Domestic airfares set to increase

Rendi A. Witular, The Jakarta Post, Jakarta

Air travelers may have to dig deeper into their pockets starting next week as the government plans to raise the reference price for domestic destinations, in a move it claims will help prevent unhealthy competition in the country's overcrowded air industry.

The reference price, the average minimum price a carrier is allowed to charge a passenger per hour, will be increased by some 10 percent, from Rp 265,000 (about US$28) to at least Rp 285,000, Minister of Transportation Hatta Radjasa said on Thursday.

The price is calculated based on the minimal costs that an airline spends on its operations, including the cost of fuel, maintenance, aircraft leasing, crew salaries and other administrative costs.

Analysts said, however, that it remained unclear whether the reference price rise would translate directly into a 10 percent increase in average retail ticket prices, especially after state oil and gas company PT Pertamina lowered air fuel prices for June.

"Aside for compensating for the rise in fuel prices, the plan is also aimed at preventing unfair competition in the industry. There are some airlines willing to 'dump' their fares to get more passengers," Hatta said in a ceremony on Thursday.

The practice of lowering ticket fares, Hatta said, could trigger a price war between airlines that would eventually bankrupt some of them, as fares would no longer cover operational costs.

Some members of the Indonesian National Air Carriers Association (INACA) have proposed the ministry allow them to impose fuel surcharges on their passengers to compensate for the rising fuel costs.

Should the fuel costs decline, the surcharge rate would be reduced or scraped, they said.

However, Hatta rejected the surcharge proposal after other members of the association opposed the idea for fear of losing passengers.

Hatta said the reference price policy had been discussed with the INACA, with the majority of its members agreeing to it.

Hatta predicted there would be two airlines likely to close their operations in the near future, aside from the recent closure of budget carrier Star Air. There were another four or five airlines that were currently in financial difficulties, he said.

"There will be more domestic airline closures. This is not merely because of rising fuel costs, but more a complication of several problems," said Hatta, refusing to name the troubled airlines.

In the future, the Ministry of Transportation would not issue any new licenses to new airline operators in order to revitalize the industry, which was already overcrowded with 28 airlines, Hatta said.

Pertamina recently announced it had lowered the price of fuel for the airline industry as of June 1 by an average of 7 percent from the previous month's prices.

While the move would relieve some pressure on the industry, Pertamina said airlined will have to pay in cash on the spot to fill their tanks at the country's 15 main airports.

Pertamina adjusts prices for air fuel every month.