Cut-throat competition in aviation business

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.