1. Draft Final Technical Report Presentation to Stakeholders: 19 May, 2011 by Mott MacDonald ASEAN Open Sky Policy Stage II

2. 2 Agenda TimeMinutesTopicPerson in Charge 10:00 – 10:3030RegistrationReception 10:30 – 10:355IntroductionDGCA/IndII & Mr Whittle 10:35 – 10:5015Summary & Overall Conclusions Mr Whittle 10:50 – 11:0010Methodology & Stakeholders Mr Whittle 11:00 – 11:2525Policy & RegulationMr O’Donovan 11:25 – 11:5025Demand ForecastsMr Folley 11:50 – 12:1525AirlinesMr Whittle 12:15 – 12:4025AirspaceLFV 12:40 – 13:0525AirportsMr Whittle 13:05 – 13:3025Social & Economic ImpactMs Congdon 13:30 – 13:4010ImplementationMr Whittle 13:40 – 13:455Closing RemarksMr Whittle 13:45 – 15:0075Question & Answer Session Moderator

3. 3 Goal and Objectives Study Goal To contribute to the long term development of Indonesia by producing a strategy for the implementation of a regional (ASEAN) Open Sky policy in 2015 (planned date). Activity Objectives  Accommodate ASEAN Open Sky policy in national aviation law;  Prepare the national aviation industry for regional competition;  Assess the benefits of ASEAN Open Sky policy for Indonesia (macro level); Deliverable Road map for the development and implementation of the ASEAN Open Sky Policy in Indonesia in 2015 (planned date). The road map will include steps to be taken by the “implementers”, including the government, carriers and airport operators.

4. 4 Description of Activity Components Figure 1 : Interdependence of the tasks

5. 5 Conclusions & Recommendations

6. 6 Aviation & Competition Law Aviation law The 2009 Aviation Law requires: Limited amendment to ensure consistency with ASEAN multilaterals More detailed amendment in relation to the economic licensing of air carriers where appropriate secondary legislation and policies should be developed Competition law General reform of the 1999 law should follow the adoption in 2010 of the comprehensive ASEAN Regional Guidelines on Competition Policy. Guidelines for aviation cases should be developed.

7. 7 Demand Forecasts & Open Skies Benefit (2025) Impact of Open Skies to Indonesia in 2025: – 16.3m additional annual passengers – 35,495 annual aircraft movements – 291,000 annual tonnes of air cargo 20102025AAGR IndonesiaDomestic Passengers (mn)872557.5% IndonesiaInternational Passengers (mn)19678.9% IndonesiaDomestic Aircraft Movements (000)7811,8485.9% IndonesiaInternational Aircraft Movements (000)1273907.8% IndonesiaDomestic Air Cargo (tons 000)4802,07010.2% IndonesiaInternational Air Cargo (tons 000)2861,38011.1% JakartaDomestic Passengers (mn)321078.4% JakartaInternational Passengers (mn)10379.5% JakartaDomestic Aircraft Movements (000)2476797.0% JakartaInternational Aircraft Movements (000)622028.2%

8. 8 Airlines Most Indonesian carriers consider profitable growth will come from domestic expansion. Seek to delay international route access and capacity expansion until domestic growth has matured. Most Indonesian airlines would prefer gradual introduction of an Open Sky Agreement across Indonesia to ASEAN markets. Gradual removal of capacity and frequency constraints currently applying on a bilateral basis, to concentrate on securing domestic growth in the short to medium term.

9. 9 Airports The most urgent need for new capacity is at Jakarta, Surabaya and Bali airports. It is easier to “sweat” terminal facilities than airfield facilities. Surface access is likely to be a major issue at all airports due to a lack of adequate rail and road access. Land use Master Plans should be developed based on the shortfalls in requirements highlighted in this presentation. DGCA should formulate and recommend a defined policy based on international best practice for safety and security.

10. 10 Airspace Implementation of Open Sky: No need for route structure changes Overall traffic increase: Capacity enhancements Update infrastructure New ATM system in Jakarta ACC Update of Ujung Pandang ACC New sectorisation Additional Air Traffic Controllers needed Monitor and evaluate the ATM performance

11. 11 Economic & Social Impact Benefits from implementation of ASEAN Open Skies likely to significantly outweigh the costs, in terms of capital costs and any lost profits for Indonesian carriers. Net flow of costs and benefits to Indonesian users is positive. NPV of IDR 21.9 trillion and BCR of 5.4. Majority of benefits will accrue to Jakarta and to a lesser extent Indonesia’s other larger airports (these airports experience the largest impacts in terms of demand growth). Need for better understanding of linkage between air service development and economic growth, informed by more in depth analysis to support policy development. Benefits could be even greater in regional economic development terms, by extending the scope of Open Skies to include more gateways and to achieve greater synergy with the strategy for development focussed on six Economic Corridors. To support modernisation of the Indonesian economy and assist with the aim of Indonesia raising its economic status globally, strong case for a more liberal approach to be taken towards the development of air services with other world regions.

