Ada Table

Ada Table

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.