Aviation Accidents Cast a Dark Shadow Over Indonesia’s Travel Sector

CEIC Indonesia Data Talk - January 21, 2015 The AirAsia flight QZ8501, which crashed into the Java Sea in bad weather off Borneo Island on 28 December, has spooked industry players, regulators and the general public. The plane was travelling from Surabaya to Singapore before it crashed, resulting in the presumed death of 140 people on board. In addition to the human cost and the financial loss involved, the tragedy is likely to have far-reaching consequences, not just to AirAsia, a budget airline, but to the general aviation industry in Indonesia (and indeed, the region as a whole). Public jitters concerning airline safety in the wake of the tragedy will place a damper on non-essential travel demand and advance bookings. The latter, in particular, will place pressure on the low-cost airline model in which AirAsia operates. However, in the long run, the psychological impact of the QZ8501 tragedy will have less impact. International air travel constitutes a sizeable chunk of overall passenger traffic in Indonesia. In 2013, international travel constituted approximately 22% of overall passenger arrivals and departures, which totalled 11.46 million and 11.58 million respectively. In particular, Singapore is a favourite destination for Indonesians and a major share of the international departures by residents. In 2013, it is estimated that there were 3.50 million Singaporean passengers departing from major Indonesian airports (North Sumatera, Banten and Bali, among others), improving marginally from 3.29 million passengers in 2012. This compares to 11.56 million international departures from Indonesia’s major airports in 2013. Deterioration of passenger confidence in airline safety will likely see an initial reduction in demand, potentially placing pressure on airline profitability. Indeed, these jitters are likely to affect regional confidence in the airline industry, especially given three major Asian airline-related tragedies during 2014, two of which involving Malaysian Airlines. However, notwithstanding the initial impact on passenger confidence, the aviation sector is expected to rebound swiftly given the generally non-recurring nature of aviation accidents. The limited options for speedy and cost-effective mode of international travel, and the sheer volume of flights taking off and landing every day, will quickly mitigate the loss of passenger confidence. The short term negative impact is also somewhat cushioned by the dip in fuel prices, alleviating some cost pressures on the airline’s margins. Fuel prices have fallen considerably from approximately USD108.95/barrel in June 2014 to just USD59.56/barrel in December, based on statistics from the Directorate General of Oil and Gas, with further falls arising in the first weeks of January. However, the net impact of the lower cost may be limited as airlines pass on the savings to passengers due to the competitive nature of the aviation sector. Perhaps the long-lasting impact of this tragedy would lie in improved regulation of Indonesia’s aviation sector, especially on low-cost carriers (like AirAsia) to prevent them from prioritizing cost considerations over safety and, hence, avoiding potential future air transport accidents. The Transport Ministry raised the floor tariff to 40% on 30 December 2014 -- i.e. airlines can only sell prices 40% cheaper than the ceiling price. On an industry level the new regulation may challenge the low-cost airlines’ business model, possibly pricing out some passengers in the short-to-medium term. Tightened regulation may also oblige airlines to rationalise costs and cut down on some of their more unprofitable routes. As of 2013, the passenger load factor – a measure of airline capacity utilization – for domestic and international flights stood at 82.99% and 69.33% respectively (compared to 80.79% and 74.03% in 2012). Critics argue it is debatable if increased tariffs will provide an impetus for improving airline safety. However, the regulatory crackdown is expected to see spillover effects on the Indonesian tourism sector. Low-cost carriers in Indonesia play a huge role in supporting tourism development, especially in bringing foreigners to the remote islands, especially given Indonesia’s archipelagic geography. The efficacy of the raised tariffs will be keenly observed by the sector for the coming months. Overall, the industry faces a turbulent path weighed down by immediate deterioration of consumer confidence and heightened regulation. While lower fuel prices will provide some relief to aviation companies (subject to their hedging strategies), regulatory constraints may potentially bring about an evolution in the sector’s business model.

Our heartfelt condolences go to the families of the tragedy.
By Yudha Prawira - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
21st January 2015 Aviation Accidents Cast a Dark Shadow Over Indonesia’s Travel Sector

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