12. 12 Implementation

13. 13 Immediate Action Plan - (1) Aviation Law – Work should start on the Law this year: requirement for proposals, consultation, finalisation and the legislative process. Plan to complete the process within 18 months to two years. Airlines – Airlines need to be aware of the change to policy that the ASEAN Open Sky Agreement will bring - an important step- change that needs to be factored into strategic planning. – Meet ICAO compliance requirements - a number of carriers need to work with international organisations to be removed from blacklists. – Develop distribution model for direct/web selling (Call centre, online payments, mobile phone payment)

14. 14 Immediate Action Plan - (2) Airspace – Replace JAATS (Jakarta’s ATC-system) – Introduce Flexible Use of Airspace – Introduce Air Traffic Flow Management – Recruit and train sufficient number of staff – Establish sufficient regulations (e.g for the use of ADS-B) – Improve Quality Assurance of Aeronautical data

15. 15 Medium / Long-Term Plan – Aviation Law The 2009 Aviation Law requires some review and revision to create a more flexible regulatory system. Much does not require changing: but economic regulation section must be readdressed. More detailed regulation should be removed to secondary legislation and policy. There is ample time to do this before 2015 if the exercise starts soon. National competition law is broadly adequate but guidelines for its applicability to aviation need to be developed.

16. 16 Medium / Long-Term Plan - Airlines Airline consolidation through relaxation of ownership & control regulations Airline Alliance and code share development with local, ASEAN and Global carriers Fleet procurement to increase the average size of aircraft operating at congested airports and acquire suitable aircraft for hub-bypass development (regional aircraft?) Increase efficiency of operation and maximise product differentiation vs.. competition

17. 17 Medium / Long-Term Plan - Airspace Implement PBN (Performance Based Navigation ( according to ICAO APAC region short term) Implement User Preferred Routing Consider WAM-(Wide Area Multilateration) for TMA and Enroute Phase out of HF (High Frequency) (replaced by CPDLC and improved VHF) Implement PBN (Performance Based Navigation ( according to ICAO APAC region medium term) Phase out of conventional radar (replaced by ADS- B and WAM)

18. 18 Incorporation of ASEAN Open Skies Policy into Indonesian Law

19. 19 Objectives The study considers: 1.Whether the 2009 Aviation Law and the 1999 Competition Law are appropriate to accommodate the ASEAN Open Skies Policy that will take effect fully by 2015; 2.Whether national aviation law and competition law are consistent with the provisions of the ASEAN multilateral agreements that will implement ASEAN Open Skies; 3.Whether current law may place the Indonesian air transportation industry at a disadvantage compared with its international competitors under the planned ASEAN Open Skies regime.

20. 20 Key Findings ASEAN Open Skies Policy does not create a fully liberalised market for air services between ASEAN states. Comparisons with other regional open skies regimes of limited assistance as they are not the same. Current Aviation Law reflects the Government of Indonesia’s inclination to intervene in the market to seek to secure certain broader national transportation objectives. Whilst some very limited government intervention can be legitimate, it otherwise prevents a liberalised market working. The Aviation Law, as primary legislation, should establish only principles, leaving the detail to secondary legislation and policy which can respond to developments over time. Experience in more liberal markets than ASEAN Open Skies, e.g. European single aviation market (where regulation, other than Competition Law, affords carriers little protection), has been very positive for consumers and generally positive for all stakeholders. Note: the review has been conducted without sight of any applicable Ministerial Regulations or Government Regulations.

21. 21 Proposals Aviation Law The 2009 Aviation Law should be amended in relation to economic licensing of air carriers: – to establish general principles that will endure rather than impose a blue print on the industry which will not be appropriate in the future – regulation needs to develop flexibly and primary legislation is too inflexible an instrument (takes too long to change and allows Minister and regulator too little discretion); detailed regulation needs to be left to secondary legislation and policies and procedures published by the Minister and the aviation regulator – Secondary legislation and regulatory policies and procedures can be more readily adjusted in line with developing market and industry conditions (but still line with principles of primary legislation) – to rebalance the present emphasis away from size and high capital investment (which will stifle Indonesian carriers’ ability to compete internationally) towards prudent financial fitness regulation.

22. 22 Proposals Competition Law Competition law in Indonesia established in 1999 – Designed to address anti-competitive and monopolistic practices of concern to the aviation industry; – Some general shortcomings in substance and procedure which require reform; – Commission for Supervision of Business Competition (KPPU): becoming more experienced; aware of a potential need to intervene and that aviation has special economic characteristics; – Opportunity should be taken to develop guidelines in respect of aviation in readiness for aviation related cases. Reform of the 1999 law may well follow - it should follow the adoption in 2010 of the comprehensive ASEAN Regional Guidelines on Competition Policy.

