Indonesia Airlines: Indonesian-Owned, Singapore-Based, Another Regulatory Oversight?

By Teguh Anantawikrama,
Chairman of the Indonesia Tourism Investors Club

 

INVESTORTRUST.ID - The emergence of Indonesia Airlines, a premium carrier established by Iskandar, an entrepreneur from Aceh, has reignited discussions about Indonesian businesses opting to base their operations in Singapore. This strategic choice raises questions about whether it reflects mere business prudence or underscores deeper regulatory shortcomings within Indonesia.

 

Is the trend of Indonesian enterprises migrating to Singapore?

 

It’s a well-observed phenomenon that numerous Indonesian enterprises, especially in pivotal sectors like aviation and technology, choose to headquarter in Singapore despite their Indonesian ownership. The motivations behind this trend include legal certainty, investment facilitation, economic stability, and more favorable tax incentives offered by Singapore compared to Indonesia.

Cick here to get the latest news  

US Billionaire Ray Dalio Becomes Danantara Advisor

In the case of Indonesia Airlines, Iskandar’s decision to establish the airline’s base in Singapore rather than Indonesia mirrors a recurring pattern—Indonesian-founded companies flourishing abroad, potentially due to domestic regulatory hurdles.

 

The aviation industry is inherently heavily regulated, with airlines navigating stringent licensing requirements, elevated taxes, and often cumbersome bureaucracy. Compared to Singapore’s business-friendly environment and attractive incentives, Indonesia’s regulatory landscape may appear less conducive to establishing world-class airlines.

 

A pertinent example is Batik Air Malaysia, a subsidiary of Indonesia’s Lion Group, which chose to expand its fleet under Malaysia’s jurisdiction. The advent of Indonesia Airlines, based in Singapore, further highlights that Indonesia’s regulatory challenges remain a significant concern.

 

This trend presents a dual-faceted scenario. On one hand, the establishment of Indonesia Airlines may not fully benefit Indonesia, as tax revenues, investments, and substantial economic activities are likely to be concentrated in Singapore. This situation suggests a potential loss of national income, stemming from insufficient incentives for local businesses to thrive domestically.

 

Conversely, the airline is expected to employ Indonesian personnel, create opportunities within the national aviation industry, and enhance global connectivity under an Indonesian brand.

 

Indonesia Airlines is neither the first nor likely the last instance of domestically-rooted businesses opting to operate from abroad. To reverse this trend, the Indonesian government must prioritize regulatory reforms. Enhancing legal certainty, offering competitive tax incentives, and streamlining investment processes in the aviation sector are crucial steps to ensure businesses like Indonesia Airlines find a hospitable environment within Indonesia’s borders.

Cick here to get the latest news

Freeport’s New Gold Refinery in Gresik Set to Deliver $5 Billion in Annual State Revenue

Is this trend purely a result of strategic business decisions, or does it highlight fundamental regulatory inadequacies hindering the national aviation industry’s growth? The answer lies in the government’s response to this ongoing challenge.

 

To contextualize the environment in which Indonesia Airlines is emerging, it’s essential to examine recent data on Indonesian air traffic, fare structures, and destination networks.

 

1.Passenger Traffic Trends

• Domestic Traffic: From January to July 2024, Indonesia recorded approximately 241.7 million domestic air passengers, marking a 15.19% increase compared to the same period in 2023.  

• International Traffic: The number of international air transport passengers departing in January 2024 increased by 0.41% compared to December 2023.  

 

2.Airfare Trends

Despite the growth in passenger numbers, Indonesian airfares have been notably high. A transportation economics expert from Gadjah Mada University highlighted that Indonesia’s domestic airfares are among the highest globally, second only to Brazil. Within the ASEAN region, Indonesia holds the highest average airfare. 

3.Airline Destinations

Indonesian carriers have been expanding their networks:

• Indonesia AirAsia: As of 2024, operates flights to various domestic destinations, including Jakarta, Denpasar, and Medan, as well as international routes to cities like Kuala Lumpur, Singapore, and Perth.

• Super Air Jet: Launched in 2021, this airline has rapidly expanded to serve 32 destinations across Indonesia, including Ambon, Balikpapan, and Banda Aceh.  

 

The Indonesian aviation sector is experiencing significant growth in passenger traffic and route expansion. However, challenges such as high domestic airfares and regulatory complexities continue to influence strategic decisions by airlines, including the choice to base operations abroad.

Addressing these issues through comprehensive regulatory reforms could enhance the competitiveness and appeal of Indonesia’s aviation industry. ***