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Saturday, February 1, 2014

Emerging Markets Indonesia: Much Potential, Flawed Commitment 

Indonesia is a country with an urgent requirement for helicopters in virtually every one of the recognized market sectors, but with cripplingly high import duties added to little apparent government support for expanding this part of the aerospace sector, opportunities for manufacturers seem limited to “on again, off again” defense procurement.

By Andrew Drwiega, International Bureau Chief

The Indonesian Army is looking to make a huge leap forward in technology when it completes the buy of eight of the latest Boeing Apache AH-64Es in a deal so far worth $500 million.
It comes to you gradually after you have been in downtown Jakarta for a while. Although there is the noise of 25 million people around you, especially on a Monday morning, when a 40-minute journey in most cities can take you over two hours in the streams of traffic mixed with what seems to be every motor bike and scooter in the country, there is still something missing – one sound in all this mayhem that should be there – but what?

Then it dawns on you when you look up that the sky is silent. The motor race that constantly roars around you on the ground is virtually unmatched by jet or helicopter movement overhead. During five days in downtown Jakarta, I saw only two helicopters over the city – and one of those actually landed on the rooftop of a nearby city high rise.

Lorenzo Pariani, AgustaWestland’s regional manager and sole representative in Indonesia, knew not only the name of helicopter operator, but said he also knew the name of the VIP being transported in (although that remained confidential). Indonesia is a country that, considering the size of the population, should be teeming with helicopters and light aircraft.

There is certainly money around, including stories that deliveries of luxury cars are all sold within days of them being imported into the country. But helicopters attract a 65 percent luxury tax levied by the government, which largely means that they are impossibly expensive to own and operate by individuals. However, by registering aircraft overseas and operating them in the country, a number of operators have developed and established charter businesses over the years, particularly Susi Air (AgustaWestland Grand and Koala AW119 Ke), Airfast Indonesia (a mixed Bell fleet, Airbus Helicopters AS350 B3/e and Russian Mi-1710), Indonesia Air (EC155 and SA365 Dauphin N2), Air Pacifik Utema (with Helimousine), Derazona Helicopters (Bell 412 Sp and Bell 206B), Pelita Air (Bell 412 EP, Bell 430, BK107, Sikorsky S-76A and S-76C++), NUH (Bell 412), TRAVIRA (Sikorsky S76A, C, C++ and B412EP), Transwisata Prima Aviation (Bell 412 EP and Super Puma AS322), Air Bali (Bell 206 and 407) and others.

For a country with a population of more than 240 million people there is little in the way of organized government helicopter support. Outside of the military, there are few helicopters owned by the government or “blue light” services. There are no helicopter emergency medical services which, for a county with growing notoriety for its world class traffic chaos, means that a rapid transit to hospital for anyone seriously injured or even with just a heart attack is dependent on location, time of day, and usually family or friends with transport immediately available. Only a select number of VIPs have access to helicopter transportation within the country. Additionally, Indonesia comprises more than 17,000 islands, although only around half of them inhabited, so there is also a recognized dearth of modern helicopters and supply aircraft.

Market in Need of Maturity

Lorenzo Pariani, AgustaWestland’s regional manager and representative in Indonesia is looking forward to the first delivery of an AW139 to an Indonesian operator in 2014. Pariani’s belief is that the surge in demand for offshore energy in Indonesia will fuel the requirement for helicopters such as the AW139 show and operated by Gulf Helicopters.
The most developed sector served by civil helicopter operators has been the coal mining industry and, increasingly, the offshore oil and gas developments that are being further developed. Mining is a significant activity throughout Indonesia’s islands and recent oil and gas finds further offshore will require helicopters with greater range and capability. This is where Pariani believes that AgustaWestland has its best opportunity with its recently developed AW189, AW169 and AW139 family of helicopters. Both recognize that there is a change in the economic attitude of the country and looking for the arrival of more foreign investors to further boost business prosperity.

Pariani revealed that AgustaWestland plans to deliver the first AW139 to one of the leading operators in the first quarter 2014, with additional orders signed last year for deliveries 2015 with different operators.

