By Keith Loveard, Senior Analyst
The Business Competition Supervisory Commission (KPPU) appears to have washed its hands of an inquiry into suspected cartel practices in the airline industry, apparently sounding the death knell for the time being for the low-cost carrier market that has done so much to boost domestic tourism.
“When the government calls for lower airfares, it should base them on market mechanisms. There should be no pressure,” KPPU commissioner Guntur Saragih said in Jakarta on April 23. The comment, while far short of an official report from the KPPU, represented a slap in the face to Transportation Minister Budi Karya Sumadi, who has been ordered by President Joko Widodo to find a way to bring down fares.
The KPPU announced that it was starting a probe into alleged price fixing behind recent airfare increases on January 21. It is not clear when the agency’s formal report will be issued, but Saragih’s comment suggests that no evidence has been found to support charges of collusion in pricing.
Sumadi on May 6 said he would be introducing a new regulation within a week to set a ceiling on air fares. He is no doubt pondering Saragih’s statement and wondering to what degree he can interfere on the question of pricing.
‘Market mechanisms’ are likely to mean finding a level that covers the costs and allows for a profit, reasonable expectations in any industry. For the minister, it is a question of balancing the reasonable requirements of the airlines with the need to keep the prospective tourism industry moving forward.
Since air fares were suddenly hiked at the end of last year, ‘competitive’ prices have been enforced with a minimum of interest in the customer. And, in what appears to be clear evidence of a move to lock competitors out of the market, Indonesia AirAsia has been frozen out of the online booking market in what appears to be a move to create a duopoly.
Not only have fares risen, but charges are now being applied for check-in luggage, with passengers being told bluntly to go and line up again at airline offices to pay the fee, then return to check-in. The changes in the industry have inevitably impacted on tourist destinations, as Indonesians who were enjoying the opportunity to visit far-flung parts of their country at reasonable cost now find it impossible to do so on limited budgets.
Ironically, the situation first came to light when reports surfaced that people in Aceh were applying for passports and flying to Kuala Lumpur first and then to Jakarta, a cheaper option that flying directly. That situation is now being repeated everywhere, with overseas flights far cheaper per air mile than domestic ones. That does not bode well for emerging domestic tourism industry locations.
The Central Bureau of Statistics early in April confirmed the fall in passenger numbers. A total of 6.3 million people flew on domestic routes in March this year, a full 21.94% fall compared to the same month in 2018, when 7.73 million people took to the air. In the first quarter of 2019, the number of passengers had fallen by 17.66% compared to the number who flew in the same period of 2018.
In releasing the figures, BPS head Suhariyanto said high air fares were to blame for the reduction. There was however a 7.18% increase in the number of passengers in March compared to the figure for February. Higher ticket prices also had an impact on inflation, making up 0.31% of the total figure for March of 2.83%.
An Industry Studded With Wrecks
The low-cost carrier industry has a long history studded with the wrecks of the numerous airlines that have been launched to try and make a living from the desire to travel of cost-conscious people. The first, according to Wikipedia, was the Icelandic carrier Loftleiðir, which started offering Transatlantic flights in 1948 and which became known as the ‘hippie airline’ in the 1960s when it became popular with young Americans making their way to Europe. It ran on the slogan “We are the slowest but the lowest.”
Britain’s Laker Airways made a more aggressive attempt to bring down air fares but was consistently refused licenses for its Transatlantic Skytrain service or for Australia-Britain flights on what was known as the kangaroo route. Regulators continued to shut it out of the market, despite – or perhaps because of – the already major losses being suffered by scheduled airline services from competition from charter operators.
Finally allowed a license for cheap Transatlantic flights, Laker did not survive the financial slowdown that hit Europe in 1982. Since then many other low-cost operators have come, and gone. India’s Jet Airways is the most recent to shut up shop after struggling to make ends meet in the competitive air space.
Tom O’Brien of tourism communications outfit Accommindo argues that some elements of the LCC market are unsustainable. He recalls that 30 years ago flying from North America or Europe to Asia was a big deal, and the air fare represented at least a month’s salary. “Now we complain if we have to spend a week’s salary to get from A to B. And the Millennials think it’s their God-given right to travel cheaply.”
