Cheap flights a real threat to old players

Cheap flights a real threat to old players

Burhanuddin Abe, Contributor, Jakarta

Believe it or not, you only need to fork out a sum of money
equal to the value of 38 liters of unleaded gasoline to fly from
Jakarta to Surabaya!

That is what AirAsia has been frequently advertising in the
newspapers lately. Indeed, since the latest fuel price hike,
people often believe that traveling by air must be even costlier
than before. So, if an airline company can offer a low rate, this
offer must attract a lot of prospective passengers.

Malaysia's AirAsia also offers low rates for flights to
destinations other than Surabaya, such as Denpasar, Padang,
Medan, Balikpapan and even Kuala Lumpur, although the seats are
limited to only between 5,000 and 10,000. This limited offer is
clearly an advertising gimmick to prompt people to buy
inexpensive air tickets,

In truth, a price war is raging now in Indonesia's skies.
Since the government deregulated flight operator licenses in
2001, new airlines have sprung up in the national aviation
airscape. To win market share, the most effective strategy to
attract consumers must be to slash air ticket rates.

For the community, this phenomenon is obviously advantageous
as they will enjoy a greater chance to travel by air. Who
wouldn't be interested to travel by air? Prior to deregulation,
an air ticket for a flight from Jakarta to Surabaya cost over Rp
500,000, but now only costs around Rp 300,000, or even less. If
you compare this with the cost of a train ticket, the difference
in price is very small; in some cases, the air ticket is even
lower in price.

Of course, traveling by air is also advantageous in that you
can save more time than if you go by sea or overland. Air travel
is very time-efficient. Given this advantage, it is no wonder
that more and more people opt for aircraft when travel long
distances.

"Over the past two years, I no longer travel by train to
Surabaya. I always fly there," said Lily Nababan, a processed
food businesswoman who owns a workshop in Sidoarjo, East Java.

There are many other people like Lily. As prices of air ticket
have become increasingly lower, many people who used to only
dream about traveling by plane are now using air travel
regularly.

This great interest in air travel has made airports as crowded
as inter-city bus terminals. They are now characterized by
confusion, discomfort and long lines before check-in. All this is
attributable to the fact that the increasing flow of aircraft and
passengers has not been accompanied by improved airport
facilities.

According to data collected by the Communications Ministry,
the frequency of domestic flights at 661 airports between 2000
and 2004 grew by an average of 16.74 percent annually while the
frequency of international flights rose by an average of 2.79
percent annually. In the same period, twelve of these 661
airports grew by an average of over 20 percent annually.

Managing and operating airports is indeed not as easy as might
be imagined, especially in the case of Indonesia, a country still
struggling in the face of rapid development in the world's
aviation industry.

In the next two decades, it is estimated that there will be
41,000 new commercial aircraft worth US$1.2 trillion and Asia
will be the main driver for this growth.

Low-cost air carrier (LCC) services are inevitable not only in
Asia (including Indonesia, of course) but also in New Zealand,
South Africa, Brazil and Australia. The ability of airlines to
cut their operational costs has enabled them to introduce their
LCC services.

AirAsia or Awair, for example have introduced online ticket
reservation systems in Indonesia to reduce reservation costs. As
such, they need not print tickets. Citilink of Garuda Indonesia
also allows their passengers to pay through BCA ATMs from
anywhere, making payment more practical and efficient.

Offering this particular payment facility, Garuda cuts short
its chain of travel agencies and therefore scraps commission
expenses. Of course, there are many other expenses that can be
cut and it is the main characteristics of LCC to scrap as many
unnecessary costs as possible. There will be no more free food on
board. Passengers are advised to take care of their own food and
drink.

At this point, however, it should not be assumed that LCC
means cheap and careless service. An airline may cut its
operational costs but will continue giving excellent service.
Even the aircraft are also excellent. AirAsia, an airline cited
as our example at the beginning of this article and having "Now
Anybody Can Fly" as its motto, operates Boeing 737-300 aircraft.

The LCC phenomenon, which is based on corporate management
efficiency, poses a serious threat to traditional airline
companies that cannot compete in terms of price. This situation
has forced them to set up second line companies or subsidiaries
to offer low-cost flights.

According to airline observer Albert Widjaya, the LCC
phenomenon is now here in Indonesia. If national airlines are not
prepared to face the influx of foreign airlines and compete with
them in the growing regional market while over 20 foreign
airlines offer their low-cost air carrier services, sooner or
later they will lose their business. "Unless the government
supports them, national airlines will not be able to compete with
foreign airline companies," he said.

Of course, the government is not just sitting still. Some time
ago the government decided to close several major cities in
Indonesia to LCC services provided by foreign airliners.

This restriction is aimed at saving the domestic aviation
industry, which is yet to able to compete with their foreign
rivals. "The government has restricted low cost air carrier
services provided by foreign airliners in potential routes as the
national airliners are yet to be competitive with foreign
airliners on the same level," said Communications Minister Hatta
Rajasa.

In addition, the government has also applied reference tariff
rates for flights in Indonesia although in the attachment to
Regulation of Communications Minister No. KM 36/2005 there is no
clear definition of a sanction to be imposed for any violation of
this stipulation.

In essence, sub-article 1 of Article 5 of this regulation only
stipulates that if a scheduled commercial air transportation
company sets their rates lower than the reference tariff rates,
the Air Communications director general may exercise special
supervision over this particular airline.

According to several observers, this policy is not effective
as it does not directly dwell on unhealthy business competition
among airline companies and neither does it have any binding
power to make sure that airlines comply with the stipulation.
Meanwhile, the closure of popular routes to LCC services provided
by foreign airlines, said Sendjaya Widjaya, Awair president
director, may have the impact of a ban on Indonesia's airlines
offering LCC services abroad.

The market is indeed liberalized now and tight competition
among airlines is no longer avoidable. Given this situation,
national airlines, said Sendjaya, should no longer be pampered.