Indonesia’s airlines industry has had an eventful 2015. A recent move by the government has given airline operators good reason to rejoice, as import taxes for aircraft spare parts have been scrapped. The incentive – part of the 8th economic stimulus package – eliminates the tax, which typically stands between 5% and 10%, for 21 categories of aircraft spare parts.
In another policy measure, back in September 2015, the government rolled back a regulation which prevented low cost carriers (LCCs) in the country from selling tickets as low as 30% of maximum fares of full-service carriers. The revised policy, which took effect in the aftermath of December 2014 AirAsia plane crash, set the lower limit at 40%. The move, intended to push airlines to allocate greater sum on ensuring safety practices, was met with criticism from businesses in the wake of already weakening demand and currency depreciation.
Nevertheless, the roll-back on the policy and import tax elimination are certainly going to improve business climate in the aviation market. Even though air passenger volume has grown modestly this year, airlines have been able to offset some of the impact from lowered energy prices. Crude oil is currently trading below US$40 per barrel (pbl) mark, and jet fuel is expected to trade around US$64 pbl in 2016, a significant reduction from nearly USD115 pbl in 2014. Indonesian national carrier Garuda Indonesia even moved into black this year as it reported some USD50 million in net profit during the first nine months of 2015, from USD222 million in losses it reported in the same period in 2014. The company is expected to report annual net income of USD34 million in 2015 – its first annual profit in three years.
One of the Fastest Five
Despite the volatility in airlines industry owing to impact of global energy prices and currency exchange rates, Indonesia is regarded as one of the five fastest growing aviation markets in terms of additional passengers’ growth, according to a recent report by International Air Transport Association (IATA).
Air passengers in the country are expected to grow to 219 million by 2034, adding 132 million new passengers – standing at number 4, behind China (1.196 billion total passengers), the US (1.156 billion) and India (378 million). Brazil is at number 5, with air passengers expected to grow by 104 million, to total 202 million by 2034. Even in terms of routes, Indonesia-East Timor will be the fastest growing route, at 13.9%, followed by India-Hong Kong (10.4%).
The projected growth in Indonesia is in line with the rising middle class incomes and growing preference for air travel in this archipelago nation of thousands of islands, where land and sea transportation connectivity is limited. The LCC sector is expected to anchor a large part of domestic growth, as middle-income Indonesians become increasingly accustomed to paying a certain premium for air travel, more time-effective and certainly deemed safer than sea transportation. Domestic air travel volumes have expanded greatly in recent years (see table), owing to these factors. Safety is increasingly becoming important to air travellers, as also highlighted from a MarkPlus Insight Kataanda survey done last year. It showed that for flyers, safety was the most important consideration before choosing an airline as opined by 43% of the respondents, followed by price (26%), amenities (20%), and flight schedules (10%).
Source: Kataanda Survey 2015, n=366
In 2015, as per data from Indonesia’s Statistics Agency (BPS), air passengers in Indonesia totalled approximately 67.5 million in the first ten months of 2015, up 12.8% from corresponding period in 2014. The total air passengers for 2014 stood at 87 million. For 2016, Indonesia National Air Carrier Association (INACA) has projected a single digit growth of 8%-9% in the number of domestic and international air passengers, partly owing to weakened purchasing power in the wake of slow economic growth.
ASEAN Open Skies – Bracing for challenges
One of the highlights this year is the Open Skies Policy under ASEAN Economic Community (AEC), set to take effect from 2015-end. As the name suggests, the policy will remove restrictions from air transport travel in the region, enabling airlines in the 10 member states to fly freely, thus improving connectivity and stirring competition, ultimately set to benefit customers with lowered airfares and improved service.
One of the key concerns about Open Skies however, as with AEC in general, is the ability of Indonesian airlines to face stricter competition from regional counterparts. As South east Asia’s largest economy, all eyes are on Indonesia as a highly lucrative aviation market, with four of the principal ASEAN connecting points located in Indonesia, namely Jakarta, Surabaya, Medan and Denpasar.
Considering the strategic importance Indonesia has as a regional aviation market, experts have urged the government to support the domestic industry with policy measures – import tax scrapping seems to be a step in that direction. However, a big question looms over Indonesia’s fundamental inadequacies, as the open skies policy will put further pressure on the already weak aviation infrastructure and limited human resources.
