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.