O’Brien does not dismiss the entire industry as hopeless. “The model is short-haul full flights; not long-haul half-full flights. A Singapore taxi driver explained to me that the best fares are one or two blocks in the rain, where more passengers queue for short hauls only; they turn you away from going far because they make their money on many short trips. LCC is the same model. Nothing genius about it. And your crew don’t need to be put in a hotel and such. Just keep the plane in the air. LCC have advantages for passengers because they need to be on time as best they can.”
A London-based airline analyst with experience in the Indonesian industry notes that while the industry still has questions about the viability of long-haul LCC operations, the short-haul and domestic LCC model is proven and tested. Indigo, Ryanair, Easyjet, AirAsia and Vietjet are some good examples.
“The experience from neighboring markets, particularly Vietnam with Vietjet, India with Indigo, Malaysia with AirAsia, suggests that in a level playing field, LCC competition is effective at bringing domestic fares down.”
“Recent bankruptcies in the LCC industry – Jet Airways, WOW, Avianca Brasil – attend to very diverse reasons. There are always macroeconomic factors that can dent profitability, such as currency in a mostly dollar-denominated industry, recessions, jet fuel, but, overall, airline failures over the past few years were the result of other factors: overcapacity, poorly-planned expansion, bad cost structures, intense fare competition from dominant carriers.”
Contrarily, in Indonesia the LCC industry is being transformed into a less than low cost variant even though conditions theoretically should make it viable.
Indonesia’s LCC Industry
The low-cost model made its introduction in Indonesia with deregulation of the airline industry in 2003. A number of low-cost carriers have come and gone, with catastrophic accidents often presaging their departure from the market.
According to a report in the Singapore Straits Times in 2009, aviation analyst Dudi Sudibyo recounted how domestic carrier Adam Air – which was shut down the year before after a crash cost 102 lives – “reportedly crammed a few pilots, instead of just one, into a flight simulator during pilot training. ‘This was how they kept costs low’,” Sudibyo told the paper.
Similar doubts have long been raised about safety standards at other Indonesian LCC operators, not least Lion Air, which has suffered more than what might be considered a normal level of safety incidents. Yet Lion Air has brushed off questions about standards and come to dominate around half the Indonesian domestic market.
It is not a public company and therefore there is no way of knowing if it makes a loss or not. It has been talking about an initial public offering, but no timeline has been mentioned. Now, with air fares suddenly steeply higher, its years of frugality may finally be paying off.
That’s if it is allowed to continue to keep charging higher fares and assuming that the market will gradually recover. Founder Rusdi Kirana, 55, has become an important political player and will be working hard to influence the government’s actions influencing the industry. The ambassador to Malaysia since 2017, before that he was a member of the Presidential Advisory Council. In 2014 he became a deputy chairman of the National Awakening Party (PKB).
Duopoly Is Profitable
Up until November last year, competition had been intense between the major operators. Garuda Indonesia was seen as the premium choice, with full service on board its modern fleet and a global reputation for excellence of service earning it the right to charge a premium. Its low-cost carrier Citilink Indonesia appeared to be struggling to stay competitive in its market niche and had far less flights than the main private competitor, Lion Air, with its subsidiary operations Wings Air and full-service Batik Air.
Lion had come to dominate 50% of the market even with a poor on-time record and a worrying level of safety incidents. Sriwijaya Air was another LCC choice, like Lion with a full-service parallel operation in NAM Air. AirAsia Indonesia was the local branch of Malaysian Tony Fernandes’ regional network.
Then in November, Citilink announced that it had inked a joint operation (KSO) agreement with Sriwijaya Air under which Citilink would run the operations and oversee the financial management of Sriwijaya and Nam Air. Garuda Indonesia president director I Gusti Ngurah Ashkara Danadiputra in the statement said the agreement was aimed to help Sriwijaya Air improve its operational and financial performance. Sriwijaya was understood to have run up bills it couldn’t pay at Garuda Maintenance Facility AeroAsia and Garuda Group was taking equity in Sriwijaya in return for the debt.