23. 23 Demand Forecasts

24. 24 Uses for the Demand Forecast Informs the Airports study: understanding future airport infrastructure requirements. Informs the Airspace study: understanding future airspace infrastructure requirements. Informs the airlines paper: understanding the size of the market and the impact on airlines. Informs the socio economic study: understanding and quantifying the benefits of Open Skies.

25. 25 Indonesia in ASEAN CountryPopulation (millions) GDP Real Growth (2010) Indonesia245.6$540.3bn Singapore4.7$182.2bn Thailand67.8$263.8bn Malaysia27.5$193.1bn Cambodia14.8$10.5bn Brunei0.4$11.5bn Laos6.3$5.9bn Vietnam87.3$97.2bn Myanmar50.0Not reported Philippines92.0$161.2bn Source: World Bank most recent statistics

26. 26 The Airports

27. 27 Top 10 Countries by GDP Growth RankCountryAverage Annual GDP Growth 1Nigeria8.5% 2India8.0% 3Iraq7.7% 4Bangladesh7.5% 5Vietnam7.5% 6Philippines7.3% 7Mongolia6.9% 8Indonesia6.8% 9Sri Lanka6.6% 10Egypt6.4% Source: Citigroup

28. 28 Major Asian Airports: Passenger Traffic Trends Millions200520062007200820092010AAGR 2005- 2010 2010 vs. 2009 JAKARTA28.329.030.932.537.344.09.2%17.8% SINGAPORE32.433.435.237.737.242.05.3%13% KUALA LUMPUR 23.323.726.127.629.734.17.9%14.8% BANGKOK39.041.044.343.640.542.81.9%5.6% DELHI15.119.123.123.225.228.513.6%13% BEIJING41.048.753.655.965.473.912.5%13% HONG KONG40.343.346.347.945.650.44.6%10.6%

29. 29 Indonesia – Shift in Propensity to Fly

30. 30 Base Forecast – Total Passengers

31. 31 Base Case Forecast – Aircraft Movements

32. 32 Base Case – Benefit of Open Skies (Passengers)

33. 33 Passenger Forecast for Indonesia

34. 34 Aircraft Movements Forecast for Indonesia

35. 35 Open Skies Impact - Passengers

36. 36 Open Skies Impact - Movements

37. 37 Air Cargo Demand Forecast Twelve study airports combined: – International air freight: growth of over four and a half times from 286,000 tonnes in 2009 to around 1.38m tonnes in 2025 – Domestic air freight: growth of almost four and a half times from 480,000 tonnes in 2009 to 2.07m tonnes in 2025. – This growth predicated on strong GDP growth and increased foreign direct investment into Indonesia. – International and domestic air mail traffic: growth at much slower rate - less air mail transported with increasing use of electronic means of communication. Additional international air freight traffic attributed to implementation of Open Skies around 291,000 tonnes per year by 2025.

38. 38 Impact on Airlines

39. 39 Objectives Determine potential impacts - positive and negative - on major Indonesian airlines : Garuda Indonesia Lion Air, (including Wings Air) Indonesia Air Asia Batavia Air Sriwijayah Airlines Merpati Nusantara Airlines SWOT analysis produced for each carrier. Identify airlines most likely to maximise the opportunity from implementation of the ASEAN Open Skies Policy.

40. 40 Introduction to Indonesian Airline Industry Comprises scheduled passenger, scheduled cargo and non- scheduled airlines: providing capacity to meet strong demand for domestic & international passenger and air cargo services. Airlines already operate in a very liberal domestic and international market environment. 16 scheduled passenger airlines: 7 likely to be impacted by the ASEAN Open Skies Agreement: subject to detailed study. The 7 scheduled airlines include 3 airlines already heavily involved in provision of international and domestic air services, namely Garuda Indonesia; Lion Air and Indonesia Air Asia. Garuda Indonesia + Indonesia AirAsia = 78% of international scheduled passengers carried by all Indonesian airlines in 2010. The other 4 airlines, Sriwijaya Air, Batavia, Wings Air and Merpati strongly focused on the domestic passenger market - international passengers < 5% of each airline’s total passengers in 2010. 3 scheduled cargo airlines: small aircraft fleets and available capacity. Air freight services already liberalised within ASEAN (agreement has not been ratified by the Indonesian government). The non-scheduled airlines mainly perform niche operations: not impacted by the ASEAN Open Skies Agreement.

