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Jakarta Post

Pricing airfares

  • Editorial Board

    The Jakarta Post

Jakarta   /   Wed, January 16, 2019   /   09:04 am
Pricing airfares Garuda Indonesia aircraft (Shutterstock.com/cesc_assawin)

The “social turbulence” national airlines encountered over the past few days as passengers cried out against what they saw as skyrocketing ticket prices simply reflects the public’s lack of understanding of how airfares are set and the various factors that are considered in ticket pricing.

Passengers complained that the ticket prices for certain domestic routes were much higher than those of international routes with the same mileage or flight time. But the comparison is not of apples with apples. In the current era of deregulated markets, whereby airlines are governed mostly by safety regulations, with maximum and minimum fares set by the government to ensure commercial viability, airlines cannot set ticket prices as they like. Otherwise, they would price themselves out of the market. 

According to the Indonesian National Air Carriers Association (Inaca), avtur (aviation fuel) accounts for 40 to 50 percent of airline operating costs, aircraft leasing for 20 percent, terminal and airport facilities (ground handling) for 2 to 10 percent and taxes and labor costs account for the remaining 30 percent.

But these factors form mostly the base fares, while the ticket price is determined by many other variables, including competition on particular routes, the duration of the flight, the day of the week and the dates of the flight. The rupiah exchange rate also influences fares for domestic routes because aircraft leasing and avtur are paid in US dollars.

There are some dates of the year on which there is simply higher demand (peak season), such as during the Idul Fitri, Christmas and New Year holidays. Airlines usually set their prices at a much higher level during these peak seasons and gain very high margins to offset the low margins or sometimes even losses they have to bear during the low season. 

Taking all these factors into account, airlines are indeed difficult businesses to run, as they are both capital and labor intensive, have complex operations and thin margins and their marginal cost of production is very low. Yet, they encounter plenty of unpredictability as major factors affecting results, such as fuel prices, weather and macroeconomic shifts, are simply beyond management’s control. 

So, when Inaca announced last week that major scheduled airlines had agreed to lower their fares for certain routes by 20 to 60 percent, that corporate action was not necessarily a response to the noisy complaints from passengers but it was because the peak season had ended.

It is simply the time now to lower ticket prices given the arrival of the low season, a stable rupiah rate and falling oil prices. 

But don’t be surprised when during the Chinese New Year celebrations early next month, for example, fares for certain routes such as Jakarta-Medan, Jakarta-Pontianak, Jakarta-Pangkal Pinang rise sharply, while ticket prices for most other routes remain normal. Then there will be a new wave of ticket price rises during the peak season in the Idul Fitri and school holidays in June.