The aviation industry in Indonesia is experiencing increasing financial pressures as the Indonesian government considers a proposal from the National Air Carriers Association (INACA) to increase fuel fees by 15%, along with raising the ceiling on domestic ticket prices. This step comes at a time when airlines are facing major challenges due to rising fuel prices stemming from conflicts in the Middle East.
According to Luckman F. Laissa, the Director General of Air Transportation at the Indonesian Ministry of Transportation, the government will take into account several factors before making any decision, including the financial situation of airlines, consumer purchasing power, the sustainability of the aviation industry, as well as safety, security, and service quality standards.
Details of the Proposal
The current fuel fees are based on regulations from 2023, while the ceiling on domestic ticket prices is based on price limits set in 2019. Currently, fuel fees account for 10% of the ticket price ceiling for jet aircraft and 25% for propeller aircraft. The National Air Carriers Association is demanding an increase in these fees given the difficult economic conditions.
The price of fuel has nearly doubled, rising from $85 to $90 per barrel last month to between $150 and $200 per barrel currently. Bayu Sutanto, the Secretary General of the association, stated that this price increase is necessary due to the rising exchange rate of the dollar, which negatively impacts the finances of national airlines.
Background & Context
Fuel prices are significantly affected by geopolitical conflicts, with tensions between Iran and the American-Israeli alliance since last February leading to increased oil prices due to supply disruptions from the Middle East. Iran has closed the Strait of Hormuz, a major shipping corridor, raising concerns about the stability of the global oil market.
According to reports, 20 global airlines have incurred losses amounting to $53 billion, marking the largest loss since the COVID-19 pandemic. Some airlines have already increased fuel fees by between 5% and 70%, including companies like Cathay Pacific, Qantas, Air India, Thai Airways, and Air France-KLM.
Impact & Consequences
The increase in fuel fees is seen as a step that could lead to higher ticket prices, which may affect both domestic and international travel. Fuel constitutes about 35% of the total operating expenses for airlines, meaning that any increase in fuel costs will inevitably be reflected in ticket prices.
National airlines are facing additional challenges due to the depreciation of the Indonesian rupiah, which has fallen by more than 20% since 2019. The rupiah was valued at 14,136 against the US dollar, while it has now reached around 17,000. This means that operating costs in dollars are increasing while revenues remain in rupiah, adding financial pressure on companies.
Regional Significance
These developments in Indonesia indicate how regional conflicts can impact the global economy, including Arab countries. The rise in fuel prices could affect travel and tourism costs in the region, potentially leading to a decline in inbound tourism.
In light of these circumstances, Arab governments must be prepared to face the economic challenges arising from fluctuations in oil prices, which may impact their economies and public budgets.