An axe falls

It has happened in Indonesia, the world’s fifth largest aviation market, where the powers that be have slapped limits on just how much the country’s carriers can charge their customers to fly.

It comes in the form of Transportation Ministerial Regulation No. 20/2019 and Transportation Ministerial Decree No. 72/2019, directives that set the floor price for domestic airline tickets (TBB) at 35 per cent of the ceiling price for tickets (TBA). Ten per cent of economy class airline seats on each flight must be sold at the TBB, with 60 per cent priced at the TBA.

If that sounds a little complicated, what it actually means is that airlines such as government-owned Garuda Indonesia, private budget carriers Lion Air and Indonesia AirAsia, are being hamstrung when it comes to the ongoing struggle to turn a decent profit during a time when economic conditions are tough and the cost of fuel is rising.

In other words, they are being forced to increase the number of discounted seats sold, thus bringing airfares down by between 12 to 16 per cent on the highest ticket prices for economy class domestic flights. For the government, it was clearly a case of trying to please a complaining public.

“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 rising airfares have driven up inflation,” said Transportation Minister Budi Karya Sumadi.

“The best way is for us to adjust the tariff ceilings. ” An article on a ministry website declared that high ticket prices have “troubled the people” and that with “something that concerns the benefit of a wider community, rules cannot be solely based on business and market matters”.

All very well from a political standpoint but it makes no sense from a commercial aviation perspective.

It’s a particularly bitter pill to swallow for Garuda which last year only just managed to scrape home with a meagre profit of A$1. 2 million.

The airfare debate has been going on for several months. In February President Joko Widowdo ordered Garuda to lower its prices following a public outcry over a spike in fares and new charges following absorption of a bankrupt local carrier, Swiwijaya Airlines, into the Garuda group.

The call received support from th

e Indonesian Hotels and Restaurants Association, which claimed high ticket prices were responsible for a 30 to 40 per cent drop in occupancy. While Garuda obeyed, Lion and Indonesia AirAsia refused to buckle and match the government-owned operator. Which is why the Transport Ministry finally acted to make it official.

The action has already seen the value of Garuda shares fall and local analysts are unanimous in their view the slide in revenue caused by lower fares will make it tough for the airline to improve its faltering financial performance.

As for the unintended consequences, in an effort to compensate, Garuda is closing a number of international and domestic routes and reducing frequencies to less lucrative destinations to cut potential losses. The headline closure is Jakarta- London, which will be axed from August. Frequency to Amsterdam will also be reduced from six weekly to just three. The Transport Ministry wanted Garuda to maintain a London service but, in reality, its action on air fares has actually given the carrier a perfect excuse to eliminate a route that has caused it problems for years.

In the past five years Garuda has adjusted its London service five times, including flying via Amsterdam. In January this year it altered the return leg from London to fly to Jakarta via the holiday destination of Bali, but even that didn’t help.

The route has never been profitable.

The problem is competition, with numerous big carriers, including Singapore Airlines, Emirates Airlines, Qatar Airways and Malaysia Airlines all proving far more attractive to European holidaymakers wanting to lounge on Bali’s beaches. They operate daily while Garuda’s Bali service is only three times weekly from London.

Garuda said while the decision to axe London was difficult it had no choice if it is to meet this year’s performance targets.

Garuda vice president and corporate secretary Ikhsan Rosan said the new policy would put “pressure on our performance”.

Garuda will work to cut costs without compromising safety, he added. The 2019 plan is to target A$20 million in net profit, which would represent year-on-year growth of 176 per cent. Given the circumstances, it seems highly unlikely. Results for the first quarter of this year are already showing an impact. Its cost per available seat kilometer – the industry unit for measuring cost – rose 16 per cent year-on-year and domestic passenger numbers dropped 22 per cent to 3. 5 million.

‘It was clearly a case of trying to please a complaining public’