Indonesia cracks down on cheap fares to boost airline safety

JAKARTA (Reuters) - Indonesia has cracked down on the sale of cheap tickets for domestic flights to ensure that airlines do not cut corners on safety, the transport ministry said on Thursday.

The decision to tighten the rules on the fares came into effect on Dec. 30, two days after AirAsia flight QZ8501 crashed into the Java Sea en route from Indonesia to Singapore. There were no survivors among the 162 people on board.

The price floor for economy class domestic flights has been raised, according to ministry documents seen by Reuters, with airlines prevented from selling tickets at less than 40 percent of a ceiling price set by the ministry. The previous floor was 30 percent, though the ministry could grant certain exemptions.

The ministry’s intention is to help to increase airlines’ profit margins, allowing them to spend more on safety.

“We want the aviation sector to be healthy, not cheap. If it’s cheap, there are many things that might not be done,” Transport Minister Ignasius Jonan told reporters on Thursday.

Some Indonesian airlines have been pricing tickets below their operating costs on certain routes to attract passengers in what is one of the world’s fastest-growing commercial aviation markets.

Its safety record, however, has been patchy and in 2007 the European Commission banned all Indonesia-based airlines from flying to the European Union after a series of accidents.

Exemptions to that ban have since been granted to some carriers, including Garuda Indonesia and AirAsia.

Since the AirAsia crash, the transport ministry has reassigned some officials and tightened rules on pre-flight procedures, though ministry official Mohammad Alwi said the new pricing rule had no connection with the accident and that authorities had taken the decision some time earlier.

It is unclear whether the pricing rule will have the ministry’s desired effect, with one aviation analyst saying it seemed like a “knee-jerk reaction”.

“It will definitely impede the budget carriers’ strategy,” said the analyst, who declined to be named because he is not authorised to speak to the media, though he added that the low-cost airlines would still be able to offer lower fares than their full-service rivals.

The new rule is most likely to affect the likes of Lion Air and Indonesia AirAsia, but several airline executives contacted by Reuters said they were not too worried.

“In fact, it means that we will not be attacked by competitors that have predatory pricing. It’s still far from Garuda’s average price,” Garuda Chief Executive Arif Wibowo said.

The regulation is unlikely to hurt sales at Sriwijaya Air because it doesn’t sell tickets at budget prices, its corporate communications senior manager Agus Soedjono said.

An Indonesia AirAsia spokeswoman declined to comment and Lion Air was not immediately available to comment.

($1 = 12,675.00 rupiah)

Additional reporting by Cindy Silviana and Eveline Danubrata in Jakarta and Fransiska Nangoy in Surabaya; Writing by Eveline Danubrata; Editing by Jeremy Laurence and David Goodman