41. 41 Characteristics of Successful Airlines in Liberalised Environments (1) Management style. Appetite for international expansion appears limited in a number of airlines, corporate culture and adopted business model impact on airline growth potential Young and appropriate fleets. Some airlines are acquiring modern regional aircraft for new route opportunities, some are standardising/simplifying their fleet structures, some are focusing on single aircraft type, some still have complex fleet structures High aircraft utilisation. To achieve lower total seat costs and crew efficiencies Efficient turn-rounds. Maximising the use of the capital equipment, a number of carriers remain concerned of Indonesian airports reducing aircraft turn-round times

42. 42 Characteristics of Successful Airlines in Liberalised Environments (2) High load factors. Load factors of some Indonesian carriers on international services are much lower than on domestic services, new entrant carriers with low cost model achieving higher load factors Cost control. New entrant carriers better placed to achieve lower cost base, use of regional subsidiaries being used by some carriers to improve cost base Distribution and yield management controls. Indonesian market hasn’t fully embraced the low cost model of direct sell distribution: use of credit cards, mobile phone payment. Some carriers are still without internet selling capability

43. 43 Traffic Performance of Major Airlines (2010) Source: DGCA

44. 44 Airline Fleets Unique geographical situation, growing population and continued economic prosperity will increase propensity to fly. Proof - rapid growth in domestic air travel. Passenger growth on international routes is from a much lower base. The load factors achieved by Indonesian airlines on international services generally lower than for domestic services. Some Indonesian airlines are rapidly increasing their fleet sizes. With the exception of Indonesia AirAsia, most new seat capacity is currently being deployed into domestic markets. In the period from March to November 2010 the aggregate fleet size of the seven largest Indonesian airlines increased by 20%. Some carriers are either ordering or signing letters of intent to acquire smaller regional aircraft which could be deployed on new ‘thinner’ intra-ASEAN markets.

45. 45 Indonesian Carriers & ASEAN Services to ASEAN countries account for 4.6% of total seat capacity offered by Indonesian airlines (March 2011) Indonesia AirAsia has largest commitment to ASEAN market: 53.5% of total ASEAN seat capacity offered by Indonesian carriers and 54.7% of total capacity offered by airline. Seat capacity to international destinations outside ASEAN represents 2.9% of total seat capacity offered by Indonesian carriers.

46. 46 The ASEAN Challenge (1) Most bilateral Air Service Agreements between Indonesia and ASEAN member states have capacity and frequency limitations applied through Confidential Memorandum of Understandings (CMOU). All but one of the airlines interviewed regarded limits as necessary to protect Indonesian carriers from capacity and frequency increases by the larger (and more successful) ASEAN hub-carriers, particularly Singapore Airlines. Indonesia to Singapore and, to a lesser extent, Indonesia to Kuala Lumpur city pairs are the most capacity constrained; airlines of both sides operating close to the maximum permitted by the CMOU. The Jakarta to Singapore route is the city pair most likely to see immediate capacity growth once the Open Skies agreement is implemented.

47. 47 The ASEAN Challenge (2) Singapore Airlines and Thai Airways operate aircraft of much larger average size than Indonesian carriers - their operations are primarily long- and medium-haul. Indonesian airlines already find it difficult to compete against carriers such as Singapore Airlines – viewed as the airline most likely to benefit from Open Skies - by enabling it to feed more international passengers over its hub. Existing connecting passenger traffic currently using domestic services offered by Indonesian airlines will be impacted as more international capacity is added, passengers will transfer from indirect routings over Jakarta to direct routings to other Indonesian cities

48. 48 Constraints The nature of the Indonesian marketplace and airport infrastructure are constraints to obtaining maximum benefits from Open Skies. Combination of currency restrictions, limited use of credit cards by the consumer and extended credit facilities offered by the travel trade will impact on the speed of development of web (on-line) sales. Airport capacity, particularly at Soekarno-Hatta, Jakarta, is very constrained. The restricted opening hours of most other Indonesian international airports impacts negatively on airline schedule development and operating efficiency.

49. 49 Conclusions Most Indonesian carriers consider that the opportunity for profitable growth will come from domestic expansion Seek to delay international route access and capacity expansion until their domestic growth has matured. Most Indonesian airlines would like to see a gradual introduction of an Open Sky agreement across Indonesia to ASEAN markets, with a gradual removal of capacity and frequency constraints currently applying on a bilateral basis, so they can concentrate on domestic growth in the short to medium term.

50. 50 Impact on Airports

51. 51 Objectives Determine the future terminal and airfield requirements based on the 2025 traffic forecasts for 7 airports. Assess the safety and security procedures at the airports and their compliance with current ICAO requirements.

