Airlines earn their wings in crowded skies
Airlines earn their wings in crowded skies
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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