Juliater Simarmata*, Charles A.N**

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1 Analysis and Evaluation on the Strategy of Indonesian Airline Companies to Face the Increasing Price of Avtur and the Decreasing Exchange Value of Rupiah against the US Dollar Juliater Simarmata*, Charles A.N** * STMT Trisakti, Jl. IPN No. 2, Cipinang Besar Selatan, Jakarta Timur juliaters@gmail.com Ch_Luciano@yahoo.com Abstract In this decade, many airline companies have closed and stopped their operation because of being not able to compete. It is caused by their mistake in selecting and using the type of aircraft and the increasing price of aviation fuel. Based on the data of the exchange rate of Rupiah against the US Dollar and the prices of aviation fuel, forecasting is then made. Through the simulation of cost comparison between Air Bus 320 and Boeing 737 per hour, we obtaine the percentage of fuel cost per hour of each type of aircraft. So we can conclude which type of aircraft is more advantageous to be used currently, in conditions that the value of Rupiah against the US Dollar is weakening and the aviation fuel price is rising. Keywords : the increasing price of avtur and the decreasing exchange value of Rupiah. INTRODUCTION 1

The growth of world population is consistently increasing and Indonesia is the fourth biggest population in the world after China, India, the United States of America.

2 The growth of world population is consistently increasing and Indonesia is the fourth biggest population in the world after China, India, the United States of America. The population of Indonesia recorded in the US Bureau of Census from 2003 to 2023 ranges from to million people. Table 1. Indonesian Population Trends A. Source: Unctadstat The growth of Indonesian population recently is followed by the economic growth since the post-economic crisis in In 2012 the growth reached 6.3%. The revival of Indonesian economy after the crisis of 1998 was seen by the emergence of new airline companies such as AW Air, Jatayu Air, Lion Air, Star Air and then followed by Batavia Air, Sriwijaya Air, Adam Air, Aerfata Papua Air, and so on. The development of Indonesian airline companies is glowing and causing a very tight competition where each company competes to obtain bigger market share by selling 2

3 tickets at the price lower than its competitors through various strategies implementation, such as Hub and Spoke, Low Cost Carrier, New Fleet to get competitive advantages. In this decade, many airline companies have closed and stopped their operation because of being not able to compete. It is caused by their mistake in selecting and using the type of aircraft and the increasing price of aviation fuel. The Fleet Plan of an airline company determines the amount of revenue, profit or loss as well as its sustainability because the total operating cost is much dependent on the type of aircraft used. For example, the dominant expenses are aircraft lease, crew cost, maintenance cost, aircraft insurance, fuel cost, and so on. In 2003 there was a significant increase of avtur price from IDR 2,700 per liter to IDR 4,500 per liter and at that time airline companies were generally using fuelinefficient fleets (Turbo Jet) and finally proposed to the Government to put the fuel surcharge into effect to cover the fuel cost in order to keep operating. A few years later, some airline companies changed their aircraft to the fuel-efficient one (Turbo Fan) and more recent in its year of production. Whereas, those who did not do such a thing or kept using the fuel-inefficient fleet eventually went to bankrupcy and stopped their operation because of being not able to compete with the other airline companies using more recent, more efficient and more economical aircrafts. In the early 2011 the price of avtur increased again very significantly because of a political shift in the world biggest oil producing countries, namely the countries in Middle East and North Africa. Since March 2013 there has been a decrease of the exchange value of Rupiah against US Dollar and this of course influences the business climate in Indonesian airline industry where the operational cost for aircraft in Indonesia is much influenced by two components, namely the avtur price and the exchange value of Rupiah against US Dollar. Of course, the phenomena of increasing avtur price and decreasing exchange value of Rupiah will influence the business of airline industry and threaten with bankruptcy if we are not accurate in determining both internal and external strategies. As released in m.news.viva.co.id Wednesday, 18 December 2013, 06:43 WIB the exchange value of Rupiah in the end of the year reached the level of IDR12,000 per US Dollar. Based on the data of Bank Indonesia (BI) s reference exchange rate at Jakarta Interbank Spot 3

