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The Sky in Blues: On the Recent Development of Indonesian Airlines Industry

Author

Listed:
  • Chaikal Nuryakin

    () (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))

  • Regi Kusumaatmadja

    (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))

  • Natanael Waraney Gerald Massie

    (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))

  • Alvin Ulido Lumbanraja

    (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))

  • Sean Hambali

    (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))

  • Devina Anindita

    (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))

Abstract

As the ASEAN put forward aviation industry liberalization measures in 2010, the Indonesian aviation industry has been moving towards the other side of spectrum of late. Two market ventures driving the change was in late 2018, where one of the leading airlines group, Garuda Group, through Citilink agreed to form cooperation with Sriwijaya Air. Second, January 2019 further marked the period in which Lion Air started charging ‘baggage fees’ and Garuda Indonesia stopped offering sub class ticket. Amid the presence of such changes in the industry, this study aims to discuss the current state, challenges, and potential of the Indonesian aviation market; comprehensively discuss the economic implications of such state of the industry; as well as how the government may act to help address the possible market failures. The study utilizes multiple data sources, i.e., data from CAPA, INFARE, as well as official governmental transportation database. We first describe the potential of airlines industry in Indonesia. We identify the periodical breaks in the industry’s growth; that is, during which periods significant changes are happening. What follows is a complete breakdown of the market concentration and landscape. We proceed to show the impacts of the generalized price hike. Our findings suggest that loss of passengers is immense. Further, we find an intriguingly similar capacity drop in the period following the Citilink – Sriwijaya deal conducted by virtually all the members of Garuda Group and Lion Air Group – all against the year-on-year trend. We specifically decompose the changes that follow the late 2018 trend. Further implications are discussed. We conclude the study with relevant policy recommendations.

Suggested Citation

  • Chaikal Nuryakin & Regi Kusumaatmadja & Natanael Waraney Gerald Massie & Alvin Ulido Lumbanraja & Sean Hambali & Devina Anindita, 2019. "The Sky in Blues: On the Recent Development of Indonesian Airlines Industry," LPEM FEBUI Working Papers 201941, LPEM, Faculty of Economics and Business, University of Indonesia, revised 2019.
  • Handle: RePEc:lpe:wpaper:201941
    as

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    File URL: http://www.lpem.org/repec/lpe/papers/WP201941.pdf
    File Function: First version, 2019
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    References listed on IDEAS

    as
    1. Austan Goolsbee & Chad Syverson, 2008. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1611-1633.
    2. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    3. Vlaar, Paul & De Vries, Paul & Willenborg, Mattijs, 2005. "Why Incumbents Struggle to Extract Value from New Strategic Options:: Case of the European Airline Industry," European Management Journal, Elsevier, vol. 23(2), pages 154-169, April.
    4. Squalli, Jay, 2014. "Airline passenger traffic openness and the performance of Emirates Airline," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 138-145.
    5. Pels, Eric, 2008. "Airline network competition: Full-service airlines, low-cost airlines and long-haul markets," Research in Transportation Economics, Elsevier, vol. 24(1), pages 68-74.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    airlines industry — imperfect competition — Indonesia — liberalization — consumer welfare;

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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