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Cost efficiency in air travel not only matter for airlines

Efficiency measures are needed to further cut airfares, which would involve actions from several ministries and related stakeholders, including state airport operators, air navigation firms and Pertamina

Riza Roidila Mufti and Marchio Irfan Gorbiano (The Jakarta Post)
Jakarta
Wed, June 26, 2019

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Cost efficiency in air travel not only matter for airlines

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span>Efficiency measures are needed to further cut airfares, which would involve actions from several ministries and related stakeholders, including state airport operators, air navigation firms and Pertamina.

After the price of jet fuel (avtur) is lowered, the cost efficiency in airport services and taxes that burden the airlines operational costs are targeted to be slashed.

State-owned airport operator PT Angkasa Pura I president director Faik Fahmi said the company was ready to adjust and lower the service fee, but was waiting for airlines to announce their low-cost carrier (LCC) services.

“We will adjust [our tariffs] on routes where airlines lower the price,” he said.

Angkasa Pura I has previously offered incentives for airlines that landed in Yogyakarta International Airport in Kulon Progo, Yogyakarta by giving a free landing fee in the first three months. After three months, the airlines could still enjoy a 50 percent discount on the landing fee.

PT Angkasa Pura II (AP II) president director Muhammad Awaluddin said the government’s recent instruction to help lower airfares by giving airlines lower airport service fees would not only affect airlines but would also push airport operators to implement cost efficiency measures as well.

“This is a good moment for us [Angkasa Pura II] too to conduct a full cost restructuring, because in airports there are actually component costs that can be more synergized and consolidated [for cost efficiency],” said Awaluddin.

To push for efficiency, AP II might implement several measures such as resource collaboration between the airlines and airports in handling customer services, infrastructure sharing between the airlines and airports to boost digitalization of the check-in process, said Awaluddin.

Currently, the contribution of the airport service fee paid by airlines, consisting of the landing fee, parking fee, aviobridge fee, counter check-in fee and airline ticket, is only around 5 percent. With the possible cost efficiency measures in the future, the airport operator might reduce the ground handling fee by 10 to 20 percent.

The government, through the Coordinating Economic Ministry and Transportation Ministry, has announced three policies to bring down airfares, namely lowering airfares for LCCs on certain domestic routes and schedules, giving fiscal incentives to airlines as well as calling on all related stakeholders in the national aviation industry to help reduce the airfare cost component.

Airlines’ operational cost components consist of jet fuel, which contributes 30 to 31 percent, aircraft leasing (20 to 24 percent), human resources (14 to 16 percent), maintenance and spare parts (16 to 20 percent) and other supporting costs such as airport service fees, which contribute 0.7 to 6 percent of the total cost.

To help airlines cut tax costs, the Finance Ministry is also set to give fiscal incentive to airlines. The ministry’s fiscal policy agency is now preparing a legal framework to give airlines value-added tax exemptions, especially for aircraft that are leased from overseas.

Fiscal policy head Suahasil Nazara said the process to give fiscal incentives was in its final stage, and it was hoped that the incentives would help reduce the airlines’ cost components.

Suahasil said fiscal incentive for airlines had previously been given to airlines through exemptions on import duty on goods and for repairs or maintenance of aircraft.

Aviation expert Arista Atmadjati said providing fiscal incentives was the right decision and would help airlines cut costs. He said fiscal incentives were an essential thing that airlines should have requested from the government much earlier.

“Airline operational costs include many taxes from importing things such as spare parts, aircraft leasing, simulators and also the purchase of spare parts including tires and lubricants,” he told The Jakarta Post on Sunday.

By giving fiscal incentives through tax exemptions, especially for three major necessities such as aircraft lease, maintenance and spare part purchases, he said the impact would be significant for airlines. He even predicted the cost efficiency as a result of tax incentives would be bigger than from reducing the price of avtur.

Institute for Development of Economic and Finance (INDEF) economist Nailul Huda said that in the short term, the policy to give fiscal incentives or reduce the price of jet fuel or airport service fees could reduce costs and prices so that airfares could be affordable to the public.

However, it is not a long-term solution.

“In the long run, I myself doubt this price reduction policy will last long. At some point, the airlines will definitely raise prices again because the root causes have not yet been resolved. It is possible that the airlines will raise prices up close to the upper limit because for them it does not violate regulations [on floor and ceiling prices],” he said.

Nailul Huda said there was a root problem in this airline business, namely the concentration and monopoly by the two biggest airline groups — Garuda Indonesia Group and Lion Group — which have an 80 percent market share. Not to mention the takeover of Sriwijaya Group by Garuda Indonesia, which brings the share of the two major groups to 96 percent.

The monopoly has allegedly led the airline giants to control the price, which kills market competition.

Huda said there was also still management inefficiency in the national air carrier’s business strategy that made it hard for them to make a profit.

The soaring airfares have started to have an impact on the number of passengers traveling by plane. According to data by Statistics Indonesia (BPS) from January to April 2019 there were around 22.98 million air travel passengers, decreasing from 30.16 million during the same period last year.

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