Local airlines launch price war on lucrative domestic routes

Adianto P. Simamora, The Jakarta Post, Jakarta

Domestic airlines are cutting airfares on the Jakarta-Medan route by between 30 percent and 50 percent due primarily to mushrooming overcapacity which has placed serious pressure on their bottom lines.

Marketing director of PT Mandala Airlines Ndan Kamandanu said on Wednesday that the recent entry of new players had multiplied seat capacity on the once highly profitable Medan-Jakarta route.

"The huge excess seat capacity has forced domestic airlines on the Jakarta-Medan route to reduce their fares," Ndan told The Jakarta Post.

He pointed out that the normal passenger volume on the route was between 700 and 800 passengers per day, but that seat capacity had jumped to between 1,500 and 1,600.

He said that the price war had created new difficulties for the ailing airline industry, particularly because it was already facing problems on the cost side with the current weakening in the exchange rate of the rupiah against the U.S. dollar.

Some 80 percent of local airlines' operational costs, including aircraft leasing and maintenance, are denominated in dollar terms, while revenue is obtained in rupiah.

"We are in a difficult position... because operational and maintenance costs are very high," Ndan said.

"But it is impossible for Mandala to maintain the old fares while our competitors, who offer better facilities, continue to reduce their fares," he added.

The government recently issued new licenses to nine airline operators to provide regular domestic flights.

The new players are Airmark, Awair, Bayu Indonesia Airlines, Deraya, Indonesian Airlines Avi Patria, Lion Airlines, Pelita Air, Rusmindo Internusa Air and Star Air.

The new arrivals will be competing with five long-established airlines, namely Garuda, Mandala, Bouraq, Dirgantara Air Service, and Merpati.

At present, Mandala's fare on the Jakarta-Medan route is about Rp 700,000 (about US$70) compared with a previous fare of about Rp 980,000.

National carrier Garuda Indonesia's executive director Bachrul Hakim said that the price war on the Medan-Jakarta route spelled trouble for the industry as it would be difficult to generate profits and maintain good service.

"All of the airlines operating now are competing for greater passenger numbers by lowering airfares and providing discounts," Bachrul told the Post.

He said that Garuda had also cut its fares in a bid to maintain market share.

At present, Garuda's travel agent fare for the Jakarta-Medan route was about Rp 800,000 compared to the previous fare of Rp 1,125,000.

Meanwhile, Indonesian National Air Carriers' Association (INACA) chairman Wahyu Hidayat played down the concerns over the price war.

"It's not a serious problem because that (price cutting) is a normal business practice," Wahyu said.

He regretted, however, the recent government decision prohibiting INACA from launching a floor and ceiling price mechanism for domestic air fares following a protest by the local antimonopoly watchdog.