Indonesia to let airlines increase fuel surcharges as aviation costs soar

[JAKARTA] Indonesia will allow airlines to raise fuel surcharges in a bid to cushion the impact of soaring aviation fuel prices triggered by the war in the Middle East, as higher energy costs squeeze carriers’ operating margins.

The country’s airlines will likely raise fuel surcharges by as much as 38 per cent, from about 10 per cent for jet aircraft and 25 per cent for turboprop services.

The government is also aiming to cap any increase in ticket prices at around 13 per cent.

Airlangga Hartarto, coordinating minister for economic affairs, said the fuel surcharge adjustment should take effect on Monday (Apr 6) and will remain in place for the next two months, with the policy to be reviewed periodically depending on developments in global oil prices and aviation fuel costs.

The measure comes as aviation turbine fuel prices have surged in recent weeks, driven by supply disruptions and heightened volatility stemming from the war in the Middle East.

Aviation fuel prices in Indonesia have climbed by around 70 per cent to about 23,000 rupiah (S$1.73) per litre, based on Ministry of Transportation data, significantly increasing operating costs for airlines.

Fuel is the single largest cost component for carriers, accounting for roughly 40 per cent of total operating expenses.

To cushion the impact on passengers, the government will introduce a value-added tax (VAT) incentive by absorbing the 11 per cent VAT on economy-class commercial flights.

“The policy is intended to cushion the impact of higher ticket prices for travellers,” said Airlangga.

In addition, the government plans to provide subsidies for airline tickets amounting to around 1.3 trillion rupiah a month.

It is also allowing airlines some flexibility in payments to state-owned fuel producer Pertamina for aviation fuel purchases.

Indonesia will eliminate import duties on aircraft spare parts, reducing the tariff to zero. “We hope the move will help lower maintenance and operational costs for carriers operating in the country,” said Airlangga.

Keeping the fuel subsidy intact

The policy marks the country’s latest response to the unfolding energy crisis, following the government’s decision last week to introduce a work-from-home policy aimed at reducing fuel consumption.

As a net oil importer, South-east Asia’s largest economy is particularly exposed to swings in global energy prices. To cushion households and preserve economic stability, the government and state energy firm Pertamina have agreed to keep subsidised fuel prices unchanged for now.

Airlangga said Indonesia could maintain current subsidised fuel prices through the end of the year as long as the average global oil price remains below US$97 per barrel.

Meanwhile, Finance Minister Purbaya Yudhi Sadewa said the government is prepared to maintain fuel subsidies despite the added fiscal burden from rising energy costs, noting that the state budget deficit is still projected to remain manageable at around 2.9 per cent of gross domestic product.

Indonesia also retains a sizeable fiscal buffer in the form of excess budget balances, known locally as Saldo Anggaran Lebih (SAL), which could be tapped if needed.

“The SAL currently stands at around 420 trillion rupiah, which can support the financing of subsidy policies if necessary,” Purbaya said.