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Jakarta Post

Lowering domestic airfares

  • Editorial Board

    The Jakarta Post

Jakarta   /   Wed, May 8, 2019   /   09:09 am
Lowering domestic airfares Empty commercial airplane seats viewed from the rear (Shutterstock/Martin Chavez)

The Transportation Ministry has finally agreed to revise the domestic airfare ceiling to force airlines to lower their ticket prices. According to the coordinating economic minister and various business associations, the high prices have upset the public, caused a 30 percent decline in domestic travel and significantly decreased the occupancy rates of star-rated hotels.

Domestic air fares have remained punitively high, much higher than comparable international flight services, even after the end of the peak Christmas and New Year season. The government initially argued it could not interfere with ticket pricing because the fares were still below the government-set ceiling. Airlines argue they have done nothing wrong for the same reason, but the public’s outcry made the government revisit the issue.

Airlines had never before set fares so close to the price ceiling during the low season for fear of losing market share. Strangely though, domestic air fares have almost doubled, even during the low season, since state-owned Garuda Indonesia took over the operations of the Sriwijaya Air Group, the third largest budget carrier in the country, late last year.

After the takeover, the domestic full-service and no-frills services have essentially been controlled by only two carriers, Garuda Indonesia and the Lion Air Group, sparking allegations that they are involved in a price cartel. Using the ceiling as the reference, the two airlines would be able to steeply raise their fares even without having to engage in “collusive” communications with each other.

The Business Competition Supervisory Commission has been investigating the suspicions about the existence of a price cartel, but an utter lack of cooperation by airlines and travel agencies, which seem to have been threatened by the carriers to not disclose any information, has made the antitrust body’s efforts ineffective.

Indeed, investigating airfare cartels is never easy because airlines are difficult businesses to run as they are both capital and labor intensive, have complex operations and thin profit margins and their marginal cost of production is very low. Yet they encounter plenty of unpredictability related to fuel prices, weather and exchange rates.

It was encouraging to learn that the coordinating economic minister instructed the Transportation Ministry to comprehensively analyze and lower the domestic airfare ceiling before the upcoming peak season during Idul Fitri early next month.

The industry still needs a government-set range of minimum fares to prevent a price war that may threaten flight safety and a fare ceiling to prevent excessively high ticket prices. However, the fare ceiling would be effective only if there is no dominance in an oligopoly, meaning the industry is open to new players. Equilibrium must be sought to reduce dominance over domestic routes by an airline or a group and the regulator should be able to maintain level competition among the players for the benefit of consumers.

The Transportation Ministry should also set the fare floor and ceiling selectively according to the business conditions on the particular service routes, the alternative means of transportation available on the routes and the general economic situations at the various destinations.