Airline competition in Indonesian domestic market-airline-within-airline strategies and impact of the COVID-19 pandemic

Abstract

This study investigates the competition among four carriers from two major airline groups in Indonesia, namely Indonesia group (Garuda Indonesia and Citilink of Garuda), and Lion Air group (Lion Air and Batik Air). An airline route choice econometric model in the spirit of Probit model is constructed and estimated to shed light on the interactions of the four airlines of these two groups. Specifically, our empirical examination accentuates how the two groups utilize the Airline-within-Airline (AWA) strategy, which refers to operating a full-service carrier (FSC) and a low-cost carrier (LCC) at the same time, and the impact of the COVID-19 pandemic. Our estimation results suggest that the established FSC, Garuda Indonesia, used its LCC subsidiary, Citilink, as a fighting brand against its LCC rivalry, Lion Air. By contrast, Lion Air established a FSC brand, Batik, to broaden the market coverage instead of purely as a fighting brand. This competition structure was however shifted by the COVID-19 pandemic. All carriers became more aggressive to serve the routes involving those major airports in the big cities with more price-inelastic travellers. The overlapping routes between Lion Air and Batik Air have increased during the pandemic. The routes serving the tourism destinations have been cut due to the drop of inbound overseas visitors during the pandemic.