Airlines must cut fares for survival and growth

The current slowing economy needs an extra large dose of stimulus to bring it back on track. Unlike previous slowdowns, this time a 360 degree effort is required to prime the pump and beat the “FUD” factor (Fear Uncertainty Doubt).

The government has to do it’s part and focus on areas like infrastructure and other plan expenditure, the companies have to do their share, improve efficiency and reduce prices, and this time around, we the consumers are also going to have to do our bit, spending a bit more than we are comfortable with, even though we face FUD.

In the aviation sector the government has done a little bit like extending credit periods and partially reducing some taxes on aviation turbine fuel (ATF) , but it needs to bite the bullet of populism, and place ATF in the declared list, to ensure a uniform 4% tax across the nation. Government has to resist the political need to distribute populist largess, in the face of elections that are looming around the corner.

I doubt, the airline companies have fully appreciated the fact, that survival, and only then, growth, will be realized, if there is more revenue and with it, potentially greater profits. Selling more products or services is a challenge in the best of times, but in the current economic environment, regardless of business segment, it is a monumental challenge, most especially if one imagines maintaining current price points.

As consumers, all around us, we are seeing prices falling. Be it cars, trucks, two-wheelers, electronics, industrial goods, clothing, even consumer consumables like toiletries, cosmetics, and higher-end restaurants. The exceptions being the two major “F”s – fuel and food, and airline ticket prices, at least in India.

Following the lead of the private counterparts in the car, two-wheeler, who have begun announcing price cutting deals, and have even passed on the savings of the 4% reduction in Central VAT (Cenvat) to customers, the airline companies too have to pitch in and bring down their fares drastically, if they are to return passengers and cargo to the skies, until now, lost to road and rail.

Instead of learning from the global airline industry, the Indian airline industry seems to be playing the same goodwill loosing strategy as that of the Indian real estate industry, who continues to blame high interest rates as the reason for their lot in life, just as airlines continue to whip the fuel demon.

We keep hearing from airlines that fuel represents about 40%~50% of their total operating costs, and that taxation on ATF must be reduced. Most passengers agree on both statements. But, when fuel prices have retreated by almost 50% from a high of Rs. 71 per litre to Rs. 38 per litre, and yet the fuel surcharge levied by airlines is brought down by a paltry 13%, that too at the behest of government “suggestions”, the airlines will have to face the cynicism and a complete lack of sympathy of the general populace, and may be, even some of the ministers.

In any organisation, may be with the exception of government, and some of most the iconic luxury brands, the first response to any slowdown is to cut costs, improve efficiencies, and offer customers a better price . The cost cutting could be anything from nominal to extreme, but the more the better.

India, and Indians, are renowned as one the most cost-conscious buyers on the planet. Give them a good deal, and they will flock to you. Keep prices high, and, you better have a big wad of cash sitting in the safe for your fixed costs, for you are going to be one very lonely organisation; and that is the downward spiral to bankruptcy.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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