(Reuters) – Indonesia’s need for more and better airports is drawing strong interest from foreign transport and construction companies, hungry for a slice of the action in one of world’s the fastest growing markets for air travel.

Next month, Indonesia is expected to ease regulations to allow foreign companies, like India’s GVK Power & Infrastructure and South Korea’s Incheon International Airport Corp , to manage and operate airports in what is already the world’s fifth largest domestic air travel market.

“After this (change in the) law in Indonesia, all airport operators will be showing an interest,” said Turkish airports operator TAV Havalimanlari Holding in an e-mailed statement.

Indonesia’s airports, many of which are operating at two to three times above their designed capacity, are crying out for investment after years of scant government funding, inefficient bureaucracy, and unending disputes over land rights.

Its nearly 200 public airports are barely coping with a travel boom and could lose market share to Singapore, Malaysia and other regional hubs if it doesn’t quickly expand, industry officials warned.

Years of robust economic growth in the world’s fourth most populous country has led to a surge in air traffic, as many Indonesians pick planes for travelling between the archipelago’s myriad islands instead of ferries.

The country’s main airport, Soekarno-Hatta International Airport in Jakarta, is expected to handle 64.4 million passengers this year, nearly triple its designed capacity of 22 million, according to its owner, Angkasa Pura II.

The country’s newest international airport, located in northern Sumatra’s provincial capital of Medan, is already operating at capacity after opening just four months ago.

Budget carrier Lion Air, which has ordered more than 500 planes for delivery in the next decade, warned its new aircraft could be diverted to its affiliates in Thailand or Malaysia if Indonesia can’t accommodate its plans to expand into the international market, said Edward Sirait, the firm’s director of general affairs.

Indonesia’s flag carrier Garuda Airlines , which last week announced plans to double its fleet to 350-400 aircraft by 2025, is also being forced to move many of its new planes to Batam and Medan airports due to the lack of capacity in Jakarta.

“Garuda’s fleet is quite flexible so we can park our aircraft in airports around Indonesia,” the company’s chief executive, Emirsyah Satar, told Reuters. “It’s a pity if we can’t fulfill the needs for transportation due to a lack of infrastructure.”

In August, Garuda was forced to announce a delay in the launch of its first Jakarta-London service by six months to May 2014 due to the capital’s ageing airport.

Satar said the company’s expansion plan was based on the government’s development program to start building 24 new airports and significantly expand current ones by 2017. Another 21 airports are to be built within a decade.

SOARING DEMAND

Overseas interest in Indonesia has been rising for years.

France’s Vinci , Germany’s Fraport AG , South Korea’s Incheon, Japan’s Mitsubishi Corp  and Sojitz Corp  have recently approached Indonesian companies about possible investment opportunities, said two senior officials with state-owned air operator Angkasa Pura I.

But no foreign firm has been able to grab a major stake in any of Indonesia’s major airports due to restrictive government regulations and land acquisition issues. The country’s airports are currently operated by either the government or state-owned companies.

“Many foreign companies have come to us. They are asking and waiting for their opportunity,” Tommy Soemoto, president director of Angkasa Pura I, told Reuters earlier this month. “It is up to the government now.”

Indonesia’s airports are on a “negative investment list”, which limits foreign involvement in areas deemed sensitive. Under the regulations, foreign companies are limited to owning no more than 49 percent of domestic airports.

Indonesian officials have proposed removing airports, ports and airport services from this list to help revive a slowing economy. The measures need the approval of President Susilo Bambang Yudhoyono.

Indonesia’s investment chief Mahendra Siregar told Reuters minor details of the proposal were still being finalized, and should be approved in early December.

India’s GVK Power & Infrastructure said Indonesia’s plan to allow 100 percent foreign direct investment in airport development would “facilitate not only capital infusion but also the much needed management, technical and operation expertise.”

India’s largest private airport operator is expected to become the first foreign company to hold a major stake in an Indonesian airport when it teams up with Angkasa Pura I next year to build a second airport in the central Java city of Yogyakarta.

The $700 million project is expected to be finalized next year with operations starting as early as 2017.

Angkasa Pura I also hopes next year to spin-off five of its most profitable airports, including the Ngurah Rai International Airport in Bali, to enable foreign investment for its expansion plans, Yudhaprana Sugarda, head of corporate planning, told Reuters earlier this month.

“Up to 900 new planes will be delivered into Indonesia in the next decade,” Sugarda said. “We must seek cooperation to improve our infrastructure to be ready.”

SOURCE REUTERS