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Opportunity still flying high for domestic airlines

Jemsly Hutabarat Contributor Jakarta

It is simply beyond our imagination that today, five years after the country's economic crisis, we can fly to almost anywhere in Indonesia at rates similar to those applied during the pre-crisis period, although the rupiah has devalued nearly five times. The ticket for the Jakarta-Medan route, for example, costs about Rp 400,000 (around US$ 47), just like in those good old days.

What is exactly happening in the commercial airline industry?

With most of its costs based on the dollar, this sophisticated means of transportation that carries millions of people around the world is experiencing a dramatic period; likewise, the Indonesian airline industry. The disturbing question on everyone's mind is whether this business can still offer even the smallest opportunity.

Airlines around the world, including in Indonesia, have been greatly affected by various events, especially the Sept.11 terrorist attacks in the U.S., last year's Bali bombing and the recent outbreak of SARS (Severe Acute Respiratory Syndrome). To some extent, the Iraq war waged by the U.S. and its allies has also affected this business.

Operational costs have skyrocketed and margins have dwindled to alarmingly fractional amounts. The reduced frequency of air travel, down by between 20 and 50 percent, have worsened the economic outlook of airline businesses. Naturally, price wars, in the form of discounts and all sorts of reductions, is the final resort of these desperate enterprises.

Prior to the Sept. 11 attacks, some analysts optimistically predicted that in less than 20 years the growth of passengers would be threefold. Ensuing events, however, shattered their forecast and the dreams of airline owners as well.

One positive outcome, though, is that airline companies were forced to revamp their operations and entire management systems to improve their revenues by cutting unnecessary costs, while providing the best services to retain passengers.

Strictly adhering to what is known in management jargon as "yield management", efficiency and cost reduction was the order of the day. Every sector is scrutinized down to the minutest details: fuel consumption, salaries of staff and crew, maintenance costs, routine overhead and so forth.

"Everybody can fly the skies now, but rates have fallen back to the ground," so goes the local joke on the cheap airline tickets. The "rate of yield", as reflected by ticket prices, has indeed fallen over the years. The chart below clearly illustrates how the cost per passenger per kilometer has been crumbling for the past 18 years, since 1985.

In spite of everything, most airline companies are surviving and some new ones have even come into the picture. One of the basic survival formulas seems to be the classic one of cost efficiency.

To attract passengers, Garuda Indonesia, for example, is implementing the "flexible rate" policy for all classes, in which ticket prices are adjusted for various zones and times of the day. Special reductions are also given for early bookings. In total, for every route 11 "types of prices" are available for certain routes and during low season.

Using second-hand aircraft is another way of reducing costs. Extra low rates for a package called Aircraft, Crew, Maintenance and Insurance (ACMI) are also available in the market for the rental of older aircraft in good condition. Further, some major airlines are even employing pilots and crew from developing countries with lower salaries.

While people in Europe are turning to trains, here in Indonesia, the reverse is the trend as the negligible difference between sea travel fares, land transportation rates and domestic flight rates has prompted passengers to prefer the faster means of transportation: airplanes.

In view of the unhealthy competition, especially in regards the price war, the Indonesian National Air Carriers Association (INACA) has attempted, with a certain degree of success, to regulate the seemingly uncontrollable fluctuation of airline ticket prices. INACA is also taking into account that other factors also influence even the slightest difference in rates, like travel agents, for instance.

Aircraft maintenance is, in fact, another core business that a major airline like Garuda Indonesia can offer. As in any other transportation business, but more so in the case of airlines, maintenance is foremost in providing a safe, reliable and comfortable means of transportation.

The types of maintenance provided by Maintenance, Repair and Overhaul (MRO) companies include line, base, component and engine maintenance. Currently, the annual revenue of MRO businesses worldwide is almost US$40 billion. In Indonesia, which has the world's fifth largest population, the figure is around $550 million per year.

Aware of the opportunities in this kind of business, a number of major airlines have formed separate MRO entities to serve not only their own fleet, but also to reap huge profits by providing their reputable maintenance services to other airlines. Lufthansa and Swiss Air are two international examples, while domestically, Garuda Indonesia has followed their lead by establishing a separate company, PT GMF Aero Asia. Although its current market share in the world -- revenue-wise that is -- is only one percent, PT GMF Aero Asia has successfully doubled its income in a year.

PT GMF Aero Asia offers world-class services at low rates made possible by efficient management plus the low local wages, which have given the company a competitive edge.

To lower maintenance costs, the "Go East" trend is definitely a huge relief for Asian MRO businesses. However, in the case of PT GMF Aero Asia, it has to be on the lookout for fierce competition from other major contenders in the region, especially from countries like Singapore, Malaysia, Thailand and China.

Though a major airline domestically, Garuda Indonesia should not be satisfied with the recent achievements of PT GMF Aero Asia.

More breakthroughs related to excellent service should be made to ensure further success, and in view of the company's current commitments to overall improvements, this seems highly likely.--The writer is a lecturer at the School of Economics, the University of Indonesia.