Up, up and away for a flock of fledging airlines

Up, up and away for a flock of fledging airlines

The economic crisis clipped the wings of the country's airline
industry, claiming at least one high-profile corporate victim and
impacting the tourism industry with the elimination of many
routes. The Jakarta Post contributor I. Christianto
reports on the new airlines taking to the skies with recovery on
the horizon.

JAKARTA (JP): There are exciting new options for air
passengers today, although most of the slew of fledgling carriers
continue to focus on the most profitable domestic routes.

One of the major considerations for investors in entering the
airline business is the promise for overall domestic passenger
traffic. The volume is expected to surge in the coming years as
the country pulls itself out of the crisis.

In less than a one-year period, seven new airlines have been
licensed to operate regular flights.

The new scheduled airlines eying a piece of the nation's
commercial aviation pie are Airmark, Awair, Bayu Indonesia
Airlines, Indonesian Airlines Avi Patria, Lion Airlines, Pelita
Air and Rusmindo Internusa Air. They join five others -- Bouraq,
Dirgantara Air Service, Garuda, Mandala and Merpati -- already in
the business of operating regular flight services.

The new scheduled airlines are from two different backgrounds,
consisting of those which previously provided non-regular or
chartered services (Airmark, Bayu, Pelita and Rusmindo) and newly
established companies (Awair, Lion and Indonesian Airlines).

Today, 12 airlines are competing for the country's skies to
attract and grab even more passengers, even though the
expectations for profits have yet to be borne out by growth rates
in the number of domestic air travelers.

Domestic passenger traffic plunged dramatically to 6.2 million
in 1998 from 13.3 million in 1997 when the economic crisis struck
with a vengeance. Last year, the figure rose slightly to 6.9
million.

The government forecasts overall domestic passenger traffic
will grow at least 10 percent to 7.6 million passengers this
year. The annual growth rate is also forecast at about 10
percent.

Chairman of the Indonesian National Air Carriers Association
(INACA) Wahyu Hidayat told The Jakarta Post that he was
optimistic that the total passenger number would reach eight
million this year as there were already four million passengers
in the first half of the year.

He believed the figure would increase to over 10 million by
2004.

But do the projected growth rates add up to much?

Data from the Ministry of Transportation show that the 106
aircraft operated by five scheduled airlines in 1999 recorded an
average decline of about 15.51 from the 208 in 1995.

In 1995 there were six scheduled airlines -- Bouraq,
Dirgantara, Garuda, Mandala, Merpati and Sempati. The latter
airline, which was owned by former president Soeharto's youngest
son Hutomo "Tommy" Mandala Putra, began regular operation in 1995
with 24 planes. It collapsed in mid-1998 after being crippled for
months by the monetary meltdown.

By then, most airlines were hard pressed to gain a profit as
their costs were predominantly in U.S. dollars, while earnings
were in rupiah, which had slid down a slippery slope in value to
the greenback.

Of the 106 aircraft in operation in the country in 1999, 43
(with a total of 8,340 seats) were operated by Garuda, 29 (1,609
seats) by Merpati, 17 (272 seats) by Dirgantara, 10 (803 seats)
by Bouraq and seven (668 seats) by Mandala.

Last year, counting total frequencies and destinations, the
domestic seat capacity totaled some 10 million.

By the end of this year, when some of the new airlines have
fully started their operations, the figure will be 15.56 million,
including 13.6 million domestic seat capacity offered by Bouraq,
Dirgantara, Garuda, Mandala and Merpati, with the remainder from
Airmark, Awair, Bayu, Pelita and Lion.

With the estimated overall domestic passenger traffic of
between 7.6 million and eight million this year, together with a
projected annual growth rate of 10 percent, it appears that there
will be a huge oversupply of domestic seat capacity yearly.

Stiff competition

The economic turmoil in 1997 caused a dramatic fall in demand
for air transportation. Most of the airlines then streamlined or
eliminated unprofitable services and rid themselves of some of
their fleet to cut the cost of operations.

The situation now is that the established and fledgling
airlines are targeting the same routes which promise higher load
factors. It is causing fierce price rivalries among the airlines
on the profitable routes, especially in linking Jakarta with
Batam, Makassar, Medan, Pontianak and Surabaya.

