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The dangers of Indonesia’s new airfare rules

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Indonesia's decision to raise domestic airfares in a bid to improve safety records is senseless and endangers the country's aviation market, experts told CNBC.

The country's transportation ministry recently announced a 10 percentage point increase in the minimum ticket price that budget airlines can charge to 40 percent of the ministry's ceiling price.

Indonesian airline companies are divided into three categories, no-frill, medium, or full service, each of which faces different ceiling prices for domestic flights. Transport minister Ignasius Jonan said the decision aims to free up funds for carriers to spend on safety measures following the crash of an Indonesia AirAsia flight last month.

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"It sounds logical at an elementary level, but it is a dangerous strategy that dilutes the ability of airlines to meet market needs," said Peter Harbison, executive chairman at the CAPA-Centre for Aviation, adding that there's a severe disconnect between improving airlines' the financial situations and raising the price floor.

Indonesia's highly price-sensitive low-cost carrier (LCC) market is among the fastest growing in the world. Increased government interference in ticket pricing will inevitably lower consumer demand for flights and even hit the tourism market, Harbison said.

"Officials seem like they want to be helping but the decision risks substantial disruption to the entire aviation sector," he said.

Safety concerns are warranted given Indonesia's weak track record.The European Union only allows five out of Indonesia's 67 airlines to fly in its airspace, excluding the country's largest private carrier Lion Air.

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"There is no correlation between airline safety and ticket prices," stated Andrew Herdman, director-general of Malaysia-based Association of Asia Pacific Airlines (AAPA).

"The consequence [of such a decision] is that you reduce the flexibility of carriers to adjust according to demand. It will just lead to lower passenger load factors and weigh on airline efficiency."

Audrey Progastama Petriny, Indonesia AirAsia's head of corporate secretary and communications, told CNBC on Friday that the airline could not respond to the transport ministry's decision at this time.

Permit irregularities

Aside from getting rid of cheaper fares, Indonesian regulators also intend to stop flights that are flying on days not covered by their permits. Each airline must request approval for flight routes and schedules from civil airport authorities at both arrival and departure points, according to the Civil Aviation Authority of Singapore (CAAS), with approval typically lasting for a period of several months.

The decision follows the suspension of AirAsia's flight permit for the Surabaya-Singapore route upon allegations the carrier was not allowed to fly on the departure date of the crash. CAAS has stated that it granted the flight approval for the route from October 26 to March 28.

"This whole business about operating without proper permits is a complete sham and window dressing, with respect to flight QZ8501," noted Scott Hamilton, aviation consultant at Leeham Company.

"Flying on a day for which it wasn't allegedly permitted has nothing to do with the accident. Instead of wasting their time with permits, authorities ought be focusing on what the pilots knew about weather updates."