A new Jakarta airport: taking flight or grounded by delay?

When should a city burdened with a congested, undersized airport not welcome  planned airport construction?  Surprisingly, when there is too much of it. If competing planners have their way, Jakarta, Indonesia, a megacity in dire  need of additional airport capacity, may find itself with too much planned  capacity.  With two major, and competing, West Java airport projects under  discussion, the planned expansion at Soekarno-Hatta International Airport  (SHIA) and the Air Force’s Halim Airport now open for domestic commercial  flights, one might conclude that long-suffering Jakarta may one day be spoiled  for choice. Too much of a good thing A classy problem indeed.  Passengers used to enduring  SHIA’s overcrowded conditions may struggle to see this  state of affairs as a problem at all.  However, airport  operators, PPP investors and airlines know that too much  capacity from duplicative airports presents serious risk to  their business models. If too much is planned, demand will be diluted and  nothing might get built.  If too little is planned, Jakartans  will be underserved.  Planners will need a Goldilocks touch  to assure investors can make money, financiers will lend it  and airlines don’t lose it. Monopoly good, competition bad Airports deliver essential public services that are  monopolistic in nature.  Undermine the natural monopoly  at the planning stage with projects proposed for the same  area, and the private sector will avoid the huge multidecade risks that airports present. The competing West Java projects give rise to the greatest  concern.  If dueling projects threaten to poach from the  same catchment pool, neither might look commercially  viable, and both might fail to take wing.   These airport projects, Karawang International Airport  (KIA) and Kertajati Airport (also known as West Java  International Airport,or Majalengka Airport) for several  years have been the subject of a behind-the-scenes  collision between national and regional ambitions.   Consistent with Indonesian cultural norms, the  competition between them can be difficult to detect, but  occasionally surfaces in contrasting public statements. KIA – nationally favored, internationally supported KIA is championed by the national government and  Japan (through JICA).  It is intended to serve Jakarta, and  to a lesser extent the City of Bandung (pop. 2.4 mil), new  satellite cities hoped to spring up near the site, and West  Java generally (pop. 46 mil).   Although 70 km. east of Jakarta (twice the distance from  SHIA to downtown Jakarta), Japan’s impressive, ambitious  Metropolitan Priority Area Plan (MPA) for Jakarta’s  infrastructure development includes a high speed rail  connection to KIA.  KIA would be well positioned to  Cimalaya Port, for which the Japanese also have grand  plans.   Some form of PPP structure is suggested in Japan’s MPA  plan, and makes good sense, but in the current political  environment, government ownership and a state role  in operations both seem very likely. Private sector  participation in construction and perhaps in an O&M joint  venture is possible. A new Jakarta airport: taking flight, or  grounded by delay? - Clyde & Co analyzes the prospects2 “Until KIA can assess the probability that  Kertajati will be built, when it might be  completed, what its capacity will be, and how  its operation will impact KIA usage, KIA’s  planners may struggle to present a feasible  business case on which KIA investors can bid.” 23 Kertajati – regionally favored by the host  government Kertajati Airport is strongly supported by the West  Java Regional Government, with foreign interest from  Korea.  Kertajati Airport targets the Bandung/West Java  catchment area.  Located much further east from Jakarta than KIA,  common catchment passenger sharing between SHIA and  Kertajati is projected in one study to be (and long remain)  less than 2%.   This would mean Kertajati may do much to benefit West  Java, as the regional government hopes, but little to  improve Jakarta’s air services. However, while Kertajati may be too far from SHIA  to impact it, the same is not true of its effect on KIA.    Assuming a catchment area with a 50 km radius,  Kertajati’s catchment area overlaps with about a third of  the area from which KIA will draw its potential customers.   Of course, KIA’s catchment area also overlaps SHIA’s area  by about a third, and a study suggests passenger sharing  as great as 40%.  However, in the SHIA/KIA case, this  overlap is the very point of building KIA.  