Weighing Loss and Profit of Foreign Airlines Serving Domestic Routes

Writer: Ameidyo Daud

Editor: Safrezi Fitra

24/6/2019, 17.35 WIB

Rumors of foreign airlines serving domestic routes emerged after President Joko Widodo talked about the open sky policy plan.

Telaah - Tiket Pesawat
pat138241/ 123rf

Plans for the entry of foreign airlines have re-emerged in recent days Transportation Minister Budi Karya Sumadi said at least three foreign airlines are poised to open domestic routes in Indonesia. Although he did not mention everything, some include the expansion of Indonesia AirAsia (AirAsia) and Scoot operations.

He hopes that the increasing number of airlines in the local aviation industry will create competitive air fares for consumers. Transportation Ministry will still regulate the upper and lower limit fares as stipulated in the Minister of Transportation Regulation No. 20/2019. “The true spirit is not about foreign entities, but more about competition,” Budi said at the Presidential Palace Complex a few days ago.

In addition to AirAsia and Scoot, Chairman of the Indonesian Employers Association (Apindo) and the Indonesian Hotels and Restaurants Association (PHRI) Hariyadi Sukamdani said Qantas’ subsidiary Jetstar would also serve flights for domestic routes. “They are the ones who are ready,” he said a few weeks ago.

Rumors of foreign airlines serving domestic routes emerged after President Joko Widodo (Jokowi) talked about the open sky policy plan. This policy that allows the entry of foreign airlines into Indonesia is expected to make the national aviation industry more competitive. Moreover, the country’s aviation industry is currently dominated by two major players. They are Lion Air Group (Lion Air, Batik Air and Wings Air) and Garuda Indonesia Group (Garuda Indonesia, Citilink, Sriwijaya Air and Nam Air).

However, the presence of foreign airlines is not necessarily considered as a solution to the problems of high operating costs and flight fares. Flight Observer and Arista Indonesia Aviation Center Director Arista Atmadjati doubted the entry of foreign airlines would bring progress to the industry.

According to him, foreign airlines must fulfill difficult requirements to enter Indonesia, starting from a maximum 49 percent share ownership provision to take care of Indonesian legal entity permits. Foreign airline Tigerair Mandala collapsed because it was unable to compete, while some low-cost carriers (LCC) also died due to price wars, such as Adam Air and Batavia Air. “AirAsia also continues to experience difficulties,” Arista told Katadata.co.id on Friday (6/21).

He also denied that the market structure controlled by Garuda and Lion was the main reason for the increase in ticket prices. Poor financial condition in 2016-2018 was the main reason for selling tickets at the upper limit.

As an example, Garuda’s profit in 2016 dropped 88 percent from the previous year to Rp 124.5 billion. A year later, the national airline had to lose Rp 2.8 trillion. Garuda managed to record a profit of Rp 11.3 billion last year despite financial report polemics. “All airlines are targeting profit in 2019, and prices are set according to the rules on the upper limit fares,” he said.

According to the Indonesian Consumers Foundation (YLKI), the government’s move to invite foreign airlines to serve domestic routes is an unusual step in the world of aviation. The YLKI Chairman Tulus Abadi reminded that it would violate domestic and international regulations.

He did not mention the specific rules, but cited the International Civil Aviation Organization (ICAO) website that there are only five flight freedoms that had been agreed internationally. Meanwhile, the open sky policy is the ninth flight freedom, which has not yet entered into a joint agreement. “The government should stop its plan,” Tulus said.

The Business Competition Supervisory Commission (KPPU) stated that opening domestic flight access for foreign airlines does not necessarily resolve the issue of ticket prices. Regarding the effectiveness of competition against ticket prices, KPPU Commissioner Member Guntur Putra Saragih said that it must be assessed from several factors, including how deep the market penetration of the incoming airlines, even though the foreign airline’s presence is aimed at increasing the effectiveness and productivity of other airlines that have already operated. “So it does not necessarily solve the problem,” Guntur said.