52. 52 Study Airports The following airports were studied: – Jakarta Soekarno Hatta – Denpasar Bali Ngurah Rai – Surabaya Juanda – Medan Polonia/Kuala Namu – Manado Sam Ratulangi – Balikpapan Sepinggan – Makassar Sultan Hasanuddin

53. 53 Data Gathering (1) A site visit was made to 6 of the 7 study airports. Medan was not visited – the current airport is closing and will be replaced by a new facility scheduled to open in 2012/13 Data provided by IndII, AP1, AP2 and DGCA Internet based research was used to augment the available data Where information was unavailable international standards were used as appropriate

54. 54 Data Gathering (2) & Development Plans Jakarta – Development planned but no details given. Surabaya – Increased provision of check-in but no timescale provided. Bali – Development plans were made available but no timescale provided. Makassar – Airport operator stated that plan was to double terminal capacity by 2015. Medan – Press releases suggest the airport will be opened at the end of 2012 but to date plagued by construction issues. Balikpapan – Development plans made available. No timescale given. Manado – Development planned for 2013 but no details given.

55. 55 Data Gathering (3) & Missing Data Not all data was readily available, including: – The split of arriving passengers by Indonesian national/foreign national. – Security throughput data was unavailable. No standardised method of measuring flow rates

56. 56 Assessing Terminal Facility Requirements Data was combined with the Mott MacDonald forecasts to evaluate terminal facility requirements using an algorithmic spreadsheet. For check-in a range of facility requirements was established that represented 30-50% of passengers not using conventional check-in desks for check-in procedures in 2025. It was assumed that the remainder of passengers would use Online Check-in/Kiosks and Bag Drops.

57. 57 Terminal Facility Shortfall by Airport in 2025 JakartaSurabayaBaliMakassarMedanBalikpapanManado HBS Screening Lanes7-187-107-9 *4-7 *- **0-1 *0 * Check-in Desks34-680 * - **0 * Outbound Passport Control 5847 *3 *- **0 * Security Search Lanes – Domestic 5-102-40 * 5-6 * - **0 * Security Search Lanes – International 5-800 *- **0 * Gate Rooms – Domestic 10 Code C15 Code C 1 Code E 4 Code C *11 Code C * - **6 Code C *0 * Gate Rooms – International 8 Code C2 Code E6 Code C *0 *- **0 * Inbound Immigration Desks 35-831-923-43 *5-9 *- **3-4 *0 * Reclaim Belts – Domestic 8 Code C 6 Code E 9 Code C2 Code C * 2 Code E * 4 Code C *- **0 * Reclaim Belts - International 8 Code E1 Code C2 Code C *0- **0 * * Planned development included in analysis ** Details of current facilities not available, hence unable to calculate 2025 shortfall

58. 58 Terminal Facility Requirements: Key points The majority of development is required at Jakarta Zero development required at Manado Larger space requirement will be in relation to Gate Rooms and Reclaim Belt provision

59. 59 Assessment of Airfield Facility Requirements Main focus on runway and taxiway capacity and stand requirements. There are more than just the physical attributes to consider including airspace and ATC procedures.

60. 60 Airfield Facility Shortfall by Airport in 2025 JakartaSurabayaBaliMakassarMedanBalikpapa n Manado Runway Capacity – Movements per Hour 61-63 *9-11 *4-6 *10-120 * Runway CodeAdequate * Taxiway CapacityAdequate * Taxiway CodeAdequate * Aircraft Stands – Code E 0 * Aircraft Stands – Code C 147 *56 *34 * 11 *18 *0 * * Planned development included in analysis ** Details of facilities not available, hence unable to calculate 2025 shortfall

61. 61 Airfield Facility Requirements: Key points The majority of development is required at Jakarta. Zero development required at Manado. Generally, the most significant development will be provision of new stands. For Jakarta it will be provision of 1 or 2 new runways and associated infrastructure.

62. 62 Safety and Security Issues Observed levels of security are not compliant with international best practice. Particular concern with hold bag screening process and passenger screening process Only one of the airports visited could produce an airside operations manual Lack of action to mitigate bird hazards Inadequate provision of facilities to ensure segregation of arriving and departing passengers

63. 63 Costs Directly Attributable to ASEAN Open Skies (£’000s) JakartaSurabayaBaliMakassarMedanBalikpapanManado Check-in Desks2,035000- *00 Outbound Passport Control 22.56.25103.75- *00 Security Lanes - International 1,40000700- *00 Gate Rooms – International 4,5851,310 0- *00 Inbound Immigration Desks 1,620708.751,316.25708.75- *303.750 Reclaim Belts - International 4,500750 0- *00 TOTAL COSTS (£M)£14.2M£2.8M£3.4M£1.4M- *£0.3M£0.0M * Details of facilities not available, hence unable to calculate 2025 shortfall or costs attributable to ASEAN Open Skies. Costs derived using UK costs without contingency JakartaSurabayaBaliMakassarMedanBalikpapanManado Taxilane4,4881,870 7483741,1220 Aircraft Stands7,1282,970 1,1885941,7820 TOTAL COSTS (£M)£11.6M£4.8M £1.9M£1.0M£2.9M£0.0M Terminal Facilities Airfield Facilities