In the SHIA/KIA  case, catchment overlap is good news, as KIA will relieve  pressure on SHIA.   In the KIA/Kertajati case, however, this overlap raises the  risk that neither airport achieves its passenger targets. Until KIA can assess the probability that Kertajati will be  built, when it might be completed, what its capacity will  be, and how its operation will impact KIA usage, KIA’s  planners may struggle to present a feasible business case  on which KIA investors can bid. The power of the permit Kertajati’s champion, the West Java government, controls  a crucial permit that rival KIA needs to go ahead, and  has explicitly linked grant of this permit to resolving the  relative roles of KIA and Kertajati Airport. Located in West Java’s jurisdiction, KIA’s fate appears tied  to the West Java government’s willingness to include KIA  in its Regional Spatial Layout Plan (locally known as the  RTRW).  The West Java government has several times  pointed out that KIA will be located in an area reserved for  agricultural and manufacturing, and not zoned for airport  use. This is no mere technicality, as it provides Kertajati  Airport’s supporters with strong leverage.  When  discussing the RTRW permit issue, the Head of the West  Java Regional Development Planning Authority is quoted  as having asked “all parties to side with the consensus  Greater  Jakarta West Java Soekarno-Hatta  International  Airport (SHIA) Halim Airport Karawang International  Airport (proposed) Kertajati Airport  (proposed)4 that BIJB [Kertajati Airport] will take precedence; then  Karawang [KIA] can be discussed.”   The West Java governor is reported to have said his  government will not act on the proposed RTRW revision  that KIA needs until KIA’s issues are fully discussed with  West Java.  Comments from others suggest that the local  planning authority feels excluded from the KIA planning  process. Bigger and faster to win the race? West Java may intend to start the race while KIA is stuck  at the starting line.  While KIA supporters wait for the  West Java government to include KIA in the RTRW spatial  plan, in 2012 West Java announced that it will accelerate  Kertajati’s completion by two years to 2018, and increase  the airport’s size. “If Kertajati enters operation later than 2020, then it will be  outdone by Karawang. Don’t be beaten by Karawang,” the  Provincial Secretary is reported to have said during a 2012  focus group discussion.  To add to planning difficulties, he  suggested that Kertajati “should increase the [airport’s]  capacity for aircraft handling, passengers and cargo from  the initial plan.”  One Kertajati supporter announced that Kertajati’s annual  passenger capacity would be doubled from 12 to 24 million  while its main runway would be lengthened from 3,000  meters to 3,600 meters to accommodate larger airplanes.   “Cargo handling capacity must also be increased from  only 85,000 tons per year because Karawang will be  handling 1.2 million tons,” said the spokesman for the  Committee for Acceleration and Expansion of Economic  Growth.  The Provincial Secretary reportedly agreed with  the recommendation to double passenger capacity and  increase planned cargo handling capacity to 500,000 tons  per year. Siting concerns - not the first time, and not the last The siting of capital intensive infrastructure projects  that are natural monopolies is a perennial issue.  Natural  monopolies feature in infrastructure assets that provide  a transportation function – airports, roads, rail and  electricity transmission and distribution.  Monopolies  arise because it makes little sense to build multiple  transportation projects if, by drinking from the same pool  of customers, no project can be profitable.   Risk of anti-competitive harm caused by protected zones  from which competitors are excluded should be held in  check by regulation (particularly tariffs) and targeted  returns for a regulated asset base.  These measures are  often controversial, as they are specifically intended  to prevent a competitor from opening next door, while  restraining the project owner from price gouging.  From  public statements made by many airlines around the  world, it is clear that users do not always believe tariff  regimes achieve an equitable outcome. While regulators need to be mindful of the interests of  users, planners cannot ignore that owners and operators  of airports and other natural monopolies care deeply that  their heavy capital investments can be recouped without  risk that an after-arriving neighboring competitor will  undermine demand.  