Indonesia’s domestic flight industry: the impact of a duopoly

Posted on June 19, 2019 By Febi Trihermanto

Price increases on domestic airline tickets in Indonesia. (Source: katadata.co.id)

Part two:

The impact of a duopoly

[Read part one: The evolution of Indonesia’s commercial airline industry]

Duopolies often lead to higher prices than a more free market would deliver, which can trigger price regulation by government authorities. According to katadata.co.id, the potential impact of a duopolistic market structure in Indonesia’s aviation industry was seen some time ago, when both groups of airlines increased their ticket prices for domestic routes.

The Indonesian Express Delivery Service Association (Asperindo) stated that Garuda and its subsidiary Citilink increased their ticket prices by 14% and 1% respectively in July 2018.  Lion Air followed Garuda Group by increasing prices by 36% in October 2018 while Sriwijaya Air increased them by 51% at the end of January 2019. The recent domestic ticket prices of Garuda and Lion groups for certain routes can be seen in the table below.

Table 1. Domestic flight prices for certain routes in Indonesia. ($1 AUD roughly equals IDR 10,000) (Source: Traveloka and AirAsia)

We compared the prices of domestic tickets with Garuda and Lion groups on six routes for 20 May 2019, three that the AirAsia group also services and three that it does not, to see if there is a price setting duopoly in action. The routes with no third competitor were Jakarta-Palembang, Jakarta-Pontianak and Jakarta-Padang. The three routes where Air Asia also operated, which had a similar range of distances and flight times, were Jakarta-Yogyakarta, Jakarta-Surabaya and Jakarta-Denpasar. The results were varied. For full-service airline (FSA) tickets there was no significant difference between prices with and without AirAsia’s presence. (FSA providers here were Garuda Indonesia, Sriwijaya Air, and Batik Air.) For low-cost carrier (LCC) tickets, however, the presence of AirAsia on certain routes disrupts Lion Air prices,  which, in the presence of AirAsia competition, see a reduction of between 4% and 21%.

If we compare the price of Garuda Indonesia international flights from Jakarta to Singapore with their domestic flight from Jakarta to Padang, which has almost the same distance, the price to Singapore is, surprisingly, 8% cheaper. The presence of competitors does indeed appear to reduce prices.

Scaring away passengers?

In 2017, Indonesia was the sixth cheapest country in which to catch a flight, according to online travel agency kiwi.com, with the average domestic flight costing US$6.49 per 100 kilometres travelled. Things have changed significantly, however, in just two years. In the above table, compiled May 2019, the average price per 100 kilometres on Lion Air has risen to US$10.55 and Garuda Indonesia has risen to US$16.80/100km. While speculative, it may well be that the increasing ticket prices have precipitated a decrease in numbers of passengers, as seen in the below table of domestic passengers using Indonesia’s five major airports at their lowest levels for the last four years.

(Source: BPS)

Though domestic passenger movements follow similar annual cycles and have seen baseline growth each year since the beginning of 2015 until mid-2018, we have since seen a downward trend. The latest figures, from February 2019, show passenger numbers hitting their lowest level since 2015. This trend corresponds with the increase in ticket prices from Garuda and Lion groups during the past year. According to Statistics Indonesia (BPS), a decrease in domestic passenger numbers was recorded in each of Indonesia’s five major airports. Soekarno-Hatta International Airport in Jakarta saw a drop of 21.26% from the same time last year, Juanda International Airport in Surabaya saw a drop of 20.80%, Ngurah Rai International Airport in Bali 11.18%, Hasanuddin Airport in Makassar 21.75% and Polonia (and later Kualanamu) Airport in Medan, a drop of 31.62%.

Neighbouring country markets

To investigate whether Indonesian domestic flight prices are regionally competitive, we compared them with prices in the most frequently visited countries nearby (not including Singapore, which has no domestic flights): the Philippines, Thailand, Malaysia and Australia. We started by looking at the breakdown of percentage shares in the various markets to see if an oligopoly was a common market structure for industries in the region.

Table 2. Domestic flight market share in nearby countries. (Credit: AIC)

According to centreforaviation.com, there are three key players in the Philippines’ domestic flight industry. Cebu Pacific Group experienced a slip in its domestic market share from 2015 to 2017, but still retained a 55% share. Meanwhile, the Philippine Airlines Group and Philippine AirAsia held 29% and 14% of the domestic market respectively. These groups dominated in the Philippines, controlling 98% of the market.

In Thailand, according to flightglobal.com, Thai AirAsia led the industry with a 34% market share, followed by Thai Airlines with 33%, Thai Lion Mentari (a Lion Air subsidiary) with 19% and Bangkok Airlines with 14%.

AirAsia dominates in Malaysia with a 51% market share, followed by Malaysian Airways and Malindo (Lion Air affiliate) with 33% and 16% market shares respectively.

Table 2 above shows that an oligopoly (with a few dominating players) is common practice in the Southeast Asia region. Different to these three countries is Australia’s domestic industry, which is dominated by its two biggest players, Qantas Group and Virgin Group, with 57% and 38% market shares respectively. In the region, this market structure is most similar to Indonesia’s.

Neighbouring country prices

Next, we compared flight prices in neighbouring countries with those in Indonesia to investigate whether market structures are causing price differences.

Table 3. Domestic flight prices for certain routes ($1 AUD roughly equals IDR 10,000) (Source: Traveloka, AsiaAir, Bangkok Airways and Jetstar Australia)

Table 3 shows the price and price per kilometer of various domestic flights routes in the region on 20 May 2019. We compared these with prices in Indonesia for flights with a similar range of distances and times. Firstly, we compared prices for the Jakarta-Pontianak route in Indonesia, Bangkok-Hat Yai in Thailand and Sydney-Brisbane in Australia. The results showed that Garuda Indonesia’s FSA tickets are 39% more expensive than comparable Thai Airways tickets and 29% more expensive than Qantas.

Looking at the same three routes, the price of LCC tickets in Indonesia are also the most expensive. Flying Lion Air from Jakarta to Pontianak is 66% more expensive than our similar-distance route in Thailand and 10% more expensive than the similar-distance route in Australia.

We then chose another route in Indonesia, Jakarta-Padang, and compared prices with Manila-Davao in the Philippines and with Kuala Lumpur-Kuching in Malaysia. For FSA tickets on this length route Garuda Indonesia was 37% more expensive than Philippine Airlines and more than double the price of Malaysian Airlines. Among the LCCs on the same routes, Lion Air in Indonesia was 41% more expensive than Malindo Air in Malaysia and slightly cheaper (by 6%) than AirAsia Philippines.

Lastly, we calculated the overall average price per kilometer of various airlines in the region and found that FSA and LCC tickets in Indonesia are the most expensive per kilometre in the region.

More players needed

Indonesia is definitely in need of more industry players to help mitigate against rising domestic ticket prices – as is supported by evidence from more competitive markets in the Philippines, Thailand and Malaysia.

More investigation is also needed into the growing role of companies that are operating across the ASEAN region, especially AirAsia Group from Malaysia and Lion Air Group from Indonesia.

Indonesia’s expensive domestic flight tickets have now sparked criticism from citizens and have also gained much attention from the President and senior ministers. On 15 May 2019, Minister of Transport Pak Budi Karya Sumadi instructed all domestic airlines to reduce their ticket prices within 48 hours, and in early June President Jokowi proposed opening domestic routes up to foreign-owned airlines (whereas currently 51% local ownership is required.)

Read part one: The evolution of Indonesia’s commercial airline industry

 

Febi Trihermato

Febi Trihermato

Indonesia Research Officer