64. 64 Conclusions The most pressing need for new capacity is at Jakarta, Surabaya and Bali It is easier to “sweat” terminal facilities than airfield facilities Surface access is likely to be a major issue at all airports due to a lack of adequate rail and road access Land use Master Plans should be developed in light of the shortfalls in requirements highlighted by this report The DGCA should formulate and recommend a defined policy based on international best practice for safety and security

65. 65 Impact on Airspace

66. 66 Indonesian Airspace

67. 67 Conventional ATS-routes – – following ground installations About 15 RNAV (Area Navigation) routes used for international traffic – Routes consist of waypoints based on either satellite positions or DME installations Conventional SID/STAR-design – – In- and outbound traffic to airports No Flexible use of Airspace (FUA) – – Collaborated decision making regarding the use of airspace between military and civilian users Congested areas (Java) Current Situation – Airspace Management and Organisation

68. 68 Future Demand RED = International trafficBLUE = Domestic traffic Source : JICA 2008 forecast 2025. 1.Overflying traffic will double 2.International traffic +31,7% 3.Open skies will add 5,5% 4.Jakarta will exceed capacity in peak hrs already 2015 5.City pair Jakarta – Surabaya will almost double

69. 69 Key Findings and Proposed Solutions (1) Open sky implementation No need for route structure changes Overall traffic increase Capacity enhancements Update infrastructure New ATM system in Jakarta ACC Update of Ujung Pandang ACC New sectorisation Additional Air Traffic Controllers needed Monitor and evaluate the ATM performance

70. 70 Key Findings and Proposed Solutions (2) Air Traffic Flow Management – ATFM Flexible Use of Airspace – FUA – CDR concept Traffic Synchronisation – TS – Collaboration between stakeholders: ANSPs Airport Operators Regulators Military

71. 71 Key Risks Organisational changes of ATM – Law No.1/2009 – Many projects are running in parallel Shortage of staff – Operational Air Traffic Controllers – Technical experts – Operational experts

72. 72 Economic and Social Appraisal

73. 73 Objectives To provide a structured socio-economic assessment using recognised transport appraisal techniques comprising: – GDP and employment impacts nationally and at the provincial level. – Cost Benefit Analysis – impacts on users (journey time savings, air fare savings), producer benefits (airlines and airports), government set against any capital or other costs of implementation. – Connectivity Impacts – improved connections for business. – Qualitative Impacts – tourism, effects on investment, improved provincial links, effects on quality of life, e.g. lifeline routes.

74. 74 Data To undertake the assessment used: – The demand forecasts. – Expected impacts on Airlines. – Information on Airport and ATM costs. – Published data on the Indonesian economy, including tourism. – Discussions with key stakeholders in March 2010.

75. 75 Limitations Accuracy of assessment is ultimately reliant on the quality and availability of underlying data. Significant issues in relation to the collection of data, particularly in relation to: – No detailed data has been available on numbers of employees on site at the 12 airports; – Information on passenger purpose of travel and values of time; – Detailed airline and airport financial data; – Provincial level multiplier information and more specialist information on the international economy. In all cases we have used reasoned assumptions to fill gaps. Whilst broad messages are correct, impacts must be seen as orders of magnitude and directions of effect rather than precise estimates.

76. 76 Uses a generally accepted framework for economic impact assessment. Quantifiable GDP and employment impacts categorised as: – Direct: generated by activity at airports or in immediate vicinity and directly related to provision of air services; – Indirect: supported by the supply chain to direct activities; – Induced: supported by expenditure of earnings from direct and indirect. Fourth category known as catalytic or wider impacts: – Focuses on the impact on issues such as trade, investment, technology transfer, productivity and tourism. Relates to the impact on users rather than the industry itself; – Generally held to be unquantifiable in terms of GDP and employment. Considered through socio-economic cost benefit analysis and qualitative analysis. Definitions of Impact

77. 77 Baseline impact in 2010 of 243,000 jobs and IDR 33.7 trillion. Jakarta by far the largest generator of jobs and GDP. Much of the indirect (supply chain) impact is assumed to arise in the vicinity of Jakarta. Current Impacts Direct ProvinceNational Total inc Indirect & Induced EmploymentGDPEmploymentGDPEmploymentGDP Jakarta 77,00013,710165,00029,500165,00029,500 Bali 11,00031018,00050018,000700 Surabaya 8,00029013,00050014,000600 Medan 5,0002209,0004009,000500 Makassar 6,00018010,00030010,000400 Balikpapan 3,0003705,0006007,000800 Manado 2,000503,0001003,000100 Yogykarta 2,000503,0001004,000100 Batam 3,0002204,0003005,000500 Banjarmasin 2,000402,0001003,000100 Tarakan 1,0001102,0002002,000200 Jayapura 2,0001203,0002004,000300 Total 122,00015,700237,00032,600243,00033,700 Source: York Aviation.

