Asia's Open Skies Are Clouded by Indonesia.

Date: 19 February 2013

Asia's Open Skies Are Clouded by Indonesia.

Carriers, Airports Embark on Building Spree as Asean Lowers Barriers to Travel, but Jakarta Applies the Brakes

JAKARTA, Indonesia—Southeast Asia's airlines are on an expansion spree to take advantage of a new regional open-skies policy. But Indonesia is resisting opening its airspace, putting a crimp in plans to add regional flights. New terminals, tarmac and planes are on tap as the Association of Southeast Asian Nations lowers barriers to air traffic within the 10-nation economic bloc. That is generating new flights to serve a booming consumer class.

Most Asean members already have implemented the new open-skies policy. But Indonesia, the biggest market, says it needs more time to get ready. "Indonesia is the hold out," says Alan Tan, an aviation-law professor at the National University of Singapore. "The problem is, there are established airline interests in Indonesia that prefer to see things restricted."

Open skies has been rolling out in stages since 2009, helping to make Southeast Asia home to the world's fastest expanding low-cost airlines, such as Indonesia's Lion Air, Malaysia's AirAsia Bhd and Cebu Pacific of the Philippines. The region has more than 600 million people and a combined economy that is larger and growing faster than India's. The expansion places Southeast Asian hubs among the busiest in the world; airports in Bangkok and Singapore get more international passengers than those in London, Tokyo and New York.

Indonesia's reluctance to open its airspace to more competition shows the difficulty the economic bloc will have as it tries to push through more economic integration in the next two years.

Asean aims to create an regional economic community in 2015 that will link financial markets more closely, lower trade barriers and ease the flow of labor. The bloc comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

The open-skies policy essentially lifts restrictions on adding flights. Between Malaysia and Thailand, for example, each country's airlines now can make as many flights as they like to the other country, assuming there is room at the airport. But adding flights to or from Indonesia can take months of bilateral discussions.

The archipelago says it plans to open up by the 2015 deadline but can't rush. "Indonesia is different. Singapore only has one airport, but Indonesia more than 20," so it takes longer to open up, says tourism minister Mari Pangestu. "Indonesia is committed and will do as much as possible for [opening] major airports," she says.

Indonesian carriers PT Garuda Indonesia and Merpati Nusantara Airlines PT are preparing themselves, but the country isn't ready yet, she says.

Analysts say the government is getting pressure from state-owned Garuda and others to protect the Indonesian market as long as possible. Garuda Chief Executive Emirsyah Satar says Indonesia is willing to open up to more flights from other Asean countries but that it needs to be assured that other countries won't use other regulations to block Indonesian airlines.

"With Indonesia alone having almost half the entire Asean population, its decision to stay out hampers the single market significantly," says Prof. Tan, of the National University of Singapore. "Intra-Asean liberalization is thus far from complete."

To ready itself for the competition, Indonesia is on an airport building binge. It plans to build and upgrade more than 20 airports. Many projects will be small landing strips, but the country also has some monster projects under way. Indonesia recently broke ground on a $2 billion expansion of Jakarta's airport, which today handles more than twice its capacity of 22 million passengers a year.

"We have to be ready," for all the competition and traffic resulting from Asean open skies, says Bambang Susantono, the country's deputy transportation minister. "It's a big deal."

Garuda and its low-cost subsidiary Citilink are spending hundreds of millions of dollars expanding their fleet. Lion Air, the country's largest low-cost carrier, ordered more than 200 Boeing Co. aircraft last year.

Other Southeast Asian cities also are expanding their airports. Singapore's Changi Airport upgraded a terminal last year and has a new terminal on tap that will boost capacity 30% by 2017. Airports in Hanoi; Bangkok; Manila; Siem Reap, Cambodia; and Vientiane, Laos; are making upgrades that will cost at least $1 billion each, according to Momberger Airport Information, an industry publication.

AirAsia, the region's largest low-cost carrier, is setting up the industry's first Asean headquarters in Jakarta, home of the bloc's secretariat. Airline Chief Executive Tony Fernandes has even moved to Jakarta from Malaysia. "It would be good for AirAsia if [open skies] was completed," he says. "That's why I'm here, to push for liberalization."

While open skies frees up the industry, executives say it could go further. The policy doesn't open up domestic routes to more competition or allow carriers to establish hubs outside their home countries. Still, once Indonesia gets fully on board, open skies should trigger a big bump in traffic and better prices for consumers.

By Eric Bellman eric.bellman@wsj.com

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