TEMPO.CO, Jakarta - The country’s netizens were protesting Transportation Minister Budi Karya Sumadi’s decision to increase the online motorcycle taxi (ojek) tariff rates last month. Their outrage only intensified when they talked about increased domestic airfares around the end of last year.
Budi Karya sprang into action, not because he was the subject of a trending topic, but because of the request by Coordination Minister for the Economy Darmin Nasution made during the coordination meeting held on May 6. Throughout the following week, he was busy holding marathon meetings at his office in Jalan Merdeka Barat, Jakarta, to find a formulation for cutting down the price ceilings (TBA) for air ticket pricing. The Aviation Law No. 1/2009 gives the transportation ministry the authority to set the TBA for economy class airfares of all scheduled commercial flights to protect consumers and business entities from unhealthy competition.
On May 13, a consensus was reached to axe the TBA by 12 to 16 percent for economy class on commercial jets. Maximum tariffs within a range of 100 percent from the TBA, excluding taxes and additional charges (extras), will be allowed for full-service airlines, 90 percent for medium service airlines and 85 percent for low-cost carriers. “That is where our wish to offer more affordable prices and the need to maintain safety meet,” said Budi, 62, on Wednesday, May 15.
After tackling the airfare issue, Budi Karya shifted his focus to the logistics preparations for the approaching end of fasting month holidays Idul Fitri exodus, from the new toll roads in Lampung and South Sumatra, inter-island crossings, to traffic engineering on the trans-Java toll roads. He said he did not expect increased airfares to affect much the usual heavy road traffic volumes. “The number of holiday travelers passing via toll roads will be massive, but mostly because of the public’s enthusiasm about the new roads,” remarked the former CEO of Angkasa Pura II.
Amid the frenzied work schedule that hardly allows him any break until after the Idul Fitri, Budi Karya sat down with Tempo’s Reza Maulana, Khairul Anam and Angelina Anjar in his office for an interview, right after which he signed the Ministerial Decree No. KM 106/2019 on the TBA.
What is the rationale behind the cut in the price ceilings (TBA) for airline tickets?
That is where our wish to offer more affordable prices and the need to maintain safety meet. One thing the public needs to know although it may not be pleasant to hear is that our airlines have been in an unhealthy competition that pushed them into losses. As a regulator, we must not allow them to continue in such a condition that could lead them to bankruptcy or sacrifice flight safety. It would also be irresponsible to lower the TBA below 15 percent.
Is there any guarantee that the average 15 percent reduction will not cause losses to the airlines?
It will not, if the occupancy rate is above 65 percent and 70 percent occupancy will give them profit. That was our main consideration in determining the tariff.
What is the current occupancy rate on domestic flights?
According to our observation, the average rate is above 70 percent. Some even have 90 percent. No other country imposes TBA and TBB (price floors). So, these are the facts if many people are dissatisfied with the average 15 percent. We also need to give room to the airlines so they can survive.
How about foreign carriers without TBA and TBB?
You can check, for example, the fares in Japan for Osaka-Tokyo route or in Thailand for Bangkok-Chiang Mai route. Prices will be high. India is also another example.
But they have better modes of road transport giving consumers options...
India’s worse than ours.
(Last Friday via Trip Advisor, Tempo compared domestic airfares in various countries for flights with a duration of around two hours and found that a Jakarta-Makassar flight ticket costs Rp1.7 million whereas a New Delhi-Mumbai (India) ticket is around Rp700,000 and a Hanoi-Ho Chi Minh City around Rp780,000. Lion Air, on the other hand, sells a Jakarta-Singapore ticket for around Rp800,000 and Jakarta-Pekanbaru around Rp1.6 million.)
Why didn’t the airlines act on the transportation ministry’s recommendation to reduce fares earlier?
I don’t want to make justifications for them. I don’t want us as a regulator on the same level as the airlines to have a sense of dominance. I proved that through the TBA cut after persuading them for three months. I reported this story during the coordination meeting with the economic affairs coordination minister. I was also informed during the meeting that the issue has already affected the inflation and disrupted the tourism and hospitality sectors. Well, the decision was taken in the meeting.
Is it that difficult to regulate air ticket pricing?
It isn’t. As usual, the private sector always tries to win the competition. Just in different ways. I can understand that because I was previously in the private sector. But, come on, don’t be like that (chuckles)...
You have the authority over the air tariff limits. Why did you wait for the request from the coordination meeting?
I did not want to arbitrarily decide something just because I got a report or I was pressured. I also wanted input from other sectors so that everyone feels that the decree is really needed. All I could do was to observe the decline in the number of passengers. Through the meeting, I found out that there were other elements that needed to be considered, such as the public’s complaints, the inflation, the tourism and hospitality sectors.
What was the complaint that you remember the most?
Cabinet Secretary Pramono Anung went on a tour across the country accompanying Pak President. One of the complaints they got from the public was air ticket fares. It turned out there was no region where they did not hear that complaint. In the past, only two regions raised the issue. West Sumatra around the time of Idul Fitri and West Kalimantan around Chinese New Year. Now everyone is feeling the heat. In Makassar, at home, at neighbor’s house, everyone talks about it (laughs)...
So much so that #PecatBudiKarya campaign emerged...
(Laughing)...I just want to work. I was given the mandate so I will fulfill it.
Is it true that you were worried about offending the state-owned enterprises (SOEs) ministry if you decided the TBA on your own as it might disrupt Garuda Indonesia’s finances?
It’s not that I was unconcerned about Garuda. Since I was the CEO of Angkasa Pura II, I knew Garuda as our pride, therefore we must support it. I show honor to them by handing over the Soekarno-Hatta airport’s brand new Terminal 3 to them. That was also the reason why I was careful in deciding the TBA cut. I discussed with many sides and apparently, there were other sectors with their own interests. So, it’s not about being worried or not. The decision would create problems for Garuda for sure. But we already calculated and based on their current occupancy rates, Garuda can still make profits.
With the fall in Garuda’s ticket fares, will low-cost carriers’ ticket prices also go down?
Yes. The market mechanism will apply. Like it or not, low-cost airfares must be below full-service fares.
Did you discuss with SOEs Minister Rini Soemarno before deciding to slash the TBA?
We discussed it during the coordination meeting with the coordinating minister for the economy. Ibu Rini left the matter to our discretion. So, there we were, racking our brains to think of ways to lower the TBA without causing losses to Garuda.
You also met with the business competition supervisory commission (KPPU) and Ombudsman.
What did you discuss?
I had to consult with all sides including the KPPU, Ombudsman and the Indonesian consumers foundation. Even though their opinions may not necessarily be in sync with our decision, at least we could feel their sensitivity. The average 15 percent TBA decrease may not solve the problem since some people expect more. But it was a measured decision.
Some view that you were indecisive...
It was good to discuss with many sides, but even so, that made some angry. Imagine if I consulted no one.
Is there any chance of lowering the TBA again?
Let’s not. Please pity the airlines. If the cut goes below 30 percent, it’s over.
Will the airlines resort to the loss leader strategy?
Yes. In case of losses, the first component to be affected is maintenance. Monthly maintenance will become bimonthly maintenance. The second component would be working hours. The usual eight hours will stretch to 10 hours. These will have impact on flight safety.
What if the airlines maintain their current prices?
Since the global airline industry does not impose the TBA and TBB rules, we must apply them with a given level of maturity. The airlines requested time to replace their reservation system and we gave them 48 hours. Sanctions for non-compliance range from warning to suspension of flight permits for given routes.
Read the full interview in Tempo English Magazine