Indonesia’s airlines look to bright future but high costs stand in their way

Indonesia's airlines look to bright future but high costs stand in their way

Vincent Fabian Thomas

Vincent Fabian Thomas

The Jakarta Post


A Pertamina truck carrying BioAvtur J2.4 is parked beside a CN 235-220 plane during a fuel test in Bandung, West Java, on Sept. 6, 2021.(Courtesy of Pertamina/.)

August 29, 2022

JAKARTA – Indonesian airlines are enjoying a rebound in demand this year thanks to the easing of Covid-19 restrictions, but analysts say high costs complicate their recovery and could even derail it. Carriers counted 24.6 million passengers on domestic flights in the first half of this year, up more than 57 percent from the same period last year, but still below the numbers recorded before the coronavirus pandemic.

Two newcomers to the scheduled flights’ segment, Pelita Air and Super Air Jet, entered the domestic market over the past year and are planning fast expansion to seize the moment.

Pelita Air, a subsidiary of state-owned oil and gas company Pertamina that used to provide charter flights, wants to operate eight aircraft by the end of this year and then add 10 more annually for the next five years, while Super Air Jet aims to operate 61 aircraft by the end of this year, roughly double its current fleet.

National flag carrier Garuda Indonesia, meanwhile, plans to operate 70 aircraft next year, double the existing number it is left with after recently entering a debt-restructuring process, but still far below the 140 units it had before the pandemic.

“We are an archipelagic country, and our economy has been growing by more than 5 percent recently, which will automatically increase demand for air travel,” Rusdi Kirana, owner of the country’s largest private airline operator, Lion Air Group, told The Jakarta Post on Monday after attending the first anniversary of Super Air Jet, which he also founded.

“I am very sure there will be significant growth this year. That is the benefit of having a strong domestic market,” he added.

Notwithstanding the optimism, the airline industry is going through a turbulent time as high fuel costs necessitate high airfares, which in turn leads many consumers to look to alternatives like sea or overland transportation.

Statistics Indonesia data show that soaring transportation fares was one of the two largest contributors to inflation in July, the other being staple food prices.

“We want to give our best to the community, but the [affordability of tickets] has become a problem,” Super Air Jet CEO Ari Azhari told reporters on Monday.

Analysts told the Post that high ticket prices were due to a mismatch between rapidly increasing demand and curtailed supply as two years of mobility restrictions had forced airlines to cut their fleets and return aircraft to leasing companies, which in turn required additional maintenance and in some cases renegotiations with lessors.

The total domestic fleet of around 350 aircraft is barely half the previous 600, analysts estimate.

Exacerbating matters, a surge in aviation fuel costs driven by high crude oil prices has increased operating expenses.

The government has allowed airlines to impose a fuel surcharge of up to 15 percent on top of the ticket price ceiling.

Haris Eko Faruddin, air and sea transportation analyst at state-owned Bank Mandiri, said that, if everything went smoothly, the industry could reach the pre-pandemic level in 2024, but the high airfares could get in the way.

“If the country fails to [adequately address] the soaring airfares, that [could derail the recovery]. It could also hamper growth in routes reachable via sea and land transportation,” Haris told the Post on Tuesday.

The Indonesian Hotel and Restaurant Association (PHRI) told the Post on Aug. 10 that prolonged high airfares would hinder the recovery of the hospitality industry as well, since people needed airlines to travel to farther destinations.

Haris added that routes to remote areas would be hit hardest, with the high costs involved possibly prompting airlines to suspend operations. Wings Air, a subsidiary of Lion Air Group, has halved flight frequency on several routes and announced in a statement it would adjust services to passenger demand.

President Joko “Jokowi” Widodo asked his aides on Aug. 18 to control airline ticket prices through increased flight frequencies by both private and state-owned airlines.

Aviation expert Gerry Soejatman countered that the government could not expect firms to increase flights on unprofitable routes. “The government can ask, but airlines must also look to their financial performance. [Serving such routes] could weaken them and jeopardize the recovery,” Gerry told the Post on Tuesday.

“What we need most is for the war [in Ukraine] to end. Then global energy prices can return to normal,” he added.

Lion Air Group’s Rusdi vowed to work with the government to provide more affordable tickets at certain times but also said more government support was needed. Beyond high fuel prices, airlines were currently bearing higher airport taxes, a weaker rupiah exchange rate, which made leasing fees more expensive and higher spare parts costs due to producer-induced supply disruption, Rusdi said.

He expressed his hope that the government would halve or even scrap value added tax on aviation fuel.

Finance Minister Sri Mulyani Indrawati told reporters on Tuesday that her ministry would look into the matter.

Garuda Indonesia CEO Irfan Setiaputra told reporters on Aug. 12 that a declining oil price could allow for more affordable fares. “The aviation fuel price is dropping.

It’s not fair if we keep raising ticket fares just because the Transportation Ministry said we could do so,” Irfan said.

“We need to side with our passengers as well. Even if I do not raise Garuda’s fares, passengers still won’t want to fly, let alone if I hike the price,” he added.

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