Cut-throat competition in aviation business

B. Gunawan, Contributor, Jakarta

Many people were surprised when Star Air ceased operations on June 1, 2005. Actually, there is nothing strange about this news given the fact that following the deregulation in the aviation business in Indonesia, the competition among airlines has become ever stiffer.

The deregulation in the aviation sector since 1999 has brought concrete results. An interesting fact is that the volume of air passengers in Indonesia has continued to rise. While in 2002 there were 12.5 million passengers, in 2003 the number rose to 16 million. In 2004, the number of passengers jumped to 20 million and this year it is estimated to reach 25 million.

In the Asia and Pacific regions, according to the data compiled by the Association of Asia Pacific Airlines (AAPA), the first half of 2005 saw the number of air passengers stand at 61.9 million people, up by 7.2 percent over the figure recorded the year before. Meanwhile, the earnings of all 17 AAPA members totaled US$ 691.8 billion, up by 30 percent over the figure recorded the year before.

It is this lucrative market that has made foreign airlines turn their attention to Indonesia. Several airlines in Asia- Pacific countries are now indeed augmenting their fleets. Boeing, for example, is now competing with other aircraft manufacturers that have also gained access to Asia-Pacific countries, such as Airbus. Airbus has even sold its aircraft to Singapore Airlines and Tiger Airways, while Boeing has sold 60 of their latest generation aircraft to Lion Air

After Malaysia's AirAsia gained access to Indonesia and secured its own market share in this country, the next to enter Indonesia must be Singapore's Tiger Airways and Australia' Virgin Blue. Offering low-cost air tickets because they can cut their overhead costs, these airlines pose a threat to national airlines. Only airlines with deep pockets and a similarly low- cost strategy can compete with them. Other airlines must find it very hard to sustain their business.

In advanced countries, governments never devise special strategies in connection with their open-sky policies. In Indonesia, particularly, however, several analysts have suggested that the government should give special treatment to national airlines in order to save them.

"This is the result of the fact that it is very easy to obtain a license for an airline business. To be honest, most of the national airlines are undercapitalized. They have maybe only two aircraft to operate and even these two aircraft are obtained through leasing, meaning that they do not own them," said aviation observer Kamis Martono some time ago.

According to the data compiled by the Communications Ministry, there are now 28 national airlines in operation with 414 aircraft. Unless the government immediately puts things in order in this sector by issuing fair regulations, then the future of national aviation will be bleak.

A seminar held some time ago even predicted that unless the government gave support by devising a national strategy in this sector, a third of national airlines would go bankrupt in the next five years. Aside from being unable to bear the increasing operational burden owing to the rising prices of fuel, national airlines will never be able to compete with foreign airlines that enter the Indonesian market.

Star Air is a case in point. Last October, the Communications Ministry revoked the aviation business licenses of four airlines, PT Trans Nusantara Airways, PT Rabin Global Air Servindo, PT Latief Alair International and PT Camar. Unlike the case involving Star Air, these four airlines were yet to operate their aircraft.

In fact, the government has a list of more than ten other airlines that it intends to close down. This measure is being taken because these airlines have yet to operate their aircraft even though they have been in possession of their licenses for over a year, a condition in violation of the stipulation contained in Government Regulation No. 40/1995 on Air Transportation and the Decree of the Communications Minister No. 11/2001 on the Organization of Air Transportation.

There are several reasons why airlines that have been issued a license do not immediately operate their aircraft. First, they only want to benefit from the fact that it is easy to obtain such a license from the government but in fact they are not managerially or financially ready to run such a business.

Second, sometimes they are allocated a "pioneering" route, for example, to fly in the eastern part of Indonesia, regions that are usually lacking in good airport facilities and economically disadvantageous.

Whatever the reason, the closure of several airlines in Indonesia reflects a "natural selection" process following the springing up of dozens of airlines in this country within just a short span of time.

This process of natural selection will go on until an equilibrium is attained. While the process is still going on, new airlines will emerge while some old ones will be closed down. Take the United States, for example. For every new airline that emerges, there is an old airline that goes bankrupt.