Indonesian carriers faced serious yield pressure in 2016 ascapacity grew amidst strong competition, and as the country’seconomic growth again fell under expectations.

The country’s two largest operators –Lion GroupandGarudaIndonesia – made it clear that the past two years have been farfrom easy, and that their focus is on keeping costs low to offsetany revenue decline. The depreciation of the rupiah againstthe dollar has not helped either.

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Garudahas yet to release its 2016 financials, while privately-ownedLion Groupkeeps its financials private.Lion Groupfounder Rusdi Kirana however told FlightGlobal earlier thisyear that Indonesian unitsLion Air,Batik AirandWings Airmerely broke even in 2016. This is in contrast to 2014,when Kirana said that the carrier is solidly profitable andmaking “10, 20 times more than Garuda”.

Indonesian carriers take stock as competition intensifiesGarudachief executive Arif Wibowo on his part said that 2016has been a struggle for both the group’s mainline carrier aswell as low-cost unitCitilink. He is however still targetingprofitability for both airlines.

Indonesia’s domestic capacity, in terms of ASKs, jumped 13.7%to 104.3 billion in 2016, higher than the 9.4% growth in theprevious year. This is largely attributed to capacity growth atCitilink,Batik AirandSriwijaya Airwith new aircraft deliveries.

This year, Lion is targeting to increase capacity by 30% - simplyby raising aircraft utilisation from eight to 10 hours. Kiranaconcedes that there is an oversupply of capacity in the market,and says he expects further consolidation in the market, whereonly the fittest will survive.

The group has a further 435 aircraft on order, but the majorityof the aircraft it will be taking this year will go to Malaysian unitMalindo Air.

“My strategy is to keep costs as low as I can,” says Kirana.“Some things such as the economy are beyond my control –but what I am skillful at is to make the airline the strongest interms of costs, reliability and safety. If we can do that, eventhough the economy is not as good as we had expected, wecan still survive,” he says.

SimilarlyGarudahas been working to reduce its fleet andoverhead costs. These involve restructuring the organisationand routes to ensure optimum efficiency. It also wants toincrease its cargo revenue.“I need to make sure that even though the yields are down, wecan cover [the shortfall] with other things,” says Wibowo.

The country’s third largest operator, Sriwijaya, meanwhile hasflown quietly under the radar. The privatelyowned carrier does not make public its financials, but saysthat 2016 was its best year ever – in terms of profitability -and has even set a target to be the most profitable player inIndonesia.

The carrier said it did well in 2016 because of a boost in charteroperations – it carried about 50% of all Chinese tourists intoIndonesia – and also operates profitable charters for miningcompanies. The group’s strategy differs from the big boys– it operates mostly older and cheaper Boeing 737s, takingthem from lessors and having the flexibility to grow its fleetaccording to market demand.

Sriwijaya believes there remains plenty of domesticopportunities, considering Indonesia’s 250 million populationand still-strong annual economic growth of 5%. Besides themainline carrier, it also has a three-year-old subsidiary NamAir.

This year Sriwijaya will aggressively induct 15 737s, while Namtakes 12 ATR 72-600s – its first turboprops. Its focus will still beon flying domestically, with its only international route beingMedan-Penang. It also working to list on the Indonesian StockExchange by May.

“This is to make the company even stronger, to raise money sothat we can take more aircraft. After the IPO we will be able todouble our fleet within three years,” says Jefferson Jauwena,Sriwijaya’s director of corporate planning and businessdevelopment.“The aim is for the company to be the most profitable airlinein Indonesia. It’s really not about how big the company is, butrather how healthy it is.”

This is an extract from Flight Dashboard's Indonesia country report, featuring a breakdown of capacity, fleet and news analysis, which can be downloaded from theReports section here