Then came the as-yet unexplained parting of the ways of the third carrier still in the game –AirAsia Indonesia – and leading travel website Traveloka. AirAsia said its flights first disappeared from Traveloka on February 14 until February 17, coinciding with its network-wide system upgrade on February 16. Traveloka had cited the 13-hour system downtime as the reason for AirAsia flights disappearing from their website in response to queries from customers, according to the airline.
However, AirAsia flights disappeared from Traveloka for a second time on March 2 without clarification, well after the successful system upgrade by AirAsia. It has not returned and today a domestic airline search on Traveloka will only bring up flights connected to Garuda and Lion.
AirAsia announced the permanent withdrawal of sales of all its flights from Traveloka after it said the travel site had been unable to explain how they disappeared. AirAsia Indonesia president director Dendy Kurniawan said: “The exclusion of several AirAsia Indonesia flights by Traveloka is a clear display of preferential treatment and an act of favoritism. Competition should be free and fair to ensure consumers benefit from the best deals, and monopolies should not kill competition at the expense of the traveling public.”
AirAsia Indonesia posted Rp782 billion ($55.6 million) in losses last year as it was hit by higher fuel and operating costs. While revenue rose 11% to Rp4.2 trillion, expenses jumped 31% to Rp5.52 trillion, due to higher fuel, maintenance, airport charges and aircraft leasing costs. In 2017, the airline had recorded Rp328 billion in profit. But while the airline’s misfortune might have been good news for its competitors, the Indonesian operator has been able to rely on the Malaysia-based operation for financial assistance when it needs help. AirAsia Group extended a $5 million loan to Indonesia AirAsia during the last quarter of 2018, enough to maintain a presence in the game.
Freight Charges Jump
If passengers were impacted by the sudden change of policy in the airline interest, so too were freight companies. Courier operations have been forced to shift to land and water transportation following a sharp increase in air cargo fares that began in mid-2018.
Indonesian Express Delivery Companies Association (Asperindo) deputy chairman Budi Paryanto said the majority of the association’s members had decided to stop using air transportation, as airlines had made several adjustments to cargo rates since June last year. Around 60% of services had been shifted to land and a combination of land and water transportation, he told reporters.
Paryanto noted that the airlines increased their cargo rates by a range of between 120% and 352% from last June to January. Flag carrier Garuda Indonesia, for example, announced six different rate increases since June 2018, with an accumulative increase of 352%. Two of the changes were announced in January alone, according to Paryanto.
Premium services continued to use airlines for their deliveries and had raised their charges by an average of 20%. Paryanto said small and medium enterprises had been impacted by the higher charges and abandoned the courier services, leading to a 40% decrease in traffic, according to Paryanto.
As with the baggage charges, there was little warning. Paryanto said the airlines made announcements suddenly, leaving couriers unprepared as they had to abide by contract agreements with clients that required a one-month notice for changes in service charges. The association was reviewing the possibility of using charter flights, with commercial airlines canceling flights amid a fall in passenger numbers leaving planes available.
Indonesian Ombudsman commissioner Alvin Lie said the air cargo rate hikes were unreasonable and stressed that his side was currently reviewing Asperindo’s complaint by communicating closely with stakeholders and reviewing regulations. He speculated that the changes could be due to the fact that the air cargo industry grew last year, while the number of passengers who traveled by air declined.
The Transportation Ministry’s Air Transportation Directorate General recorded an 11.2% increase in cargo in 2017. The number of passengers, however, nosedived by 10% to 126 million in the first 11 months of 2018 from the same period in 2017. As the number of passengers is declining, airlines tend to reduce the number of their flights from three to one per day, resulting in the decrease of space for cargo, Lie said, adding that as a result, cargo rates had increased.
Amid all of the confusion about where the industry is headed, Garuda’s CEO I Gusti Ngurah Askhara Danadiputra is being less than transparent. In his role as chairman of the Indonesia National Air Carriers Association (Inaca) he has claimed in the past that the sudden surge in ticket prices was due to higher demand during the Christmas and New Year’s holidays. Value-added tax for domestic flights as well as high operating costs also contributed to the surge, he said.
