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Duopoly appears behind steep rise of airfares
Air passengers in Indonesia have suffered from a drastic rise in domestic ticket prices. There was even a viral phenomenon in which people living in Aceh rushed in droves to get passports to visit Jakarta because flying to the capital city via Kuala Lumpur was cheaper than going directly.
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Garuda Indonesia airlines are parked at Terminal 3 of Soekarno-Hatta International Airport in Tangerang, Banten. (Tempo/Tony Hartawan)
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ir passengers in Indonesia have suffered from a drastic rise in domestic ticket prices. The domestic tourism and hotel industries suffered as well. There was even a viral phenomenon in which people living in Aceh rushed in droves to get passports to visit Jakarta because flying to the capital city via Kuala Lumpur was cheaper than going directly.
Criticism prompted the government to enact Transportation Ministerial Regulation No. PM20/2019. The components for calculating fares were evaluated. For domestic routes, the lowest authorized price (price floor) shall be no lower than 35 percent of the highest authorized price (price ceiling).
On the other hand, international flights have never known such a restrictive price rule. In the realm of liberalization, multilateral agreements such as the ASEAN Open Skies deregulate fares and open markets.
This explains why the flights between Jakarta and Singapore are cheaper than between Jakarta and Yogyakarta. For comparison, based on a random booking on a low-fare airline, we find that the former flight costs Rp 550,000 (US$38) for 105 minutes in the air, while the latter, which is 30 minutes shorter, is more expensive at Rp 980,100.
The main difference is that there are more than a dozen airlines competing for the Jakarta-Singapore service while the Jakarta-Yogyakarta route is virtually controlled by only the national flag carrier and its subsidiaries and affiliates and the Lion Air group.
However, the transportation ministerial regulation does not necessarily reduce the price of domestic flight tickets apparently because there is now a duopoly within the airline industry. Last year, a difficult financial situation prompted the Sriwijaya Group to join the state-owned Garuda Indonesia Group. As a result, today’s market is a de facto duopoly controlled by Garuda Indonesia Group and the Lion Group.
The current market structure would be conducive for allowing domestic airfares to remain higher than international standards. When one dominant player decides to impose a high price, the other one would surely follow. Since they dominate the market, a perfect opportunity occurs to increase prices without worrying about losing customers.