78. 78 By 2025, the total impacts have increased to around 505,000 jobs and 117.7 trillion Rupiah of GDP. An additional 29,000 jobs and 6.3 trillion Rupiah of GDP compared to without Open Skies. Total Impacts – Open Skies Effect

79. 79 Primary impact is in and around Jakarta. However, there are significant gains elsewhere, particularly in Bali and East Java. Employment Impacts – Open Skies Effect by Province ProvinceDirect Own Indirect & Induced Other Indirect & Induced Total Jakarta 10,60010,10050021,200 Bali 2,1001,20003,300 East Java 1,10060001,700 North Sumatra 70040001,000 South Sulawesi 5001000600 East Kalimantan 3002000500 North Sulawesi 10000 Yogyakarta 100 0200 Riau 10000 South Kalimantan 000100 Papua 2001000300

80. 80 The second element of our quantified assessment of the impact of ASEAN Open Skies on Indonesia focuses on an assessment of the impact of the changes on socio-economic welfare. Designed to give a broader view of the costs and benefits to society as whole from the liberalisation of air services rather than focusing specifically the impacts on the level of economic activity. Focuses on quantifying and then monetising the impact of ASEAN Open Skies on a range of different groups in the economy and society. These groups are: – Passengers (Users): journey times and air fares; – Airports (Producers): operating surplus and investment costs; – Airlines (Producers): operating surplus and investment costs; – The Government of Indonesia: tax revenue. Cost Benefit Analysis (1)

81. 81 Variety of assumptions made to make the assessment. Key issue was impact on Indonesian airlines. Concerns exist as to whether Indonesian airlines will be ready to take advantage of the opportunities offered by Open Skies in 2015. Assumed that Indonesian airlines will only capture 25% of Open Skies growth. This leads to a significant loss in ASEAN market share from around 39% in 2010 to around 33% in 2025. This does not result in an absolute loss of passenger demand across Indonesian airlines as a whole, although there may be individual winners and losers in terms of benefiting from growth. Cost Benefit Analysis (2)

82. 82 Benefits to Indonesian users are significant. Primary source is air fare savings. Total benefits of around IDR 7.3 trillion in 2025 for Indonesian users. Discounted benefits for the period of around IDR 26.9 trillion. Costs to Indonesian users primarily relate to airline investment costs. Discounted costs to 2025 of around IDR 5.0 trillion to Indonesian Users. Cost Benefit Analysis - Results Benefits – Indonesian Users Costs – Indonesian Users

83. 83 Net flow of costs and benefits to Indonesian users is positive. NPV of IDR 21.9 trillion and BCR of 5.4. Results for All Users are also important. Benefits and costs to non- Indonesian users are not a direct benefit to Indonesia but they do reflect Indonesia’s attractiveness as a place to invest, do business and visit Cost Benefit Analysis - Results

84. 84 Cost Benefit Analysis - Results Summary of Discounted Costs and Benefits (IDR Billions) Indonesian UsersAll Users Benefits Journey Time Savings 1,1332,220 Air Fare Savings 18,42631,671 Airport Surplus 1,286 Airline Surplus 1,17710,473 Government Revenue 4,903 Total Benefits 26,92550,553 Costs Airport Infrastructure -219 ATM Costs -10 Airline Equipment Costs -4,747-18,557 Total Costs -4,976-18,786 NPV 21,94931,767 BCR 5.42.7

85. 85 Benefits to passengers are assumed to accrue to individual airports. Airline and airport benefits tend to Head Offices in Jakarta and Government revenue to Jakarta as the seat of Government. The primary beneficiary of Open Skies is Jakarta but again there are significant benefits elsewhere. Cost Benefit Analysis - Results Location of Discounted Benefits by Airport (IDR Billions) Passenger Benefits Producer Benefits Government Revenue Total Jakarta10,5052,4634,90317,871 Bali2,99400 Surabaya2,43000 Medan2,15800 Makassar41200 Balikpapan16500 Manado11400 Yogykarta39500 Batam8100 Banjarmasin9200 Tarakan11200 Jayapura10100 Total Present Value19,5592,4634,90326,925

86. 86 Currently, the economy is focused more towards primary (extraction of raw materials) and secondary (manufacturing) economic activities, rather than higher added value tertiary (service) activities. Partly a reflection of the Country’s strength in terms of its natural resources. The country has significant oil and gas reserves, which make a significant contribution towards Indonesia’s GDP, and a range of other resources such as Palm Oil, Thermal Coal, Cocoa and Tin. Focus is very much on servicing the countries very large domestic markets. Wider Impacts