It is clear that ASEAN member countries all need significant preparation for this policy implementation, especially in the field of integrated air traffic management. While that would be an ongoing effort, recent news reports suggest at some delays as Indonesia and Philippines are yet to open their markets in full; Indonesia has so far opened up only Jakarta while the Philippines has removed restrictions from all cities except its capital Manila. The other eight countries have however lifted all restrictions.
Service differentiation as competitive advantage
As ASEAN’s single aviation market stirs up competition thereby lowering prices, a key differentiation that airlines in the region can achieve is by improving their quality of service. A more competitive fare environment will significantly improve customers’ ability to afford air travel, creating an expanded target segment, while airlines will also benefit from improved market access. More economical air travel is also going to boost tourism arrivals, both intra-ASEAN as well as of international tourists.
While lowered fares could affect airlines’ margins, it also drives them to be more cost-efficient and get better at yield management in order to remain competitive. For a service-oriented business like airlines, a major differentiator would be customer service quality, which is becoming increasingly important as flyers become more demanding, not to forget their increased tech-savviness, which makes online experience equally important. Putting the customer’s needs and expectations at the centre of their service offerings can help airlines create a competitive edge and differentiate themselves.
As airlines scramble to lower fares in order to stay competitive – average customers pick airlines based on cheaper price – the quality of service would become even more important to make customers’ experience more memorable and pleasant. While business travellers solicit a more privileged treatment, economy travellers too are becoming more demanding as well as willing to pay for some extra services accounted for as ancillary revenues – basically any form of non-ticket revenue.
The concept, increasingly relevant to LCCs, includes a variety of ways in which revenues can be generated, such as in-flight meals and entertainment services, check-in facilities, concierge, and baggage handling. From choice of seat selection, premium economy upgrades, and on-board Wi-Fi to travel related services (hotel rooms, concierge) ancillary services are available to customers at an extra cost. Airline-tied up credit cards too are becoming more popular, generating a lot of cash for the airlines.
Though an emerging trend, airlines are paying close attention to these newer revenue generation streams. Airlines ancillary revenue globally is projected to grow from USD50 billion in 2014 to USD59 billion this year, accounting for 7.8% of total airline revenues. According to CarTrawler Yearbook of Ancillary Revenue report 2015, Indonesia flag carrier Garuda Indonesia only derived 0.3 percent of its revenue from ancillary services, and all from extra baggage fees. On the other hand, Tiger Air, Jetstar and Air Asia count among the top airlines for ancillary revenues as a percent of total revenues.
It so seems that airlines in the ASEAN region would need to step up their efforts at earning ancillary revenues. Personalisation significantly helps this cause as customers are increasingly willing to share personal data with businesses in expectation of receiving improved service quality. The historical data on customer preferences from airline passenger records can act as a valuable resource for airlines to determine purchasing behaviour and personalise service, not to forget the big data analytics which can track information based on loyalty rewards, social media activity, and credit card usage. This can then effectively be leveraged to present relevant product offers to customers.
Improving engagement through digital
Akin to any other industry influenced by the digital transformation, airlines too must actively engage with their customers online. Social media such as Facebook and Twitter have become informal customer care channels, where grievances are often posted by customers and their timely resolution is an effective way to improve customer experience and general top-of-mind awareness. Not only that, prompt social media response also results in publicity; for instance, a recent Southwest Airlines flight which got delayed due to a technical glitch and stranded thousands of passengers. Not only did the airline personally responded to each tweet/message on social media, but handed out pizzas to hungry passengers. A 30-member ‘social business’ team is behind the great social media show, directly working with all departments including operations, logistics, and HR.
Further, In addition, social media can not only be effectively leveraged to popularise unique promotion and offers, but also to drive engagement through content marketing, which creates lasting relationships and brand loyalty. Some interesting examples of interactive social media campaign include Virgin Atlantic’s ‘Looking for Linda’ contest. Dutch national carrier KLM’s ‘Meet & Seat’ service which uses social media to introduce business travellers booked on the same flight, based on similar interests.