PT Dirgantara Indonesia president director Budi Santoso (left) and chief engineer Palmana Bhanadhi (right) inspect Dirgantara’s N219 aircraft on Dec. 11 at a hangar in Bandung, West Java. The Indonesian aircraft manufacturer, in cooperation with the National Institute of Aeronautics and Space (LAPAN), designed and built the twin-prop aircraft specifically for flying in and out of small airports and airfields with short runways in remote areas.
At the beginning of 2019, the consumer community of the airline industry was surprised by the very high increase in the prices of airplane tickets simultaneously on almost all airlines. Astonishingly, the increase in the prices of flight tickets nearly touched the figure of 70 percent. Therefore, it is very natural if the price increase becomes a hot ball in the realm of public discussion.
Until now, the debate over the tariff increase has not been fully completed even though the government and several airlines have responded to this rate increase. The increase in avtur was allegedly attributed to the very high increase in airplane ticket prices, since the component of avtur prices could reach 40 percent of the total cost. However, the very high price of aviation fuel cannot answer the reason behind the dynamics on the increase in ticket prices because the increase in airplane ticket prices occurred when the avtur price was declining.
In the end several airlines tried to diminish the wave of protests by lowering the tariffs by 20 percent from the initial increase of 70 percent so that the effective increase in the ticket prices is around 50 percent. Nevertheless, the phenomenon of rising aircraft tariffs still leaves several basic questions that have not been fully answered until now. What really happens in the national aviation industry?
New stage
Actually, after the decision of the Business Competition Supervisory Commission (KPPU) in the 2000s related to the abolition of the upper and lower limits of airplane fares, the national aviation industry
has entered a new stage. The national aviation industry has been directed to struggle competitively so as to create efficient performance from each airline. This step is considered very effective because after the decision there appears airlines that offer flights of low cost carrier (LCC) types with airline ticket prices that are much cheaper.
After the KPPU\'s decision and the emergence of various types of LCC flights, the aviation industry grows very rapidly. This can be seen from the very quick increase in air travel traffic. In 2003, air travel traffic was still below 400,000, but by the end of 2017 air travel traffic had almost reached the one million mark. In other words, air travel traffic increases by around 40,000 every year.
Concentrated
However, along with the development of the national aviation industry, aviation industry players are now starting to concentrate on just a few airlines. In 2005, the market domination of the national aviation industry was still relatively spread even though several large airlines had greater market control.
According to the records of CAPA-Center for Aviation & Indonesia DGAC, in 2005 the market share of the national aviation industry was dominated by Garuda Group (24 percent), Lion Group (25 percent), Sriwijaya Group (8 percent), Air Asia (2 percent), and others (41 percent). At the end of 2017, this market share almost completely changed to the Lion Group (50 percent), Garuda Group (33 percent), Sriwijaya Group (13 percent), Air Asia (2 percent), and others (2 percent).
Even, by the end of 2018 the market share of the Indonesian aviation industry was practically only controlled by two groups after the Garuda Group took over the operational management of the Sriwijaya Group.
The concentration level of the aviation industry market, which only converges on the two groups of airlines, is a strong indication of a change in the market structure from oligopolies initially to duopoly. The market share that leaves 2 percent for Air Asia and 2 percent for other airlines makes Air Asia and other airlines have no power in influencing prices in the aviation industry market. They will only become followers in the midst of the hegemony of the two market rulers.
Borrowing an analysis from the theory of Industrial Organization (IO), the change in market structure in the aviation industry will have an impact on competition behavior, including pricing of each airline.
Duopoly and competition behavior
The duopoly market structure provides two alternative competition behaviors for the players, namely competing and forming coalition. For industry players, the coalition behavior usually offers a greater level of profits compared to competition behavior. However, in some countries, including in Indonesia, this coalition behavior is prohibited because it is contrary to the principles of healthy business competition. Even, Indonesia already has an antimonopoly law as well as its supervisory institution (KPPU).
Therefore, even though the market structure in an industry leads to oligopoly and duopoly, company behavior is expected to remain in competition with each other so that the most efficient prices are created, thereby increasing the overall competitiveness of the industry. In the competition behavior, a duopoly market structure will create two main players, namely players who act as leaders and those who act as followers.
Controlling companies are usually market rulers who determine pricing policies before the others, while the followers are companies that determine the prices after the controlling companies determine the pricing policy. If referring to this concept, the duopoly market will not create price homogeneity at the same time.
Interestingly, in the Indonesian aviation industry in the LCC flight market, Lion Air, which has the power to set prices first, does not become a determinant as precisely it is Citilink that raises prices earlier. The same thing happens in the full service carrier (FSC). Batik Air, which is supposed to be a follower airline, even becomes the first airline to raise prices. This certainly raises big questions for aviation industry consumers, is there really an indication of a cartel in the Indonesian aviation industry?
The phenomenon of rising airline ticket prices should be the entry point for KPPU to conduct further investigation whether there is indeed collusive oligopoly in the aviation industry in the country. Until now there has been no strong conclusion whether collusive oligopoly has occurred in our airline industry. In fact, price uniformity and decision-making behavior patterns are the initial indications of the absence of competition. Uniformity of prices can cause abnormal profits that can be enjoyed by all airlines if all of them make price agreements.
The phenomenon of collusive oligopoly should not occur in all sectors of the economy, including in the aviation industry. The phenomenon of collusive oligopoly will be detrimental to consumers and will certainly encourage enormous inefficiencies in the aviation industry. This inefficiency will ultimately result in a high-cost economy that leads to a decline in the competitiveness of industrial products.
To eliminate collusive oligopoly, the government cannot hand it over to the market mechanism. The market cannot amend the collusive oligopoly phenomenon in a short time. Therefore, an affirmative policy from the government is needed to encourage healthy competition in all economic sectors, including in sectors controlled by state-owned companies. The government must create healthy competition to create economic efficiency so that it can improve the welfare of society as a whole.
Agus Herta Sumarto,Lecturer at the School of Economics and Business, University of Mercu Buana; and Indef Researcher
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