New airlines: How long will they survive...?

Sudibyo M. Wiradji, Contributor, Jakarta

Indonesia's air transportation industry made headlines with the announcement that several new air carriers had been established, despite the country's lingering economic woes.

The questions most frequently asked following the announcement were: "How will these airlines perform?" "And how long will they survive?"

The country's huge population and immense size, comparable in length to the American continent, are cited when describing the potential of the airline industry. And it is this potential that entices investors to venture into the "service industry".

However, as experts have said, running an airline, considered a capital and technology-intensive industry, requires professionalism on all levels, from management, marketing, service and safety, to the maintenance of planes.

"The airline business, over the long term, requires professionalism and precise calculations in all aspects," the Indonesian National Air Carrier Association (INACA)'s spokesperson, Yoyok Priyowiwoho, said.

Rungkat GB, the aviation adviser at 3R & Partners, shared this view, saying: "In running an airline, the individual spirit is not enough. In addition to the high level of professionalism required on the part of airline operators and their crews, healthy and fair business practices and law enforcement are also contributing factors to the survival of an airline," he said.

The list of new airlines includes Airmark, Awair, Bayu Indonesia Airlines, Deraya, Indonesia Airlines, Avi Patria, Lion Airlines, Pelita Air, Rusmindo Internusa Air, Star Air, Alatief Alair International, Asia Avia Megatama, Bali International Air Services, Nusantara International Services and Satrio Mataram Airlines.

These new players will vie for passengers with the already established airlines, including Garuda Indonesia, Merpati Nusantara Airlines, Bouraq and Dirgantara Air Service. Unlike the established airlines, which have established networks and loyal customer bases, new airlines will have to struggle hard to make themselves known to the public and to establish networks.

How will the new carriers do in grabbing a piece of the estimated nine million domestic travelers in 2002? Particularly with over 60 percent of the market being controlled by old and established airlines like Garuda Indonesia, especially the more lucrative routes like Jakarta-Surabaya, Jakarta-Denpasar, Jakarta-Yogyakarta, Jakarta-Semarang, Jakarta-Solo, Jakarta- Medan, Jakarta-Makassar, Jakarta-Balikpapan and Jakarta-Manado. Garuda claims that it has a load factor of between 70 percent and 75 percent on these routes.

Merpati Nusantara Airlines executive vice president, Yoyo W. Basuki, said the airline focused on East Java and several areas of West Java, with a load factor of between 70 percent up to 80 percent on some of these routes.

"Our multileg strategy has helped the company yield profits per line," he said.

He expressed confidence that with the airline focusing its flights on the more promising routes, a cost-effective policy and the maximum utilization of its 35 commercial carriers, the company would be able to grab a national market share of 26 percent in 2002.

Indonesia Airlines, which began its operation in March of this year, said its business strategy was to concentrate on serving the Jakarta-Surabaya route, a route it expected to control a 20 percent to 25 percent market share of.

"We do not intend to seize a market already controlled by an airline. Rather, we want to provide new services that are required because of market growth," the airline's spokesman said.

With market growth, he said Indonesia Airlines was optimistic its targeted load factor of between 50 percent and 65 percent was reachable.

"The carrier is expected to reach a break-even point on each route it serves within a year," he said, adding that the airline would be operating six aircraft by the end of this year.

Sources at INACA said the number of domestic passengers was expected to increase by 8.3 percent to an estimated 9 million in 2002; by 7.7 percent to an estimated 9.7 million in 2003; and by 7.1 percent to an estimated 10.4 million in 2004.

Despite the tight competition in the airline industry, many parties, including established airline operators and experts, warmly welcome the arrival of the new carriers. Garuda Indonesia, with its 41 aircraft, for instance, said the establishment of several new airlines over the last several years had not threatened its business, but was seen as a positive development for the air transportation business in the country.

Garuda Indonesia's communications manager, Pujobroto, said: "The phenomena can provide stimulus for all national flight operators, including Garuda, to make continuous endeavors to increase their capabilities and quality of service."

Merpati Nusantara Airlines' Yoyo W. Basuki said competition was natural in any business. "Competition provides a major basis for working more professionally," he said, adding: "Our top priority is handling and caring for our customers."

Rungkat GB, who is also the chairman of the Society of Indonesian Air Commerce, hailed the establishment of new airlines as necessary for building an adequate air transportation system.

Indonesia needs more carriers and other supporting facilities, including well-equipped and modern airports, sophisticated air control towers and capable flight crews, he said.

The effect of the establishment of the new airlines, and the resulting increase in competition, has already been seen in the slashing of prices and the offering of discounted airfares. This is seen as good news for air travelers, but an "unhealthy business practice" for the airline industry as a whole.

Pujobroto of Garuda Indonesia, however, said his airline did not use rates to secure market share.

"Garuda never uses rates as a marketing tool," he said.

With airline rates falling over the last two years, the industry has seen a jump in the number of domestic passengers.

New airline operators generally offer promotional discounted airfares to attract customers. Indonesia Airlines, for instance, has a two-month promotional rate of Rp 450,000 for the Jakarta- Surabaya route, cheaper than the standard market rate of Rp 650,000.

Airfares reportedly have dropped by between 40 percent and 50 percent on average, with tickets for the Jakarta-Medan route, for example, being sold for Rp 500,000 compared to the previous rate of Rp 1 million.

"As a consequence, the number of domestic passengers has increased drastically. But this does not necessarily mean that they (airlines) will book a profit because their rates are so low," Yoyok Priyowiwoho of INACA said.

The airlines' offering of discounted airfares has reached such a level that experts are expressing concern over dumping on the part of airlines.

Rungkat GB said the airfare dumping by all airline operators in the country over the last three months was an unhealthy practice that would eventually lead to the demise of the airline industry, because revenue from flights could not meet the minimum required operating costs (price deterioration).

The continued slashing of airfares would only benefit brokers, while the operators would suffer losses.

Referring to the situation of the airline industry in the United States and in Europe, Rungkat GB said a fleet with a load factor of 35 percent in those countries could generate a profit.

"Here in Indonesia, a carrier with a 135 percent load factor has yet to reach the break-even point," he said

Based on calculations by aviation experts and officials, a carrier with a load factor of 50 percent should generate a profit margin, he said.

Seen from the macroeconomic standpoint, the country's airline operators are in financial trouble and even "on the brink of bankruptcy". Therefore, the government should impose tight controls on rates to avoid the deterioration of the country's flight industry, by setting up a rate commission in cooperation with INACA and under the supervision of President, he said.

Experts have questioned how operators can cover the cost of aircraft maintenance, in light of the extremely low fares. Between 40 percent and 50 percent of airline revenue is spent on aircraft maintenance; costs that should be paid in US dollars.

"An aircraft should always be in a good condition because it deals directly with the safety of passengers," one expert who asked to remain anonymous said.

With the increasing number of airline operators, INACA expressed hope that the government would establish passenger safety regulations.

"Passenger safety should be taken into consideration in running this business. They (operators) should not just fly aircraft without considering the safety of passengers," Rungkat GB said.

But only time will tell how long the new airlines are able to survive.