in Sumatra, Denpasar in Bali, and Balikpapan and Tarakan in Kalimantan. It created a flight to Ambon in the eastern part of the Dutch East Indies immediately before the Pacific War broke out. KNILM was unable to operate in the Dutch East Indies during the Japanese occupation and was then completely dissolved and its fleet transferred to KLM Interinsulair Bedrijf (KLM-IIB) in August 1947.
After the Republic of Indonesia eventually secured full recognition of its independence from the Netherlands at the Round Table Conference in late 1949, the aviation business was officially reopened. According to the Garuda Indonesia website, however, the first Indonesian commercial flight was actually by the Indonesian Air Force (then AURI, today TNI-AU) in January 1949, who rented out planes branded ‘Indonesian Airways’ to the government of Burma. As a result of the 1949 conference, this practice ended and former domestic cabin crews and the planes themselves returned to service.
The conference had also required the Netherlands to hand over Dutch East Indies resources and wealth to Indonesia, including the KLM-IIB airlines. The national airline, Garuda Indonesia, was then founded in 1949 by President Sukarno after acquiring and renaming KLM-IIB.
During the 1950s, Garuda Indonesia monopolised the domestic flight market as the only airline company connecting major cities in Indonesia. It officially became a state-owned company in 1950 and delivered its first international flight – a hajj service to Mecca – in 1956. Its first regular international services were to Hong Kong and Amsterdam, opening in 1963 and 1965 respectively.
In order to connect remote areas within the archipelago, Merpati Nusantara Airlines (Merpati) was established by the Indonesian government in 1962. Garuda Indonesia and Merpati then dominated the market until the end of the 1960s. Competition in the domestic flight market began in 1969 with the establishment of the first private airline, Mandala Airlines, which was followed by Bouraq in 1970. Competition between these four airlines lasted until 2000.
Another airline called Sempati Air Transport was established in 1968 but did not have a regular flight schedule in its early operations, offering mainly transportation for oil company workers. Pelita Air started operating a similar service in 1970 and is still operating today. Sempati, however, started scheduled services and grew rapidly, enlivening domestic flight competition in 1990s after Tommy Suharto, the youngest son of former president Suharto, bought it in the late 1980s. He renamed it simply Sempati Air in 1994 and it soon became the first private airline allowed to use jet engines, giving them a boost over other private companies.
In 2000, under President Abdurrahman Wahid, Indonesia deregulated its commercial aviation industry to stimulate the tourist industry. He removed government controls over routes, fares and market entry for new airlines.
The commercial airline industry grew quickly as a result of deregulation and several new airlines were established, such as Lion Air (1999), Adam Air (2002), Batavia Air (2002) and Sriwijaya Air (2003). Pre-existing private airlines such as Bouraq and Sempati fell by the wayside. Meanwhile the state-owned Merpati struggled as Garuda was given wider access to key domestic routes. However, financial crises and aircraft accidents forced several airlines to close down.
Adam Air, for example, had been Indonesia’s fastest growing low-cost carrier but fell into serious financial distress before being shut down by the government after its Flight 574 crashed in the Makassar Strait in January 2007 flying from Surabaya to Manado. It then declared bankruptcy in March 2008. Then Batavia Air, despite recording zero accidents, declared bankruptcy in 2013. The following year Merpati Nusantara Airlines closed down also, unable to service a Rp. 7.9 trillion debt (AUD 790 million). After these bankruptcies, several airlines eventually consolidated into a few larger groups, the main ones being Garuda Indonesia Group (in which sits Sriwijaya Group) and Lion Group. This created a potential oligopoly in Indonesia’s commercial domestic flight industry.
Meanwhile, Malaysia-based Air Asia established an Indonesian subsidiary, Air Asia Indonesia, becoming the first off-shore carrier to establish a presence in the domestic market.
Currently, to connect major cities in Indonesia, the Garuda Group has Garuda Indonesia as a full-serviced airlines (FSA) and Citilink as a low-cost carrier (LCC). The Sriwijaya Group has Sriwijaya Air and Nam Air. Lion Group has Batik Air as its FAA, Lion Air as LCC and Wings Air to connect remote areas, while Air Asia Indonesia is a subsidiary of Air Asia Malaysia and operates on a small number of routes. The other four airlines connect remote areas and Indonesia’s outer islands.
Last year, Sriwijaya Group entered into an operational partnership agreement with Citilink. With Sriwijaya and Citilink both now under Garuda’s umbrella, the domestic airline industry is converging towards a duopoly.
Domestic airline market share
According to centreforaviation.com, Indonesia’s domestic aviation market has more than tripled in size, from less than 30 million passengers in 2005 to 96.9 million in 2017. Indonesia is now the fifth largest domestic market in the world after China, US, India and Japan. The industry was once very fragmented, without a single airline exceeding 25 percent of the market share in 2005. It has changed over the last 12 years, however, with today’s market dominated by two groups, Garuda and Lion.
After launching its operations in 2000, Lion grew very quickly to become Indonesia’s largest domestic market airline in 2008 with a 25 percent market share. As a group, its market share passed 50 percent in 2017, hitting 51 percent. This figure included 10 percent captured by its full-service subsidiary, Batik Air, and a further 6 percent by Wings Air that operates on less-busy routes across the archipelago, codesharing with its parent company.
Garuda Indonesia’s market share, meanwhile, increased significantly from only 19 percent in 2010 to 26 percent in 2015, while Citilink grew from a 2 percent market share when it was first established in 2012 to 12 percent in 2015. This gave Garuda Group a combined 38 percent of the domestic market in 2015. This was, however, the highest that figure went, falling to 35 percent in 2016 and 33 percent in 2017. This was due to Garuda Indonesia focussing less on domestic growth and the expansion of Citilink’s market share slowing also. The third largest group, Sriwijaya Group, captured 13 percent of the domestic market in 2017.
On 9 November 2018 Garuda Group, through its subsidiary Citilink, took over the Sriwijaya Group through a joint operation (KSO) scheme. The entire operational and financial activities of Sriwijaya Group are now managed by the KSO. With Sriwijaya Group under its umbrella, Garuda Group commands approximately 46 percent of Indonesia’s domestic flight market.
Beyond these two commercial airline conglomerates, Indonesia Air Asia is the third largest group but captures only 2 percent of the market, down from 4 percent in 2013. This is mainly because it has been shifting its focus towards the international market in recent years. Finally, a few other airlines remain in the game, but collectively they account for no more than 2 percent of the domestic flight market.
Febi Trihermato, Indonesia Research Officer