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Quo vadis affordable domestic ticket price?

The polemic over the controversy of what is publicly seen as excessive increases in domestic ticket prices has continued

Ridha Aditya Nugraha (The Jakarta Post)
Jakarta
Wed, June 26, 2019

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Quo vadis affordable domestic ticket price?

The polemic over the controversy of what is publicly seen as excessive increases in domestic ticket prices has continued.

It appears too soon to assess the effectiveness of the newly introduced Transportation Ministerial Regulation No. 20/2019 ,which lowers the economy ticket ceiling prices of full-service airlines by a range of 12 to 16 percent.

Typically, airlines set higher fares during the peak season, which usually takes place during the Idul Fitri, Christmas and New Year festivities. Those high fares usually diminish over time. This time, however, that logic does not seem to apply.

Ticket prices have remained unusually high and the current duopoly market structure seems to be a factor in the new phenomenon. But the market domination by the Garuda Indonesia Group and Lion Group does not automatically lead to anticompetitive behavior. There must be an indication of collusive price fixing or cartel arrangements.

However, as game theory says, two dominant players do not even need to communicate to set equally high prices.

The situation makes it harder to prove the two groups are engaged in a price cartel. It explains the reason why the Business Competition Supervisory Commission (KPPU) has yet to make any conclusions after a few months of investigation.

The history of the airline business has traditionally been characterized by inefficiency and a very thin profit margin. It costs the owners a lot of money.

Consequently, passengers also bear the burden through high ticket prices. Instead of mainly focusing on the price cartel suspicions, the government should also take the initiative to determine whether national airlines are operating efficiently, compared to their foreign counterparts.

But efficiency varies from time to time depending on the factors influencing the industry, and they need to adapt.

The costs for airline operations can be broken down into direct and indirect operation costs.

Direct operation cost components are mainly used to calculate the domestic ticket price. Those are the fees for aircraft leasing, maintenance, pilot and cabin crew, avtur, insurance, as well as airport and navigation services. Jasa Raharja Insurance is mandatory in Indonesia, but costs only Rp 5,000 (US$0.35) per person.

On average, the price of avtur in 2019 is lower than in 2018. The rupiah to United States dollar rate for maintenance and leasing is also not much different than last year.

Therefore, the failure to ensure efficiency is likely the other key in the puzzle of excessive domestic ticket prices.

There will be no (too high) margin when no profit is gained due to inefficient operations.

Currently the average tariff for international flight services conducted by national airlines is lower than for domestic flights.

The keen competition between airlines in international routes, including intra-ASEAN routes, has set up a level playing field. This situation helps to define a fair ticket price.

International flights have never known both a floor and a ceiling price.

In the realms of liberalization, multilateral agreements such as ASEAN Open Skies deregulate tariffs and let the market decide. It appears to compete on international routes, national airlines ‘subsidize’ through high domestic ticket price.

This explains why Jakarta-Singapore flights could be cheaper than Jakarta-Yogyakarta flights.

There is no precise global indicator to determine whether the ceiling price is set too high, including to Indonesia. They obviously distort the market rather than improve it.

Allowing foreign carriers to serve domestic routes (cabotage) is a potential solution to ensure competition and keep down ticket prices. But the Indonesian Aviation Law No. 1/2009 itself forbids cabotage.It should be pondered whether regulating the number of national airlines is necessary.

An equilibrium must be sought to reduce the dominance of domestic routes by an airline or group.

To illustrate, South Korea actively regulates the number of national airlines to manage the level of competition for the consumers’ benefit. A cartel is prevented from the very beginning.

The policy has a positive impact on promoting the growth of local tourism. Presently, Jeju Island is one of the main attractions in the country.

Relying on the arrival of travelers through the Seoul-Jeju Island flights, this domestic route was the busiest route in the world in 2018. It makes sense if South Korea has an interest in keeping domestic ticket prices affordable. The policy also benefits logistics business.

Direct international flights to Jeju Island are open for foreign carriers, mainly from China and Japan. Other global airlines compete through code-share arrangements.

As for international flights, intervention on ticket price does not exist. Fine air transportation management leads to healthy competition between South Korean and international carriers.

The South Korean experience should lead to encouraging the KPPU to evaluate and intervene with the Sriwijaya Group-Garuda Indonesia Group Operational Cooperation Agreement (KSO). It is undeniable that KSOs have influenced the creation of a duopoly market as well as the increase in ticket prices in congregations in recent months.

Expanding KPPU authority as an economic regulator pertaining to civil aviation should be considered.

The KPPU may fiddle with airline slots at the airport in order to open space for (new) competitors. This scenario could only be conducted with more competitors and not in a duopoly environment.

Finally, the government should consider comprehensive aviation subsidy guidelines with airlines and airports as the beneficiaries. Logically, subsidy is at odds with fair competition.

However, there is a justification when it concerns the enhancement of connectivity between the islands for stimulating regional development. Ensuring air connectivity is vital for Indonesia as the world’s largest archipelagic country.

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The writer is a faculty member specializing in air and space law with the International Business Law Program, Prasetiya Mulya University. He is also a member of the German Aviation Research Society.

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