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Turbulence in the sky

Publication Date : 04-02-2013


The public’s trust in Batavia Air began to decline after Malaysian AirAsia and its Indonesian partner PT Fersindo Nusaperkasa decided last October, after three months of due diligence, to cancel their plan to acquire the budget airline for US$80 million, as initially agreed in their memorandum of understanding (MoU) in July.

Even though AirAsia chief executive officer Tony Fernandes formally cited ”different corporate cultures” to be the reason behind the cancellation, the market perception of Batavia Air, one of Indonesia’s biggest low-cost carriers, had since then been quite negative, thereby adversely affecting its sales.

As such, the Jakarta Commercial Court’s verdict last Wednesday declaring Batavia Air bankrupt for defaulting on US$4.6 million debts to the US International Lease Finance Corporation (ILFC) was simply another nail in the coffin.

Batavia Air’s fatal mistake was the management’s decision in 2010 to lease two Airbus A330s from ILFC for three years without the support of a credible marketing study.

Undertaking such a big deal in the hope of obtaining a contract from the government to become one of the designated carriers for Indonesian haj pilgrims simply did not make any business sense.

Batavia Air’s bankruptcy also shows us how fierce the competition within the fully liberated airline industry has been. The industry now has more than 15 scheduled carriers.

The number of air travellers within the country has increased by more than 18 per cent annually over the past seven years to reach 66 million last year, on the back of steady economic growth and low fares provided by budget carriers.

The emergence of many budget airlines has made air travel affordable to an increasingly large number of people, further feuelling rapid growth in air travel across the world’s largest archipelago.

However, the profit margin is quite small, while airline businesses need a huge outlay of capital and high technology and are labour intensive in nature. For this reason, top-calibre management is needed to make airlines competitive in the market.

In an industry that produces a highly perishable product — passenger seat is wasted once a plane takes off — producers can easily resort to a price war. When a plane takes off with empty seats, the product (passenger seat or freight space) is spoiled. Hence, the carrier can either get a dollar or nothing because the high fixed costs make the marginal cost of adding passengers almost negligible.

Worse still, the price of fuel which is wildly volatile accounts for one third of airline operating costs, while air transportation infrastructure in the country, including pilots, is extremely inadequate, further adding to the costs.

The top priority for the government now must be to ensure the interests of consumers (ticket holders) are fully protected in the process of Batavia Air’s liquidation.

Despite this bankruptcy, the outlook of the airline industry in the country remains rosy. The potential market of air travel is huge and as the economy grows and more people can afford air transportation the market will continue to expand.

Nevertheless, the government should carefully manage the deregulation of the airline industry to gear up domestic carriers for fierce competition from neighbouring countries, especially in facing the open-sky policy in the Asean region in 2016, because budget airlines have also sprouted up in other Asean countries such as Thailand, Malaysia, Singapore and the Philippines.


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