Airlines companies keep prices low to survive

Airlines companies keep prices low to survive

P.C. Naommy,The Jakarta Post, Jakarta

The country's airline companies have been cutting fares to record
lows to survive amid fiercer competition, in what one analyst
described as a price war that would eventually hurt the overall
industry.

But airline operators dismissed such a bleak projection, as
they expect air fares to increase in the high season in the
second half of the year.

Industry observer Dudi Sudibyo said the current price war
between airlines for domestic routes was unavoidable as
competition had become tougher with the entry of several new
players in the past couple of years.

The situation has worsened considering that January to May is
generally considered the low season.

"It's a complicated situation for many airlines companies;
they would cut their own throat if they maintained high prices
during these times," Dudi told The Jakarta Post over the weekend.

"But instead of engaging in a price war, as is happening these
days, airline companies should build solid cooperation to deal
with current obstacles and future challenges," he said.

Dudi feared that if the price war in the domestic routes
continues, many airline companies would suffer serious financial
losses.

"With the current prices, people may only have to pay between
Rp 200,000 to Rp 300,000 (about US$35.71) to go from Jakarta to
Surabaya, while the company must pay about $80,000 to $300,000 to
lease a single Boeing 737 in one month," he said, pointing out
that the income from domestic flights would not be able to cover
the operational costs.

Local passengers have seen prices dipping over the past couple
of year particularly with the entry of new airlines providing
cheaper no-frills services. This has contributed to the troubles
faced by major domestic airlines like state-owned Garuda
Indonesia (the country's flagship carrier) and Merpati Airlines.

Merpati has asked for a government bailout amid huge debts and
declining business following the SARS outbreak, terrorist attacks
and fiercer competition. Meanwhile, Garuda said earlier this week
that pre-tax profit in 2003 plunged by 76 percent from the
previous year due to unfavorable global conditions and stiffer
competition at home. It said that pre-tax profit in 2003 was Rp
238.7 billion, a sharp decline from Rp 1 trillion booked in the
previous year.

Airline operators, however, said that the very low domestic
airfares was only temporary as prices would eventually increase
again once the high season began.

"We should not view the situation only as it is today, but
rather see the big picture of one whole year," said marketing
director of Merpati Airlines Totok Nursatyo.

Totok further explained that airline companies would still
earn profits this year because the current losses would be offset
by higher prices and strong revenue during the upcoming peak
season.

Similar comments came from Nurwulan Handayani, public
relations manager of Star Air. Nurwulan said that Star Air has
applied flexible pricing in the low season with eight fare
classes.

"In the low season, when demand is sluggish, we will cut fares
to the lowest range, and vice versa, when the demand starts to
pick up, we will raise the prices to higher ranges."

Nurwulan further said that low prices did not mean low safety
standards, for the company had applied Civil Aviation Safety
Regulations (CASR) since it started to operate on July 8, 2001.

Meanwhile, Lion Air spokesman Hasyim Arzal Alhabzy said that
the company would never regard the current situation as a "war".

"The term 'war' implies unhealthy competition in the industry,
whereas in fact, there isn't any," said Hasyim.