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.
Expensive flight fares in the past 10 months have obviously limited people’s access to economy class domestic flights. The plummeting number of tourists has affected the tourism industry. With many travelers are postponing their plans, several travel agencies have gone out of business. Hotel occupancy rates and souvenir shop revenues have also dropped.
These grievances are heard at nearly all tourist destinations, including Padang, West Sumatra; Labuan Bajo, East Nusa Tenggara; and Raja Ampat, West Papua.
The high price of avtur (aviation turbine fuel; jet fuel) is said to be among the factors behind the skyrocketing flight fares. However, state-owned energy giant PT Pertamina says the high avtur price was caused by an increase in the US dollar exchange rate, as well as fees for transportation, logistics infrastructure investment and other airport fees. On the other hand, airlines say that flight fares have increased because of the increased fuel price and leasing fees due to the higher dollar exchange rate.
Thus, the polemic surrounding today’s pricey flights should not be seen as simple, as it involves a tug-of-war of various interests. Therefore, the solution must be cross-sectoral. It is understandable, then, that the Transportation Minister prefers to let the Office of the Coordinating Economic Minister handle the problem.
Intervention option
With the Office of the Coordinating Economic Minister handling the problem, the option for intervening in flight fares expands, including in synergizing related ministries and agencies.
Available intervention options include stabilizing the rupiah exchange rate against the US dollar, improving efficiency in avtur management, using subsidies and tax instruments, adjusting floor and ceiling prices, and reformulating the avtur price. Stabilizing the rupiah exchange rate is highly important and fundamental for the aviation and tourism industries, and for the national economy as a whole. For the aviation industry, the continued depreciation of the rupiah will lead to higher fuel costs and leasing fees.
Stabilizing the rupiah exchange rate against the US dollar is doable through measures such as controlling the import of goods and services, increasing exports, and attracting more foreign investment to improve the current account and balance of payments. The government needs to be more selective in foreign exchange spending and in controlling foreign debt.
The next option is to improve efficiency in avtur management in the upstream – production at refineries or import channels – and in the downstream, particularly fuel distribution through terminal and aircraft refueling depots (DPPU) at all airports. Currently, around one-third of the national avtur need is fulfilled through imports. Statistics Indonesia (BPS) data shows that avtur imports in 2017 was 1.54 million tons (1.925 billion liters), worth US$825.3 million, and 1.22 million tons (1.525 billion liters) in 2018, worth US$861.1 million.
On average, the value of imported avtur was 42.87 US cents per liter in 2017 and 56.47 US cents per liter in 2018.
In fact, Indonesia has an abundance of kerosene as raw material that can be processed into conventional avtur, as well as raw palm oil that can be processed into green avtur. Indonesia should thus not need to import avtur, and should be able to export it instead. Accelerated development of avtur and bioavtur refineries, both existing and new, is a must.
Regionalized avtur production and distribution bases are necessary to improve efficiency. This plan would include designating the Cilacap refinery as the main refinery, the Balongan and (later) Tuban refineries for Java and Nusa Tenggara, the Dumai refinery for northern Sumatra, the Plaju/Sungai Gerong refinery for southern Sumatra, the Balikpapan and (later) Bontang refineries for Kalimantan and surrounding areas, and the Sorong refinery for Papua. Other strategic areas, particularly around Makassar and Maluku, also need accelerated development of new refineries, including mini refineries. Regionalization can reduce the production and distribution costs of avtur and other fuels.
Coordination is needed between relevant ministries and agencies to formulate and realize efforts to improve efficiency and accelerate the expansion of avtur production capacity to at least fulfill the domestic consumption rate of around 4 million kiloliters per year. The government needs to find financing solutions for concurrent refinery construction and development in all regions.
With efficient avtur management, it is not impossible that the national avtur price could be much lower than that in Singapore. Avtur is a strategic commodity, as it has a strong impact on the national aviation and tourism industries. Low-price, higher quality avtur will attract airlines flying international routes to transit and refuel in Jakarta.
Subsidies and tax policy
Other possible intervention instruments are subsidies and taxes. As we know, 10 percent value-added tax (PPN) and 0.3 percent income tax (PPh), as well as other levies, are imposed on avtur sales for domestic flights. This makes our avtur less competitive, as avtur at Singapore’s Changi airport is not subject to these two taxes.
To resolve the “emergency situation” of expensive flight fares over the past 10 months, the government, through the Finance Ministry, can implement a temporary exemption on PPN and PPh until the condition normalizes.
Other options like lowering the ceiling price (if necessary) and ticket prices for state-owned enterprise and market leader Garuda should consider developments in avtur price and the dollar exchange rate. Among these various options, temporary PPN and PPh exemptions on avtur (say, for three months) is the logical immediate step since it is difficult for the rupiah exchange rate to strengthen to below Rp
14,000 per US dollar. Another option is to reformulate the avtur price in reassessing the avtur imports that meet only a third of domestic needs.
Wihana Kirana Jaya, Professor, School of Economics and Business, Gadjah Mada University
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