Airlines earn their wings in crowded skies

Fri, 25 Apr 2003

Airlines worldwide are reeling from the double blow of the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome (SARS), but Indonesian carriers have two other problems to deal with: a cut-throat airfare war and the loss of the visa free facility for tourists. And while SARS, the Iraq war and abolishment of the visa exemption are unexpected developments that are exerting varying impacts on local airlines, the ongoing fare battle cuts to the core of their business prospects and survival. The number of airlines soared following the deregulation of the air transportation business in 1999, increasing from six in 1998 to 19 today, with the inevitable development of unhealthy competition among local carriers. With its population of 215 million spread over far-flung islands, Indonesia offers huge potential for the development of the airline industry. While air travel was once a luxury only the rich could afford, the entry of more airlines serving the busiest and most lucrative routes has caused airfares to plummet. Data issued by the Indonesia National Air Carriers Association (INACA) predict the number of domestic air passengers will continue to surge. In 2000, there were 7.58 million passengers but the number increased to 8.27 million in 2001 and to 8.96 million in 2002. The figures are expected to reach 9.65 million this year and 10.34 million next year. In terms of passenger numbers, the business looks promising, but it is less rosy when passenger growth rates are taken into account. The latter dropped to 8.3 percent in 2002 from 9.1 percent in 2001, and 10 percent in 2000. The figure is projected to decline further to 7.7 percent and 7.1 percent in 2003 and 2004 respectively. There are many factors at play the price war. People seeking cheap tickets visit a number of travel agents, and this group has a significant role in setting low airfares. The types and age of airplanes as well as time schedule also affect determination of airfares. Many airlines offer cheaper tickets for flights early in the morning or late at night, but a more modern aircraft will probably mean a higher airfare, due to the leasing and maintenance fees. INACA's chairman Indra Setiawan said the aviation industry and the government must work closely together to prevent the price war from worsening. The government should, for example, play a greater role in maintaining supply and demand at a fair level. Indra acknowledged that the growing number of airlines in Indonesia was a good sign for the aviation sector because more competition would prod the enhancement of services. "Still, supply and demand must always be considered to avoid a severe price war and bankruptcy. In China and Japan, the total number of domestic air passengers reaches 100 million annually, but each country has only four or five air carriers." In Indonesia, there are some 10 million domestic air passengers per year. With 19 airlines -- or with a total fleet of 180 planes in operation --the number of passengers is still too small for the industry. Chairwoman of the Association of Travel Agents in Indonesia (ASITA) Meity Robot shared the view that supply and demand must be considered carefully by both of the government and the industry. "Ideally, there should also be a floor price (lowest airfare) set by the government, so that airlines can't set rates below the floor rate," she said. "This (fare war) is not healthy and could lead to bankruptcy." One of the new airlines, Awair, temporarily suspended its services earlier this year. The company stopped services on the three most profitable routes of Jakarta-Denpasar, Jakarta- Surabaya and Jakarta-Medan but said it would resume operations later this year. It was the first suspension of a domestic airline since the government liberalized the sector in mid-2000. Meity warned that the airfare war among the air carriers would not only affect the airlines, but also other transportation sectors, such as rail and shipping networks. Indra said all players in the aviation business should in finding way to deal with the low demand. "For example, they (airlines) can form a kind of small alliance, so they are more competitive in term of services and networks," he said. Ale Sugiarto, president of StarAir, another of the new airlines, said competition should be based on service, not fares. "Fuel, maintenance and fleet leasing will formulate the airfare. But the cost structure is actually more complicated. When an air carrier reduces its airfare, it will be hard to put it back to the previous level. Then the carrier will face a fatal condition." He said that each air carrier should strive to compete in the market by providing convenience throughout its services, and working with hotels and travel/tour agencies to offer attractive packages. Such a strategy has been adopted by Bali-based Air Paradise International, which began services in February. The airline's president, Kadek Wiranatha, said his aim was to draw more Australian tourists to Bali by operating his own planes and offering attractive tour packages in tandem with airfares. "At this stage, I don't want to compete on the domestic routes. And I have to be honest that I am embarrassed as I only have a jet flying to Perth and Melbourne," he said. Air Paradise currently flies from Denpasar to Perth four times a week and Denpasar-Melbourne twice weekly with an A310 jet. "In July, we will link Denpasar and Seoul three times a week. Later this year, we will link Denpasar and Fukuoka and Tokyo and Shanghai as well as Jakarta, our first domestic destination," he said, adding that the price of each flight was based on a combination of airfare, hotel and tour service in Bali.

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