4 Dollar Rate (Jisdor), it is recoprded since Thursday, 5 December 2013 that the position of Rupiah is set at the level of 12,018 per US Dollar or decreasing 58 points from the level of 11,960 per US Dollar in the transaction on Wednesday 4 December Hiwever, in the first weekend of December, Friday 6 December 2013, the position of Rupiah strengthened again as set at the level of 11,960 per US Dollar. The transaction in the spot market held the exchange value of Rupiah below the level of 12,000 per US Dollar until Tuesday in the second week of December. On Wednesday 11 December 2013, the exchange rate of Rupiah dropped to the level of 12,005 per US Dollar. Entering the third week of December the position of Rupiah had not recovered from its fall at the level of 12,000 per US Dollar. Data from Jisdor issued by the central bank shows that up to now, Tuesday 17 December 2013, Rupiah is set at the transaction level of 12,104 per US Dollar. The decreasing exchange value of Rupiah against US Dollar beats the airline industry. This is as ststed by the President Director of PT Garuda Indonesia Tbk, Emirsyah Satar, Monday 16 December 2013 in m.news.viva.co.id Wednesday, 18 December 2013, 06:43 saying that the whole airline industry was very beaten by the consistent weakening of Rupiah since the mid year. Emir explained, almost 60 percent of the cost incured by airline companies was in US Dollar as the transaction tool. "Airline companies, not only Garuda, incure almost 60 percent of their cost in US Dollar," said Emir in Jakarta. The weakening Rupiah, he said further, clearly impacted on the increase of the airline company s burden. Such a condition resulted in a loss. Emir did not explain more detail about the amount of the loss experienced by Garuda during the weakening of Rupiah. However, in his opinion, the airline company which does not have any overseas route feels a very heavy burden now. "It is because the year-on-year depreciation of Rupiah has almost been 14 percents," said Emir. This is supported by the statement from the Chief Executive Officer (CEO) of PT Citilink Indonesia, M Arif Wibowo, Wednesday 18 December 2013 saying that the weakening of Rupiah had decreased the company s income by 20 to 30 percents. The reason is that the costs incured by airline companies are in dolar whereas the income is in Rupiah. "It matches the depreciation of Rupiah. The depreciation is around 20 to 30 percents, right? The income is in Rupiah, whereas the expenses/costs are in Dollar," said Arif in Jakarta. It is as published in VIVAnews m.news.viva.co.id on Wednesday, 18 December 2013, 18:40 WIB. 4

5 PROBLEMS: In this research, the problems are as follows: 1. How was the exchange value of Rupiah progressing against US Dollar during ? 2. How was the progress of avtur price during ? 3. How is the cost structure of various types of aircraft used in Indonesia? 4. What is the strategy implemented by companies in order to keep growing? THE AIM OF RESEARCH: The aim of this research is to know: 1. The progress of the value exchange of Rupiah against US Dollar during , 2. The progress of avtur price during , 3. The cost structure of various types of aircraft used in Indonesia and 4. The strategy implemented by companies in order to keep growing. THE METHOD OF RESEARCH The activity of this research is carried out using quantitative and qualitative research designs. Meanwhile, according to its expansion degree, this research is descriptive-explorative. This study begins with collecting data of the growth of both domestic and international passengers, data of the national fuel price, data of the average exchange rate of Dollar, and followed by literature study to obtain information on the theory and its application. 5

6 To obtain the information on the necessary data, the reseachers take the data from reliable sources. The data of domestic and international passengers is taken from the data released by Central Bureau of Statistic (BPS), the data of national fuel price is taken from Pertamina, the data of average exchange rate of Dollar is taken by monitoring the market. From the data and information obtained, then a forecast is made. Furthermore, cost comparison simulation is performed on Air Bus 320 Family and Boing 737 per hour, in order to obtain the percentage figure of fuel cost per hour of each type of aircrafts. RESULT AND DISCUSSION A fleet plan of an airline company significantly determines the amount of revenue, profit or lost and sustainability because the total operating cost is much dependent on the type of aircraft used. The most dominant costs are for aircraft lease, crew, maintenance, aircraft insurance, fuel cost, and so on. Fleet Planning is one of the most important activities carried out by an airline. Many airlines go out from the business or get bankrupt because of not having a good Fleet Planning that make them not able to compete. According to Radnoti (2002), there are 3 (three) methods to calculate the total aircraft operating cost, namely Direct Operating Cost (DOC), Indirect Operating Cost (IOC), and Total Operating Cost (TOC). Direct Operating Cost includes the costs that directly influence the aircraft operation. Indirect Operating Cost includes the costs that have indirect influence on the aircraft operation. Total Operating Cost includes the total aircraft operation costs for a route comprising both direct and indirect costs or the amount of direct operating cost plus indirect operating cost. The Total Operating Cost (TOC) of each type of aircraft varies much due to several things that influence such as: a. Aircraft price 6

7 b. Maintenance cost c. Crew Cost d. Fuel Cost e. Aircraft Insurance f. Route Navigation Charges g. Handling Cost, and so on Thus, in every Fleet Planning the company should consider several important aspects such as: 1. Type of aircraft 2. Number of aircraft to be used 3. Age of aircraft 4. Financial target such as projected income, cost, and profit. In order to determine the type of aircraft that will be used, the company should consider and take into account the following things: 1. Total Operating Cost for the type of aircraft 2. Payload 3. Routes to fly and the facilities 4. Market size or demand in a route. The condition of market in Indonesia is so potential for airline industry that a company should be able to select it well in accordance with the condition of the 7

8 company or the aircraft that is owned, especially from the aircraft ability and its operating cost. Based on several sources of data such as Bappenas, World Bank, and Bank Indonesia, the economic growth is around 5.8% to 6.2%. In 2014, the target of economic growth set by the government is lower than in This of course will become an obstacle for business circle in Indonesia, especially for airline industry. From the perspective of airline industry, it is very hard to survive and get profit in 2014 if a company does not have a specific strategy (Fit Strategy). The number of domestic passengers in 2013 grew around 2.1%, while the number of international passengers grew around 9.47%. From the result of domestic passenger forecasting 2014, it is known that the growth of passengers only reaches the figure of around 5.6%-11.9% and the international passengers grow around 8.5%- 15.9%. Table 2 8

9 Figure 1. Source : Data processed by the authors Table 3 9

Figure 2. Source : Data processed by the authors - 2014 The same thing happens to the growth of cargo as an additional revenue for airline companies.