87. 87 Achieving a step change in economic performance is likely to require an increasing emphasis on high value added activities and those in the ‘knowledge economy’. These are likely to include sectors with a significantly greater need for air transport access, such as: – Banking and financial services; – Management and professional services; – Property; – Aerospace; – IT; – Research and Development; – Transport; – Telecommunications; – Oil and Gas; – Mining and Quarrying. Wider Impacts

88. 88 Wider Impacts – the Role of ASEAN Partners ASEAN is clearly and important international partner, particularly for FDI. Singapore is a particularly important partner. However, in terms of trade particularly, other parts of the world are important (notably Other Asia). ASEAN Open Skies is therefore helpful but should be only a first step.

89. 89 Wider Impacts – Tourism (1) Biggest markets are within ASEAN, Singapore and Malaysia, but others generate limited demand. Limited numbers from Europe and North America may reflect lack of direct connections.

90. 90 Target markets within the tourism development strategy will reinforce this pattern – only Philippines from other ASEAN (i.e. not Singapore and Malaysia) is a target. The Ministry of Culture and Tourism has identified that air seat capacity is relevant to the promotion of tourism and the attraction of additional visitor numbers. However, this is at an aggregate national level and not linked to priority areas for tourism development Bali is the biggest attraction now and will continue to be a focus for the future. The strategy identifies an objective to see a diversification of tourism destinations, with an emphasis on reducing the disparities in tourism between Western and Eastern Indonesia Developing air service access is identified as a priority. International experience would suggest direct access will assist in this, particularly in terms of dispersing the tourism product Therefore, it would seem reasonable that while ASEAN Open Skies can only be helpful in developing tourism but ultimately the main markets for the future are further afield Wider Impacts – Tourism (2)

91. 91 Indonesia has recently drawn up an Economic Transformation Plan. The aim is to improve economic performance and to see Indonesia move up the ranking of world economies by size from 17 th in 2010 to 12 th in 2025 and 7 th or 8 th in the longer term. There are three fundamental planks to this economic transformation strategy: – reassessing historical engines of growth; – strategically resolving the lack of infrastructure; – realigning policy to focus on economic strengths. At the core of this strategy is the prioritisation of development to six strategic corridors, with a focus in eighteen key sectors or economic areas integrated into these strategic corridors. Ultimately, this strategy would see Indonesia become a globally competitive knowledge based economy at the forefront of innovation and with a skilled labour force. Wider Impacts: Economic Transformation Plan

92. 92 ASEAN Open Skies will tend to cement the link with Singapore and its importance as an investment partner. It is also likely to cement the importance of ASEAN partners overall as sources of inward investment, building on their existing 44% share. To that extent, Open Skies can be seen as an important step towards attaining cohesiveness in the region. However, on its own, ASEAN Open Skies may not be sufficient to overcome obstacles to attracting more inward investment globally. In terms of trade, Other Asian countries are more important trading partners than the countries within ASEAN. This further suggests that ASEAN Open Skies needs to be seen as a first step to opening up improved air service access throughout Asia. So, whilst ASEAN Open Skies will contribute to the modernisation of the Indonesian economy, the limitation to the ASEAN region alone may constrain the impact it will have, as will the restriction on the proposed opening up to only five main airports from 2015. Wider Impacts: Economic Transformation Plan

93. 93 Wider Impacts – Connectivity Jakarta and the other large airports are the primary providers of both business focused connectivity now and in the future. However, the smaller airports experience much greater gains. Open Skies is a chance to connect directly to global centres in ASEAN much more effectively or for the first time. The core driver of many of the wider, unquantifiable impacts of air services is the extent to which changes in air services enable improvements in connectivity.

94. 94 Our analysis suggests that the benefits from the implementation of ASEAN Open Skies are likely to significantly outweigh the costs, both in terms of capital costs and in terms of any lost profits for Indonesian airlines. Our assessment of quantified impacts suggests that the majority of benefits will accrue to Jakarta and to a lesser extent Indonesia’s other larger airports. This is unsurprising considering that these airports experience the largest impacts in terms of demand growth. However, there is a need for greater understanding of the linkage between air service development and economic growth, informed by more in depth analysis to support the development of policy. We believe that the benefits could be even greater than those arising from the current Open Skies proposal, particularly in regional economic development terms, from extending the scope of Open Skies to include more gateways and to achieve greater synergy with the strategy for development focussed on six Economic Corridors. Furthermore, in order to support the modernisation of the Indonesian economy and to assist with the aim of seeing Indonesia raise its economic status globally, there is a strong case for a more liberal approach to be taken towards the development of air services with other world regions. Conclusions and Recommendations

95. 95 Overview

96. 96 Questions and Answers Terima Kasih!