Ignore this concern, and investors  will steer clear. Japan has experienced three-cornered airport competition  similar to that shaping up in Java.  Kansai, Osaka (Itami)  and Kobe Airports present a good example that too much  densely sited airport capacity can be too much of a good  thing.   Each airport serves the Osaka-Kyoto-Kobe catchment  area and each is located very close to the other two.  Kobe  Airport is a mere 22 km from Kansai Airport.  Itami is 43  km from Kansai, and Kobe is 26 km from Itami.   Plans to build Kobe Airport were long in the making, and  the need for a third major airport in the region was briskly  debated, with local government opting to build to assist  recovery from the Great Hanshin Earthquake.  Having  passed through a multi-year initial ramp-up period, Kobe  Airport has settled into operating well below capacity,  but reportedly at levels sufficient to harm the other two  airports because some traffic is drawn away. Airlines too have been adversely affected, with Kobe’s  opening reportedly driving JAL and ANA to shift orders  from efficient wide-bodies to serve Kansai to more  mid-sized aircraft when Kobe split the passenger pool.   Ironically, having adjusted jet orders to reflect smaller  loads distributed across three airports, JAL has since  discontinued all Kobe services, and ANA has cut back its  services.56 “Location alone suggests KIA is the  better choice as Jakarta’s second airport,  and its ability to receive funding support  further suggests KIA will prevail.”7 And the winner is? KIA is conceptualized as a major international gateway  airport that will handle 60 million passengers a year.   Japan has helped develop plans for related facilities,  including a high speed rail line, a freight rail line,  a seaport, an industrial park and various related  facilities.  The Japanese plans even envision that national  government offices may move from congested Jakarta to  a new satellite town near KIA and that a Shinkansen train  will bring passengers from Jakarta’s Jalan Sudirman to KIA  in 20 minutes. It is a beguiling prospect, and worthy of serious  consideration. The price tag is very, very high, but Japanese  ODA would go a long way toward covering the cost.   National government support is of course meaningful for  success. Kertajati is conceptualized as a much smaller airport of  between 1/5 and 1/3 KIA’s size. It would be the nucleus  of a new town development as well. The West Java  government’s presentation on “Kerajati Aerocity” (available  online) proposes to develop a 1800 hectare site, with 75%  of it for non-aeronautical purposes, such as industrial,  commercial, residential, recreational and cultural uses.   These plans are perhaps more aspirational than the KIA  plans, but not without merit.  West Java’s industry and  population make it a heavyweight among Indonesian  provinces, and it makes sense for it to think big. However, without substantial national and international  funding, there is a real prospect Kertajati Airport will  become a spoiler, rather than a full rival to KIA.  Kertajati’s  chances may increase as its cost decreases, and to do that  Kertajati would need to recast itself as a smaller regional  airport. The consolation prize for West Java may not be  unattractive.  The Japanese high speed rail plan begins in  phase 1 with a Shinkansen link from Jakarta to KIA, but  in phase 2 that track will be extended to Bandung, West  Java’s largest city.  If this happens, West Java will find  much to welcome in the rival plan. What’s an investor to do? No doubt with frustrating delays, and in a manner  foreigners may not fully fathom, Indonesia will resolve  these issues. Location alone suggests KIA is the better choice as  Jakarta’s second airport, and its ability to receive funding  support further suggests KIA will prevail. Kertajati may well have a future as a regional airport,  replacing Bandung’s existing airport.  If not, then mindful  that West Java has already spent tens of millions of dollars  buying the land for Kertajati Airport, a financial exit will  be sought. In the meantime, Japanese interests can be expected to  continue to develop momentum on an impressive array of  projects proposed for Jakarta, of which KIA is but one, and  non-Japanese interests will weigh promoting alternatives  or teaming up with Japanese partners on their projects. After such a long drought in building projects on this  scale, Indonesians should be pleased to see that the level  of interest in new projects is high.  The trick, as noted,  is in the Goldilocks planning to provide a commercially  attractive project that is just right for investors.