10 Figure 2. Source : Data processed by the authors The same thing happens to the growth of cargo as an additional revenue for airline companies. The growth of domestic cargo in 2014 will be around 5%-7% while international cargo will grow around 1.5%-2%. With the condition of cargo growth as given by the above-mentioned data, it will not much help the airlines to cover the loss they suffered from due to the increasing price of avtur and the people purchasing power nowadays. Of course, Fleet Planning of an airline company will much determine the viability of an airline business to keep existing and sustainable. The Fleet is closely related to cost and price, even the recent avtur price will have great impacts on the operational vialbility of a company. Besides the fuel price, the exchange value of Rupiah against US Dollar also dominantly influences the cost and price. 10

11 Table 4 Source : Pertamina Figure 3 11

12 Source : Data processed by the authors 2014 Table 5 Source : Market Monitoring Figure 4 Source : Data processed by the authors

13 The condition of the exchange value of Rupiah against US Dollar and the price of avtur in 2014 which are not promising for airline industry will surely have impacts on the ticket price and people purchasing power. Table 6 13

Table 7 From Table 6 and Table 7 it is shown that the change in the exchange rate of Dollar and the price of avtur influence both the selling price per hour and the selling price per seat hour of the

14 Table 7 From Table 6 and Table 7 it is shown that the change in the exchange rate of Dollar and the price of avtur influence both the selling price per hour and the selling price per seat hour of the types of aircraft used. For example, it can be seen from B aircraft that there was a change in Total Operating Cost (TOC) per seat hour in 2013 which increased very significantly from USD 7, to USD 7, in the period of January 2014, where the composition of fuel cost changed from 49.75% to become 50.85%. And if we see from Boeing NG fleet, the Total Operating Cost (TOC) per seat hour is much lower and more competitive than Boeing as well as A-320. Seeing the condition of recent airline companies in Indonesia, it can be said that it has not matched the business expectation yet, because only a limited number of airlines use Boeing NG, such as Garuda Airways, Lion Air, and Sriwijaya Air. Among the causes of limited use of Boeing NG fleet are limited working capital as well as the imbalanced number of order and production of Boeing due to many customers all over the world. CONCLUSIONS 1. The exchange value of Rupiah against US Dollar in 2009 has ever weakened until the average point of R10,563 per US Dollar, started to strengthen in 2010 and 14

15 2011, and weakened again in 2012 until the end of 2013 to reach Rp10,604 per US Dollar, 41 points lower than the exchange value in The average price of fuel/avtur keep increasing during The increase of avtur price from 2009 to 2010 was 9.6%, from 2010 to 2011 was 27%. From 2011 to 2012 the price of avtur increased 8.18% and from 2012 to 2013 increased 5.49%. 3. Almost 60 percents of the costs incured by airline companies are in US Dollar. The weakening of Rupiah that increased the burden of airline companies combined with the high price of avtur will directly influence the operating cost and the ticket price where in Indonesia the price of avtur changes every twoo weeks. The composition of avtur cost in TOC in 2013 for B aircraft is around 50 percents and B ER aircraft is around 45 percent while in January 2014 the composition of avtur cost in TOC for B aircraft is around 51 percent and B ER aircraft is around 46 percent. 4. If seen from the perspective of airline industry in 2014 it is very hard to survive and get profit if it does not have specific strategy (Fit Strategy). SUGGESTIONS 1. The government should consistently try to strengthen the exchange value of Rupiah against the US Dollar in order to be able to help strengthen the domestic industry sector, especially airline industry. 2. It is expected that the government may increase the price of avtur as low as possible in the future in order to support the development of domestic industry sector especially airline industry. 3. With the condition of fluctuative exchange value of US Dollar and the increasing price of Avtur in the next years, thus it is necessary for airline companies to be wise in choosing the type of aircraft to be operated. 4. The strategy that should be implemented by airline companies with the condition of fluctuative exchange value of US Dollar and the increasing price of Avtur in the next years is to make a fuel conservation policy such as implementing Cost Index, Tankering Fuel, choosing Optimum Flight Level, focusing on the flight technique and maintenance to enable the efficiency in using fuel during the flight and to save the operating cost to be able to compete. For the companies that still use fuel-inefficient aircrafts, it is necessary to substitute it with the aircrafts with more economical fuel consumption. 15

16 BIBLIOGRAPHY Barry, W. S, 1965, Airlines Management, Gorge Allen & Unwin Ltd Radnoti, George, 2002, Profit Strategies for Air Transportation, McGraw-Hill Companies, Inc. Shaw, Stephen, 2007, Airline Marketing and Management sixt edition, Ashgate publishing limited, England Wells, Alexnader T, 1993, Air Transportation A Management Perspective, Aviation Departement, Wadsworth Publishing Company, Belmont, California 16

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