AirAsia deal stirs budget aviation rivalry

The acquisition of domestic carrier Batavia Air by AirAsia Berhad will likely have a smooth landing as Asia’s largest low-cost airline teams up with its local partner to avert the ownership cap imposed on foreign companies on Indonesian airlines.

However, the acquisition will fuel competition among the country’s low-cost airlines such as major player Lion Air, which controls 47 per cent of the market, Garuda Indonesia’s budget airline subsidiary Citilink, which has just begun to fly under its own brand, and several other smaller airline companies.

Transportation Ministry spokes-man Bambang Ervan said in Jakarta yesterday that the acquisition would not violate the national aviation law, which limits foreign ownership to 49 per cent in a national airline.

“The acquisition is in line with the 2009 Aviation Law because an Indonesian company remains the major shareholder in Batavia Air,” Ervan told The Jakarta Post.

AirAsia and its Indonesian partner PT Fersindo Nusaperkasa, owner of a 51 per cent stake in Indonesia AirAsia (IAA) signed an agreement yesterday to buy PT Metro Batavia, the owner of Batavia Air for US$80 million.

Under the agreement, AirAsia Berhard will own a 49 per cent stake in Metro Batavia, while Fersindo will hold the remaining 51 per cent. Some 76 per cent of the shares will be bought this year and the remainder by 2013.

“The Batavia Air acquisition is a fantastic opportunity for AirAsia to accelerate our growth plans in one of the most exciting aviation markets in Asia, and further underlines our belief in the growth potential of Indonesia’s aviation sector,” AirAsia Group CEO Tony Fernandez said in a statement.

Meanwhile, aviation expert and former investigator at the National Transportation Safety Committee Hana Simatupang said that the acquisition showed the growing dominance of foreign airlines in the national aviation industry. “This is what I am afraid of. Foreign airlines, through their subsidiaries, will control domestic airlines because the domestic airlines have failed to professionally manage their businesses,” Simatupang told the Post.

“In addition, our regulator is not firm in preventing foreign ownership through regulations. The Indonesian aviation business is at stake.”

She said that the long-term impact of such acquisitions would be dangerous – domestic carriers would gradually die off, while foreign carriers would be able to further spread their wings in Indonesian airspace.

Only national flag carrier Garuda Indonesia, its strategic business unit Citilink, and privately owned Lion Air might be able to compete with foreign airlines because they were well managed, but for other airlines, the entry of foreign airline companies into the country was a threat, she added.

“Again, this acquisition shows how incompetent our carriers are. We will see more acquisitions in the next few years if our carriers cannot improve their business and the regulator does not issue strict regulations on ownership,” she said.

This acquisition comes on the heels of Tiger Airway’s takeover of Mandala Air earlier this year.

The acquisition will help AirAsia to compete against rivals in the region when the Southeast Asia open-sky policy is implemented in 2015. “Most Indonesian carriers are not ready for the open-sky policy when it comes into effect in 2015,” she said.

Even though analysts might see the acquisition in a negative way, Fernandez said the partnership would help both companies to grow.

“This is a good marriage because Batavia Air is the jewel of Indonesia. We hope we can build something very special here, to grow tourism in Indonesia, and help more Indonesians to fly,” Fernandez told reporters in a conference. He said that through the new partnership, AirAsia and Batavia’s market share in Indonesia stood at 20 per cent. By the end of this year, both companies aim to transport 14 million domestic passengers.

Batavia Air president director Yudiawan Tansari said the company would maintain its name and its mid-range service after the acquisition.