Should Air Ticket Prices Be Regulated?

published @ The Jakarta Post

Low cost carriers (LCC) are an innovation of value in serving airline customers. Some customers value convenience, but others value low prices, especially for short-distance flights. This market niche has been well-filled by some airlines. To cut the price, a no-frills service is given.

Following the crash involving prominent LLC AirAsia, the Transportation Ministry is to set a minimum fare for air travel tickets. This policy will require that companies charge no less than 40 percent of the price ceiling. The basis for this policy is the argument that LCC neglect safety, jeopardizing passengers. But is it true?

Data reveal that the link between ticket price and flight safety is extremely tenuous. LCC know very well how to manage low margins in this highly regulated business. Ridiculously, a director at the ministry wondered how LCC could sell tickets for only Rp 10,000 (79 US cents) for the Jakarta-Medan route (The Jakarta Post, Jan. 8, 2014). To him that’s impossible.

He forgot that low prices are simply a marketing strategy. LCC do not sell all their seats at such low prices, and, of course, not all the time.

Such an impossibly low price is intended to prompt hype in order to spread the LCC brand. As a result, the load factor (the number of passengers compared with seats available) will be high, and the airline still has a good margin because of its economies of scale.

LCC are created by entrepreneurs pursuing profit; don’t teach the fish how to swim.

This would-be regulated minimum price will also aggrieve consumers. For the last decade, people have enjoyed travelling throughout the archipelago by plane because of these cheap prices.

Another concern is that the regulator will have no idea or control whether the funds from the increased price will be allocated for safety measures or simply for profit.

Worse, if the minimum price has been set and in the future – hopefully never — a plane crash occurs, then this policy will have been pointless and disadvantageous to all stakeholders.

But without regulating minimum prices, how do we address safety issues?

The responsibility lies with the Transportation Ministry. Instead of setting a minimum price, it’s better to issue strict regulations for flight safety. Plane maintenance, weather data provision, operation audit etc: the regulations must be put in place. LCC must comply with regulations. As long as all safety regulations are fulfilled by airlines, then the safety of the plane must be left to The Almighty.

The policy of minimum price definitely barks up the wrong tree. The focus should be on strict regulation, certificates of safety and good supervision. After that, let the airliners compete, and let the customers decide and enjoy the low prices.

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