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.