Indonesia is growing fast and its energy needs are pushing the oil companies to explore farther fields together with the more efficient exploitation of the existing fields: “This is where we believe that ‘family concept’ will provide a cost effective solution for the oil and gas sector.”

The company is also eager to expand into the VIP and corporate markets with the Grand and the GrandNew when conditions allow. “We are going to open a service center within the year while engineers and pilots can already use the training academy in Kuala Lumpur (where there is a new AW139 Level D simulator).

“The main challenge is to bring an understanding of fleet management to these industry sectors,” stated Pariani. At the moment operations are piecemeal and reliant on individual aircraft, rather than an operation that embraces internationally recognized management techniques. “Instilling a culture of safety is also a critical factor,” he noted, a point underlined by Ludovic Boistot, President Director of the Airbus Helicopters subsidiary in Indonesia, which has the largest OEM office of any of the major manufacturers with just over 25 employees in the office on the outskirts of Jakarta.

Arie Wibowo, VP marketing, Indonesian Aerospace
Airbus Helicopters has contracted for Indonesian Aerospace/PT Dirgantara Indonesia (PTDI) to manufacture upper fuselage sections and tail booms for its EC225/EC725 family since 2008. A recent success was the first delivery of an integrated upper and lower fuselage from PTDI’s Bandung plant in West Java. The current contract is for 125 component sets valued at $43 million. PTDI will now be integrating both upper and lower sections into a main fuselage assembly and shipping it to Airbus Helicopters in Marignane, France. The schedule that has been set for 2014 is for one EC225/725 tail boom every three weeks and an integrated fuselage every 10 weeks.

Boistot said that Airbus Helicopters had partly helped to establish new manufacturing machinery at PTDI’s plant. “It is a mix of contract and investment from the government. It gives us what we need in terms of quality and the process and end product are subject to the same quality inspections and checks of every Airbus helicopter product.”

The collaboration with the Indonesian government was regenerated several years ago after the country suffered from severe economic difficulties at the end of the last century. “We are looking for opportunities and Airbus Helicopters has firmly re-established its secure footing here,” said Boistot. “There is a huge potential market in the country. Aerospace is an industry that is attracting supported by the government and for sure there is the potential to collaborate further.” Airbus Helicopters is currently working to expand its collaboration with Indonesian industry regarding various added value fields relating to the completion and customization of its range of helicopters.

One of the industry sectors yet to be developed is the third party supplier sector. There is not significant volume of small manufacturers to support the expansion of the aerospace industry, but Boistot said that his company continues to explore the idea of sourcing small items from within Indonesia.

“If we could find more suppliers, we would consider it.”

Ceremony at Indonesian Aerospace in Bandung, Java to mark the delivered of the first complete main fuselage assembly for Airbus Helicopters EC725 and EC225.
Although there is a huge luxury tax of 65 percent on the importation of aircraft, which is completely holding back the development of the civil private ownership market, it is aimed for the moment largely at individual owner/operators. As has already been shown, the charter business has been able to find its own way to procure and operate helicopters.

Boistot and Pariani both believe that in order for the national business of helicopter operations to improve there needs to be greater understanding within Indonesia of how well internationally established operators manage modern helicopter fleets, both economically and practically. There needs to be a significant leap of understanding in the capabilities of modern digitally equipped helicopters, good business models for operating fleets and how to manage their operational costs, maintenance costs, aircrew and ground maintenance training requirements, international safety requirements and equipment updates.

Arie Wibowo, vice president of marketing and sales for PTDI, explains that the government is seeking to “revitalize our business” since the economic decline around 1999. “We are striving to return with some financial facility given to us by the government. We are now almost like a private company but owned by Ministry of Finance and coordinated by Ministry of State Owned Enterprise.”

While the focus of PTDI currently seeks to be on the production of fixed-wing turboprop aircraft through its licensing agreement with Airbus Defence and Space, particularly in area of business around China, Southeast Asia and the Pacific, Wibowo confirmed that the organization wants to “keep our mission to expand the aerospace industry – both fixed-wing and helicopters.” He said that there was a drive to establish Indonesia among the regional industries to not only survive, but grow.

