Sunday, March 17, 2013

The Air Fares Conspiracy Theory?

The Last Time Domestic Airlines were allowed to decide fare levels, They went into a Hand-Wringing war to death. This time, The Government has intervened. But the Players Aren’t Amused. Steven Philip Warner Answers Why.

Every time one scuttles across data-laden scrolls that predict “hope” for airlines in India, the claims are dismissed as wishful thinking. This situation has not changed in a long time now & under such a circumstance, even a good P&L account does little to ease the broad populist anger. Hardly mattered therefore, that the two largest domestic airlines – Jet Airways & Kingfisher – reported improved financials in recent times. [While Jet announced profits of Rs.124 million during Q2, FY2010-11 (compared to a loss of $4.07 billion last year), Kingfisher reduced its losses by 44.88% to Rs.2.31 billion.] One quarter of good treatment cannot play ice on the bump.

Painful memories of Rs.260 billion in losses in the past five years (source: IATA) is hard to wipe out. The ever-increasing debt load of the high-fliers is another sore. Rs.582.73 billion and counting it is, of which Jet accounts for Rs.138.97 billion and Kingfisher for Rs.79.22 billion (as on March 2010). There is worry in the air, and the airlines have suddenly realised that they are sinking faster than stone. And their hurried attempt to ensure profits by increasing fares by at least 200% over the past month (since November 15, 2010, “after a confluence of issues led to capacity falling short on certain routes, particularly to/from Mumbai”, as Sydney-based B. Somaia, Regional Director, CAPA tells B&E), proves this.

The airlines had put forward a distance-based pricing cap “logic” to the Directorate General of Civil Aviation (DGCA), for its approval. The following were the fare slabs proposed: distance less than 750 km, 750-1,000 km, 1,000-1,400 km and more than 1,400 km. Had the DGCA given its nod (which it did not, and the players are now demanding independence when it comes to price-setting), an IndiGo ticket priced at Rs.6,581, purchased on the day of travel, between Delhi and Mumbai, would have sky-rocketed by 244.3% to Rs.22,000 (distance of 1,407 km). For JetLite passengers, the spot fares would have risen by 289.1% from the current Rs.7,967 to Rs.31,000. Thus the fares of even the low-cost carriers (LCCs) would have become about 100-200% higher than the ongoing economy fares charged by the Full-Service Carriers (FSCs). Bad news for an environment which saw air traffic grow rapidly only after the advent of the LCCs in 2003. Says John Siddharth, Aerospace Expert, Frost & Sullivan to B&E, “LCCs have been successful in India due to their low cost strategy. Assuming the LCCs do not have a good competitive pricing in place, it would first reflect in their load factors, which would take a nose dive from the current average of about 85%. The Indian airline sector is on the verge of transforming into a luxury which would result in a negative growth of air passenger traffic.”


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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