Shortly after the monetary crisis struck in 1997, a number of
aircraft stood idle following the drop in the load factor on the
profitable routes to about 30 percent. The load factor has
improved recently to between 60 percent and 75 percent. Total
commercial flights have dropped to about 130 flights to 90 cities
at the end of last year, from 201 flights connecting 115 cities
in 1997.

Now, with a load factor of 60 percent, an airline which
operates a leased aircraft like a Boeing B737-200 will already
gain a profit.

Some airlines, however, face a dilemma of whether to use a
higher airfare to obtain profit quicker, or reduce fares in the
hope of higher passenger numbers and steady income.

Several have taken the latter route, slashing airfares up to
30 percent. The airlines claimed the airfares were introduced as
"promotional rates".

Wahyu said offering price discounts was a normal business
practice and the competition was also good for consumers.

He warned the commercial situation would be hampered when the
players ignored business ethics.

Some airlines' sales agents are reportedly pushing prospective
passengers to exchange their tickets for other airlines when they
arrive at airports. The agents have been compared to professional
scalpers.

The practice has been decried by many parties, including the
Association of the Air Commerce Society (PAUKI).

According to Wahyu, single rates or airfare uniformity is no
longer relevant.

"Airfares depend on type of the fleet. An airline may select
to lease and operate a cheap, aging jet. But then the maintenance
fee will be costly. Another airline may want to use a jet with a
much higher monthly leasing fee, but low maintenance fee."

He said the monthly leasing fee for a B737-200 jet produced in
the late 1980s, for instance, was between US$80,000 and
US$100,000. The rates are only for the jet, no insurance, crews
or other facilities.

He added the monthly leasing fee for a B737-300 jet ranged
from US$225,000 to US$250,000. "It is much more expensive, but
expenses for maintenance and fuel will be much lower."

In response to the complaints on airfare dumping practices,
INACA, with acknowledgement from the government and the House of
Representatives, has set a limit on the amount price operators
can charge so they would not underprice their tickets.

"We have introduced the so-called floor and ceiling rates. By
doing so, we can avoid an oligopoly and protect both of the
operators and consumers," Wahyu said. "The benefit of this is
that operators can still introduce various fares, therefore
consumers can select. Airlines which offer much cheaper fares
than the floor rates will not gain any profit.

"Meanwhile, the travel agent will have no chance to take
advantage."

He added that the major component in setting the floor and
ceiling prices was the currency exchange rate.

According to Director General of Air Transportation Soenaryo
Yosopratomo, the government will not license an airline found
guilty of offering "too much of a discount". The problem is that
there is no definition of what is an acceptable discount.

Regulations

An increase in the number of airlines will help the
development of the sector. The flip side is that better
regulations are necessary to ensure the industry grows well and
that unprofessional carriers do not crowd the market.

There are several regulations dealing with the airline
business, namely the Law of Aviation No. 15/1992, Government
Regulation No. 40/1995 and Presidential Decree No. 96/2000. There
are also a number of related international conventions ratified
by Indonesia.

Decree No. 96/2000 restricts foreign investors to ownership of
a maximum 49 percent of an airline company in Indonesia. The
government said it took the measure because it feared foreign
investors, if allowed to control a domestic airline, might decide
to discontinue services on unprofitable routes, thus affecting
transportation services

Regulation No. 40/1995 rules that commercial scheduled or
regular airlines can be operated by state-owned companies,
private firms and cooperatives.

In addition to scheduled or regular airlines, the regulations
also define nonscheduled or chartered airlines and general
airlines (companies which operates aircraft for personal use).

The operators have to acquire a license to run the business,
but it will be revoked if they do not operate within 12 months
after the issuance.

Technically, the airlines must also meet several requirements
set by the Directorate of Certification and Air Worthiness
(DSKU). The government has also issued a regulation on civil
aviation safety regulation relating to Aviation Law No. 15/1992.

Airlines must also have the international standard Air
Operator's Certificate (AOC). But, a company in Indonesia may be
granted, or already has received, a local license without having
the AOC.

Soenaryo told House members last month that the government was
able to revoke the license of an airline if it lacked the AOC.

There is no clear requirement for what constitutes a minimum
size fleet, nor regulations for an airline to operate with only
one aircraft.

It is no wonder that more new operators or commercial
unscheduled flights are proposing regular services. A new
airline, Star, will take to the skies soon. Meanwhile, there are
around 115 unscheduled or chartered airlines in Indonesia,
including Camar Nuansa, Deraya, Derazona, Gatari, Jatayu,
Manunggal and Trigana.