Lion Group Corporate Communications Strategic Danang Mandala Prihantoro said that he could not comment further on the government’s plan to add rivals from abroad. “We will inform you if there are further developments,” he told Katadata.co.id.

On the other hand, the policy of allowing foreign airlines to fly in Indonesia could have an impact on the economy. Economist from the Institute for Development of Economics and Finance (INDEF) Didik J Rachbini said the effort to include foreign airlines into the domestic market is a desperate move from the government.

“This industry is experiencing problems now. The root is unhealthy competition. The easy way is to include foreign airlines. It’s an instant policy, but it creates other problems for the economy,” he said in Jakarta, Tuesday (6/18).

Inviting foreign airlines will bring harm to domestic in a long-term economy. This loss will be seen in the accumulation of Indonesia’s primary income with an increase in the service deficit and the current account deficit. The presence of foreign airlines is the same as including foreign investments that exploit the domestic market. The reason is that the investment is not intended for export and does not generate foreign exchange.

Ticket Price Solution

Instead of inviting foreign airlines, Arista and Tulus asked the government to take other policies. To reduce ticket prices, Arista said the government should provide incentives, such as airport rental rates that are distinguished by passenger peak and off-peak hours. The reason is because 70 percent of airplane operations depend on foreign exchange volatility. This is why airlines cannot control the operating costs. “This is a hidden cost that is rarely known by regulators and the public,” he said.

From the consumer side, Tulus asked for the removal of Value Added Tax (VAT) in the fares that are charged to consumers. This is a step to bear the burden jointly between the government and the airline. “It’s if the government wants to empathize with consumers and airlines,” he said.

Tulus also advised the government to synergize with KPPU to accelerate the investigation into the alleged aviation industry cartel between Garuda and Lion. Regarding the KPPU’s investigation, Guntur said the process is still running, even though it has not yet reached the trial stage. “We still give investigators the chance to examine evidence,” he said.

The government, through the results of the coordination meeting at the Coordinating Economic Ministry, has also formulated three decisions regarding ticket fares. First, reduction in flight ticket prices for LCC for a certain time, which is being finalized. Second, all aviation industry stakeholders (airlines, airport operators, and fuel providers) are committed to lowering costs related to flight operations.

Third, the government prepares fiscal incentives for airplane services and imports of planes and its spare parts. “The incentives are in the form of rental services, reparation and maintenance of airplane, rentals from outside the customs area, and matters concerning the import of planes and its spare parts,” Coordinating Economic Minister Darmin Nasution said in Jakarta, Thursday (6/20).

The State-Owned Enterprises (SOE) Ministry, as one of Garuda Indonesia’s shareholders, stated that there is still no internal discussion regarding the government’s decision to reduce airplane ticket prices. According to SOE Minister Rini Soemarno, the policy must be accompanied by consideration of the increased airline costs.

The consideration is needed because airlines must maintain the security, comfort and safety of their flights. “I always emphasize the calculation of cost. We are transparent,” Rini said in her office in Jakarta, Friday (6/21).

Although the policy has not yet been issued, Lion Air has already launched a low-price promotion. In his official statement, Danang said the airline would impose a flight ticket price promotion of up to 50 percent of the basic fare. This promotion will be applied to the scheduled time departure and certain conditions.

Some of the fares offered include the ticket prices of Rp 583,000 for the Jakarta - Surabaya route and Rp 396,000 for the Jakarta - Semarang route. However, the prevailing price also does not include the recorded baggage rates, Passenger Service Charges (PSC), VAT, and insurance costs.

“The booking or purchasing of promotional tickets can be done no later than 10 days before departure (H-10),” he said in a press release on Friday (6/21). The offer is available starting June 20.

Your Email Has Been Registered
sorry there was a problem signing you in
Please Fill Email Address
Fill Email Correctly
Please type the Captcha correctly