Saturday, December 7

Indonesia’s plan to cut air travel costs

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After passenger numbers dropped off sharply in the opening months of the year, Indonesia’s government has moved to rein in rising air travel costs by lowering ticket prices and increasing local production of jet fuel.

On May 13, the government announced it would enforce a 12-16 per cent reduction in fares for all airline carriers, in response to public complaints about the rising cost of air travel. The cuts came into force on May 19.

Domestic fares rose sharply over the past year, from an average of US$70 in the first quarter of 2018 to US$96 by the end of March 2019, an increase of 42 per cent.

This was driven by higher jet fuel costs and further accentuated by the fall in the rupiah, which dipped 6.98 per cent against the US dollar in 2018, adding to the cost of imported hydrocarbons products.

A continued retreat of the currency, which touched 14,500 rupiah per US$1 in late May, will further add to import costs.

The government ruling to lower the price ceiling came ahead of the Eid Al Fitr Muslim holiday in early June, one of the busiest times for carriers.

Passenger numbers, fuel consumption fall

There was an 18 per cent year-on-year decline in the number of domestic passengers carried in the first quarter of 2019, according to a report by Statistics Indonesia (BPS), from 22.2 million to 18.2 million seats.

Market leader Garuda posted a 15.2 per cent drop in seat sales, from 11.8 million to 10 million, according to a report issued by the company in April.

Aside from rising ticket prices, some of this decline could be linked to the slowing of the national economy.

The Indonesian economy expanded at a slower rate than expected in the first quarter, due primarily to a fall in exports and investment growth. While it posted growth of 5.07 per cent, this was below the 5.2 per cent targeted by the central bank, Bank Indonesia.

Weaker travel numbers have also impacted fuel demand.

Jet fuel consumption decreased from 15.5m litres per day in 2018 to 13.5m in the first four months of this year, according to data released by national oil company Pertamina.

This saw Pertamina’s jet fuel inventory rise from 30 days of reserves in 2018 to 42 days.

Amid higher global oil prices and a weaker rupiah, Indonesia spent 12 trillion rupiah (US$850.9 million) on jet fuel imports last year. This constituted a 4.3 per cent increase on 2017 despite lower volumes – 1.22 million tonnes compared to 1.54 million tonnes in 2017. In response, the government announced Indonesia would stop importing some processed oil products as of June.

“Starting next month, we will not import oil and gas products, including jet fuel and diesel,” Darmin Nasution, the coordinating minister for economic affairs, told local media.

“We want to use our own, produced and processed here. This will help the current account, in addition to encouraging more exports.”

Pertamina issued a statement on April 29 saying it had halted imports of jet fuel in January, due to the fall in air travel frequency. The company also announced it will increase production of jet fuel by upgrading processing capacity at some of its existing refineries.

Liberalising jet fuel distribution

The government has opened another front in its fight against high ticket prices by moving to end Pertamina’s distribution monopoly.

At the end of March the government announced it was granting a licence to supply jet fuel to a joint venture between local oil logistics firm AKR Corporindo and UK energy major BP.

Though the licence covers a single distribution point – Morowali Airport in Central Sulawesi – the Ministry of Energy has said further permits will be made available, opening up the segment to greater competition.

It has yet to be made clear whether the AKR-BP joint venture plans to import jet fuel or rely on supply from Pertamina.

This Indonesia economic update was produced by Oxford Business Group.