RI airline industry flying turbulent skies

RI airline industry flying turbulent skies

Tantri Yuliandini
The Jakarta Post
Jakarta

"Don't build an airline. It is a capital intensive business
with a very slim profit margin and high risks".

These are what Wahyu Hidayat, chairman of the Indonesian Air
Carrier Association (Inaca) preaches almost every time he is
invited to talk in a seminar on the Indonesian airline industry.

"The margin is from about minus 6.1 percent to 2.8 percent for
the airline industry compared to between 4 percent and 5 percent
for other industries," he said, adding that as of 1997 more than
120 airlines in the world had gone bankrupt.

Yet, despite his pessimistic words of caution, Indonesian
skies are becoming more and more crowded with new airlines coming
into business.

Last year alone saw six new airlines entering the industry,
which adds to the already established five -- Garuda Indonesia,
PT Merpati Nusantara, Mandala Airlines, Bouraq Indonesia, and
Dirgantara Air Service.

The six are Lion Mentari Airlines, Bayu Indonesia Air, Awair
Internasional, Pelita Air Service, Airmark Indonesia, Indonesia
Airlines Avi Patria and Internusa Air.

While waiting for the latter two companies to start flying,
two other airlines have begun operations this year; they are
Kartika Airlines and Star Air that began operations in May and
July this year respectively.

Who knows how many more airlines are going to spring up in the
near future ... but then again, maybe not.

The Sept. 11 attacks on the United States have surely opened
people's eyes to the volatility of the airline industry.

Made on two hijacked commercial airplanes, the attacks have
driven fear into the hearts of even the bravest air passengers.

Subsequent to the attacks, major airports in the U.S.
suspended operations leaving hundreds of planes and thousands of
passengers stranded and causing millions of dollars in losses.

Also, facing extravagant amounts in claims, insurance
companies hiked their premium charges while lowering their
coverage. Airlines around the world struggled with the increased
insurance premiums, with many turning to their respective
governments for help.

Planes that needed about an 85 percent load for the flight to
break even, now only saw about a 60 percent to 70 percent load
factor. The consequence is that the airlines were forced to cut
down on employees, Canada 3000 airline was even forced to shut
down completely.

In Asia, the impact was not so profound. Those bearing the
brunt of the crisis were airlines whose major market was the U.S.
and so far, Indonesian airlines do not service the Americas.

This however does not mean that Indonesian airlines are off
the hook.

Although Indonesian airlines does not serve the U.S. market as
yet, incoming traffic from Europe and especially the United
Kingdom has always been important for Indonesia's tourist
industry and airlines.

This market, comprising about 15 percent of the total foreign
visitors to Indonesia compared to the U.S.'s 5 percent, is
sensitive to issues regarding security.

It does not help a bit that Indonesia has the largest Muslim
population in the world and that travel warnings advising foreign
nationals against visiting Indonesia have been issued by various
governments, including the British government, due to the loud
voices of a small group of Muslim radicals.

So in the near future, travel to Indonesia from Europe and the
U.K. will probably slacken, leaving local airlines to focus and
intensify marketing efforts toward domestic and regional flights.

However, there are potholes for airlines solely serving
domestic flights as many of the new airlines are doing, not least
the issue of U.S. dollar-based operating expenses against a
rupiah income.

Dollar operating costs comprise 40 percent of the total
airline expenses, including aircraft leases, insurance and spare
parts. In the meantime, the airlines charge their services in
rupiah, which doesn't account for much considering today's
exchange rate.

"Either they are very bold or not so smart," Singapore
Airline's general manager for Indonesia Raja Segran once remarked
about the owners of new airlines.

The best chance for survival for many of these new airlines is
to start flying regional routes to bring in dollar revenue.

However, new airlines with a limited budget usually opt for
older types of aircraft for their initial operations, which would
not pose a problem when all the players are using the same types
of aircraft.

But, "psychologically people would refuse to fly on older
planes if they had the choice," Segran said, raising concerns
that Indonesian airlines with their older planes would not
compete well with others such as Singapore Airlines.

This does not bode well for the future of the industry if
Indonesia intends to further open up its skies and embrace
globalization in the next two or three years.

A recent alliance between Mandala Airlines, Pelita Air
Service, Bouraq Indonesia, and Dirgantara Air Service, however,
is a step toward a restructuring of the Indonesian airline
industry.

An alliance was the only way the airlines could provide new
destinations without adding more planes, or killing off other
airlines in competition, head of Mandala's development division
Kus Winarko said.

The airlines in the alliance would complement each other's
routes so that passengers could have more destination choices,
flights, and schedules, resulting in an increased load factor as
passengers would take connecting flights using the partner
airlines.

Joining an alliance would also cut costs as expenses such as
ground handling are borne together.

It would not be a bad thing then if Indonesian airlines could
establish alliances such as the internationally acclaimed Star
Alliance or Oneworld Alliance.

And perhaps instead of foreign airlines directly operating in
Indonesia, local airlines could cooperate with them to form a
domestic extension of a global airline alliance.