Also to blame was the price of fuel. Inaca urged state energy firm Pertamina to lower avtur prices by 10% so that airlines could lower their operating costs. Global oil prices have been pushing higher on US moves to tighten sanctions against Iran’s oil exports, and fuel costs typically make up between 40% and 50% of an airline’s operating costs. Danadiputra also blamed rupiah weakness for the higher fares, since aircraft leasing had to be paid in dollars.
During a chat with the media, Transport Minister Sumadi reportedly said that he had doubts about Danadiputra’s claim that Garuda had already made its tickets cheaper. “I told them, ‘you are not sincere, not honest’,” Sumadi was quoted as saying.
Sudden Shrinkage
The higher fares for both passengers and freight and the reports that airline flight frequencies have been cut back point to a contraction in the industry. The same is true on the ground. The higher prices are impacting badly on developing tourism destinations. The government had been pushing 10 ‘Beyond Bali’ destinations, most of them requiring transport by air, and their future now appears threatened.
Destinations that require long flights such as Raja Ampat in West Papua and Wakatobi in Southeast Sulawesi have seen visitor numbers drop. At Raja Ampat, one operator says numbers are down 30%. At Belitung, site of the Tanjung Kelayang ‘Beyond Bali’ site, operators say numbers dried up in the first months of the year but are beginning to pick up again. At Rp730,000 for the cheapest return ticket, getting to the island is now more than twice as expensive as it used to be in low season.
Coordinating Minister for Maritime Affairs Luhut Panjaitan said on March 27 that ticket prices should be cut by April at the latest. He made the comment during a meeting with stakeholders in the tourism sector, including the Indonesian Hotel and Restaurant Association (PHRI). Association of Indonesian Tours & Travel Agencies (Asita) chairwoman Nunung Rusmiato said the airfare hike had pushed down the average hotel occupancy rate by 20% to 40%, according to PHRI data. Panjaitan, along with other stakeholders, is still waiting for the promised reductions.
One argument put by Panjaitan was that aviation turbine (avtur) prices were high because Pertamina, as the sole supplier, was keeping them artificially high. He promised to cut the price by cutting value-added tax and income tax and encouraged private operators to enter what has been Pertamina’s monopoly.
Almost immediately, the Energy and Mineral Resources Ministry issued a temporary license for PT Dirgantara PetroIndo Raya, a joint venture of publicly listed fuel trader PT AKR Corporindo and British energy giant BP, to sell avtur at Maleo Airport in Morowali regency, Central Sulawesi. As the center of the booming smelter industry the joint venture is likely to thrive at Morowali, but that will do little to relieve stresses in the tourist industry.
Tourism Minister Arief Yahya, in a recent interview with Kompas daily, admitted that the high fares are a severe blow for the tourist industry. “Virtually all tourist destinations in Indonesia are feeling the impact, especially those outside Java that depend on air access,” he said.
While Yahya can only plead, President Widodo, Panjaitan and Sumadi all have political capital resting on a reduction in fares. At the beginning of the year Widodo said he wanted the fares cut by February but since then he has been silent on the issue.
With the country’s biggest annual travel period coming up – Idul Fitri, when millions go home from the cities to their home towns – Widodo will at least be grateful that the election period is over so disgruntled would-be travelers can’t take their revenge on him at the ballot box. Already, there are predictions that many people will stay home, further shrinking the economic bonus that the regions have come to expect from cheap air fares.
One alternative for the consumer is more overseas jaunts. Industry analyst Ridha Aditya Nugraha, writing in The Jakarta Post, notes that it is now cheaper to fly to Singapore from Jakarta than to Yogyakarta. “The main difference is that there are more than a dozen airlines competing for the Jakarta-Singapore service while the Jakarta-Yogyakarta route is virtually controlled by only the national flag carrier and its subsidiaries and affiliates and the Lion Air group,” he wrote.
While other costs of overseas travel such as accommodation may deter many Indonesians, many who have got the travel bug will be tempted. That would leave the development of new Indonesian tourism sites still-born, and foreign capital rushing out of the country once more, something the country cannot afford.