Opening Up the Sky
The government needs to improve the structure of the country’s airline industry. The entry of foreign airlines is needed to bring about healthy competition.
The country’s aviation industry needs to be improved. The presence of only two airline groups in the market is unhealthy. Improvements to the structure of the market could be carried out, including by implementing President Jokowi’s statement to invite foreign airlines to serve domestic routes in Indonesia.
The government’s decision to reduce the upper limit on airfares by up to 16 percent for economy class using jet aircraft, as well as implementing a discount for aviation fuel, have proved unable to bring about a fall in the price of airplane tickets. Users of air transport services in the last six months have had to pay much more for tickets. Domestic passengers have to transit overseas when flying to other destinations in Indonesia in order to get cheaper tickets. This is the irony of aviation in this country. The Business Competition Supervisory Commission says there are indications the aviation duopoly is the reason for soaring ticket prices.
These unhealthy business practices could be prevented by opening up to new players. At present, Malaysian airline Air Asia serves domestic routes under the flag of Air Asia Indonesia. But the number of flights is very limited, with a market share last year of only one percent. This is far less than the Garuda Group (Garuda Indonesia, Citilink, Sriwijaya Air and NAM Air), which controls 46 percent, and the Lion Group (Batik Air, Lion Air and Wings Air), which has a 51 percent market share.
Admittedly, fares that are too low are not good for the aviation industry. Many low cost airlines are reported to have delayed the purchase of spare parts to save on costs. And from the regulatory aspect, since 2016, airfares have not been increased. The airline industry sets tariffs autonomously. This has been made easier with the presence of only two players in the market.
As a result, ticket prices have now more than doubled. The four airlines managed by Garuda have increased fares between 46 and 149 percent: Garuda by 46 percent, Citilink by 64 percent, Sriwijaya Air by 97 percent and NAM Air by 149 percent in the first quarter of this year. Meanwhile, Lion Air has completely abandoned its position as a low-cost airline. Expensive loans and the halting of operations of its Boeing 737 Max 8s—after one of its aircraft crashed into the sea off Karawang, West Java last year— have impacted the finances of the Lion Group. For Garuda, the purchase of expensive Bombardier aircraft, which are said to be experiencing problems, seems to be the reason. The question is, why must consumers bear the burden of bad management decisions?
The government has a number of plans after the reduction in airfare upper limits by the transport ministry proved ineffective. Among them are reexamining the price of aviation fuel, urging renegotiations of aircraft leasing rates, and considering fiscal incentives for airlines such as reducing value added tax. But as long as the sector is controlled by these two groups, airfares will continue to rise.
Therefore, the door needs to be opened to other players. It should be made easier for foreign businesses to enter the market. This would make local airlines improve their business structures. Subsequently, the market would be dominated by airlines that are efficiently managed and that are able to improve passenger service standards. There would no longer be a need for regulations limiting airfares. It’s time for an open sky policy.