News
Garuda reduces fares ahead of national election
February 22nd 2019
It is flights-for-votes in Indonesia as government-owned Garuda Group lowers fares by 20% after being requested by a president facing re-election. Fares grew as fuel did, but no one is talking about airline economics. Read More »
Aviation tends to attract out-sized political attention, and this has proven especially the case in Indonesia, whose mountains and islands make air travel essential. The Garuda Indonesia Group, which carries about half of domestic passengers, is reducing airfares by 20% after Indonesia President Joko Widodo requested lower fares.
There had been public discord about rising airfares, and Joko, as he is commonly called, is seeking re-election in April. The Indonesian government owns 61% of Garuda. Reuters cited banking analysts unhappy with such government intervention.
The situation has largely ignored the reality of the operating environment. Garuda and Citilink from late-2017 were seeing CASK growth, which accelerated in late 2018 – in line with rising fuel prices. Yield growth did not keep up until November 2018, when Citilink’s yield growth exceeded CASK growth. Garuda saw strong yield growth but even faster CASK bloating.
December saw both airlines grow yield faster than CASK. This was likely the result of fuel prices decreasing but tickets for the popular travelling season having been sold in prior months when fuel was more expensive and factored in as such to ticket prices. January figures have not yet been disclosed.
An online petition started in January calling for lower fares; it now has 361,000 signatures. Joko’s official rationale is that lower fares will stimulate domestic demand and help the hospitality industry.
Garuda Indonesia repeated these talking points, with CEO Ari Askhara saying in a statement about the fare reductions: “This is in line with the aspirations of Indonesians, a number of national industry associations, and the (wishes of) the president of Indonesia, who wants a reduction in flight prices to support economic growth, especially in the tourism sector.”
But volume growth will be hard to achieve. Citilink’s load factor has recently been above 90% while Garuda’s domestic load factor is in the 70-80% range, likely a result of weak loadings on secondary routes.
The public outcry was partially based on the false assumption that the government increased airfares after the fatal crash of Lion Air flight 610. The Indonesian government unhelpfully said at the time it was considering raising the minimum fares airlines could charge, suggesting the crash was due to cost-savings; Lion Air blames the new 737 MAX that was involved.
Indonesia sets minimum and maximum fares for different types of airlines. Indonesian airlines have said their fares are all within the permitted threshold. Lion Air said it will not decrease air fares.
