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Business Insight

Passenger anger ends up biting Indonesian airlines

Government trims cap on maximum fares by up to 16% as holidays approach

Domestic airfares in Indonesia have remained high since the Christmas holiday period last year.   © Reuters

In Indonesia, the world's fifth largest aviation market, domestic airlines have been forced to cut their prices due to an outcry about accelerating fare hikes, as Indonesians make plans for the upcoming Eid al-Fitr Islamic holidays.

The Ministry of Transportation last week announced that it had lowered the maximum fare for domestic flights by 12% to 16%. The change took effect over the weekend.

"After evaluation and persuasion from our side, prices have remained unaffordable for the public. We've received a lot of complaints from the public, the tourism sector, hotels. And [the rising airfares] have driven up inflation," said Transportation Minister Budi Karya Sumadi. "The best way is for us to adjust the tariff ceilings."

The ministry has threatened administrative sanctions, up to revoking operating licenses, for airlines that fail to comply with the fare caps.

A search of travel website Skyscanner indicates that local airlines are going along. A one-hour flight from Jakarta to Yogyakarta, a top local tourist destination, is now available for less than 1 million rupiah ($69) for flights departing over the next month. A search several weeks ago put the cheapest fare at 1.4 million rupiah.

"Lion Air Group states that we are compliant, and implementing policies from the regulator," said Danang Mandala Prihantoro, a spokesman for Indonesia's largest private air carrier, in a text on Monday.

National flag carrier Garuda Indonesia could not be reached for comment. Its vice president and corporate secretary, Ikhsan Rosan, told Indonesian news portal detikFinance that Garuda would comply, although the new policy would put "pressure on our performance."

He added that Garuda will work to cut costs without compromising safety, possibly by tweaking its services. "We have to find smart ways to survive despite the tariff ceilings adjustment," Rosan said.

Until the policy change, domestic airfares in Indonesia had not fallen from last year's Christmas season peak. This has led to mounting customer complaints, declines in passenger volume and airlines cutting flight frequency on some routes. Some less popular ones have been eliminated entirely. A number of local tourist destinations have also reported lower visitor numbers.

Garuda's earnings for the first quarter of the year reflects these developments. Its cost per available seat kilometer -- an industry unit for measuring cost -- rose 16%, year-on-year, in January to March, while its average fare rose 42% to $96.

As a result, the number of its domestic passenger volume dropped 22% to 3.5 million. Garuda managed to raise its seat load factor from 70% to 73% by reducing the number of less profitable flights. And the price hikes helped it post a net profit of $19.7 million for the period, which one analyst called Garuda's "best result since the first quarter of 2016."

The Transport Ministry had pressed the airlines to reduce fares before imposing the caps, but they refused to budge, citing rising jet fuel costs and a decline in the rupiah. Indonesia's Business Competition Supervisory Commission, meanwhile, has been looking into allegations of price fixing. Garuda's takeover of Sriwijaya Air's operations last year and its partnership talks with Lion Air have fueled suspicions of overly cozy ties among the three carriers. The commission has yet to reach a conclusion.

The Sriwijaya Group controls 13% of Indonesia's aviation market. The deal would increase the Garuda Group's market share to 46% and narrow the gap with market leader Lion Group, which has a 51% slice. Together, Garuda and Lion control 97% of Indonesia's aviation market, based on 2017 data from the Australia-based Center for Aviation.

With Eid al-Fitr, the holiday marking the end of Ramadan, approaching and millions of Indonesians preparing to return to their hometowns, the transport minister decided the sign the new rules on May 15. The holiday falls on June 5-6 this year.

Although air travelers may celebrate, transportation analyst Alvin Lie criticized the government's move. He said the airfare floors and ceilings had not changed since 2016, while jet fuel prices have risen and the rupiah has plummeted against the dollar.

"If the public thinks the airfares expensive, it's because of the government's failure to revise the price ceilings and floors gradually," said Lie, who is also a member of the Indonesian ombudsman that oversees the transportation sector. "They should have evaluated the prices every year, so the public wouldn't have been shocked by price hikes."

He added that airlines may try to cope with thinner profit margins by skimping on ground services, such as by reducing the number of check-in counters and airport lounges, and by cutting meals or other in-flight services.

Indonesian airlines' struggle with higher fuel prices and a cheaper currency is seen elsewhere in Southeast Asia, which has been "a market of rapid growth but meager profits" over the past few years, according to CAPA.

The center said of 20 publicly traded airlines or affiliates based in Southeast Asia, only six were in the black in the third quarter of 2018, and that 19 recorded a decline in profitability compared with the same period in 2017. In its 2019 outlook, CAPA said the profitability of Southeast Asian airlines will likely slip further, following a deterioration in market conditions in the second half of last year.

"Intense competition and a generally price-sensitive population made it difficult for airlines to pass on higher fuel costs," CAPA said in a February note.

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