Military Looks to Boost Acquisition

The Indonesian government has renewed its interest in building military capability and is looking to accelerate the expansion and modernization of its forces. However, planning relies more on staged acquisition rather than a commitment to a definite procurement timetable. Said Boistot: “They do not have a plan where they will buy 100 helicopters at one time, but they currently prefer to buy in smaller numbers of say 5 to 15 helicopters, depending on the mission.”

The most recent big news for the Indonesian military was the surprise joint announcement between U.S. defense secretary Chuck Hagel and Indonesian defense minister Purnomo Yusgiantoro in 2013 for the sale of eight Boeing Apache AH-64E Guardian attack helicopters to the Indonesian Army (TNI-AD). How that was explained to the Australians who continue to have a tense relationship with Indonesia has not been widely discussed. At the time of writing, Indonesia had recently accused the Australian government of spying while the Royal Australian Navy (RAN) has been turning back boats with asylum-seekers from Africa, who are allegedly being trafficked at great profit through Indonesia. During these activities the RAN had entered Indonesia’s territorial waters.

The sale of these sophisticated attack helicopters to the world’s most populated Muslim country with its reputation for endemic corruption really serves to underline how the United States now values making allies in Southeast Asia as it looks to face up to Chinese regional expansion ambitions. Countries to watch for increased U.S. detente in addition to Indonesia include Singapore, the Philippines, Malaysia and even Vietnam (all countries surrounding increasingly disputed South China Sea). Japan, the Republic of Korea and Taiwan already have strong ties with the U.S. military and are also expanding their rotorcraft capabilities, particularly as part of an expansion of amphibious forces.

The Boeing Apache deal is valued at around $500 million, which would include aircrew and maintainer training (although expert sources state that a fully funded Apache program would be valued at triple that figure – around $1.4 billion). “Providing Indonesia these world-class helicopters is an example of our commitment to help build Indonesia’s military capability,” said Hagel. However, there are many doubters about whether the deal will actually progress quickly – and to completion. With a demonstrated tight rein on defense spending, in an “on again, off again” fashion, and witnessed by the slow flow of Bell 412 EPs for the Indonesian Army in recent years, together with an alleged grounding of most of the Super Puma fleet due to a lack of financing and through life management, the maintenance of such a highly sophisticated fleet of helicopters as the Apache Guardian will require a dramatic transformation in the way the government conducts its defense budgeting and management. While the stated reason for the requirement of such advanced helicopters is described at contingencies and counter-piracy operations, Indonesia has its share of militants in areas such as the Aceh Peninsular. It also has a long border Malaysia in Kalimantan although there is no suggestion of tension here (despite an insurgent war being fought in the region in the 1960s).

In 2007, the TNI-AD revealed a 25-year plan to purchase up to 135 helicopters to include attack helicopters including already bought Mi-35s, and prospective buys such as Airbus Helicopters AS550 Fennecs. The Indonesian Navy is also interested in the AS565 MB Panther, which would be added to the Air Force’s decision to buy six EC725s for search and rescue (SAR) back in 2012, with delivery scheduled in 2014.

The mainstay of air support for the TNI-AN is currently based around its Russian Mi-17-V5 helicopters (the last six of which it received in August 2011); Bell 412 EPs (of which an eventual fleet of 24 have been declared with Bell Helicopter feeding them through as finances are made available by the government); and Super Puma N322s acting as VIP aircraft. Both Airbus Helicopters (formerly Eurocopter) and Bell Helicopter have perhaps the longest standing relationships with the Indonesian government. Bell Helicopter’s relationship was limited around the turn of the century following the economic crisis, while Airbus Group has best retained its footprint in the country through the manufacture of fixed wing turboprop transport aircraft by PTDI under license from Airbus Defence and Space.

In general, the expansion of the aerospace sector is something that the government needs to address more closely, particularly in terms of how taxation is applied to aircraft purchases. In addition, it requires a coherent financial commitment and strategy to both the development of its own industrial base and to the way to structures military helicopter acquisition. Without it, the government will find that it continues to either pay a premium for limited number buys, or that it will fall a long way short in fielding properly funded capability over the lifecycle of the aircraft that it buys.

 

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