More wings color the sky

JAKARTA (JP): Air travelers in Indonesia can now enjoy lower fares and a wider choice in services following the establishment of a number of new air carriers in the country.

No new measures have been introduced for domestic liberalization, but an increasing number of investors have shown a sudden interest in running commercial scheduled airlines. The government has licensed at least 10 new companies to operate regular flights in less than a one-year period.

New scheduled airlines include Airmark, Awair, Bayu Indonesia Airlines, Deraya, Indonesian Airlines Avi Patria, Lion Airlines, Pelita Air and Rusmindo Internusa Air and Star Air. They complete with five long-established airlines -- Bouraq, Dirgantara Air Service, Garuda, Mandala and Merpati.

The new scheduled airlines are from two different backgrounds, namely those which previously provided nonregular or chartered services (Airmark, Bayu, Deraya, Pelita and Rusmindo) and newly established companies (Awair, Lion, Star and Indonesian Airlines).

It is interesting to note that the founders of Lion and Star both come from the travel agency business, providing them with the network to explore the airline business.

In addition, many executives working with the new airlines previously worked with the established airlines.

Nonetheless, all of the operating airlines are now competing for passengers, even though the expectations for profits have yet to be borne out by growth rates in the number of domestic air travelers. In addition, the airlines all want to serve the most profitable domestic routes.

In Indonesia, a company may become an airline operator by owning just one aircraft. The airline can hire pilots and flight attendants from other airlines and obtain catering from other companies.

The cabotage principle may have also encouraged Indonesian investors to enter the commercial aviation industry. Cabotage protects them from competition from foreign airlines on domestic routes, which remain closed to foreign airlines.

One major attraction to running an airline is the promise of overall domestic passenger traffic. The volume is expected to surge in coming years as the country pulls itself out of the economic crisis.

The number of domestic passengers dropped to 6.2 million in 1998 from 13.3 million in 1997 when the economic crisis first struck Indonesia. The overall domestic passenger traffic was stable in 1999 and 2000 at about 7.5 million.

Indonesian National Air Carriers Association (INACA) chairman Wahyu Hidayat said the number of domestic travellers was estimated to grow gradually, reaching more than 10 million by 2004.

Oversupply?

Data from the Ministry of Transportation and Telecommunications show that the 106 aircraft operated by five scheduled airlines in 1999 recorded an average decline of about 15.51 percent from 208 in 1995. By 1999, counting total frequencies and destinations, the domestic seat capacity totaled some 10 million.

When some of the new airlines start full operations, seat capacity will exceed 15 million, with Bouraq, Dirgantara, Garuda, Mandala and Merpati accounting for 13.6 million of it and the new airlines the remainder.

With the estimated overall domestic passenger traffic of between seven million and 10 million until 2004, there will likely be a huge oversupply of domestic seat capacity annually.

To gain profit, airlines must be selective with fleets and routes. They must consider carefully whether to lease and operate cheap, aging jets that would have higher maintenance costs, or lease and operate newer jets with a higher monthly leasing fee but low maintenance costs.

In setting airfares, they also must consider whether to apply higher rates to obtain quicker profits, or reduce fares in the hope of higher passenger numbers and a steady income.

In fact, several new airlines are offering discounted airfares. The airlines claim the airfares were introduced as "promotional rates".

"Promotions are common for new airlines or new routes. We'll cancel our promotional rates after people become familiar with our services," said Deraya president St. Rahayu Sumadi.

Deraya launched its flights linking Jakarta and Bandung last December and presently is the only airline serving the route.

Wahyu agreed that discounts were a normal business practice and the competition was also good for consumers. "But we should remember that there is business ethics. Once ethics are ignored, a business will be ruined."

To support the business, INACA has introduced "floor" and "ceiling" rates based on the rupiah's exchange rate. This is to avoid creating an oligopoly and so that airlines can still introduce various fares, therefore giving consumers more options.

Meanwhile, the government will revoke the license of any airline found to offer "too much of a discount".

But one old problem remains, that there is no definition of what is an "acceptable discount".

-- I. Christianto