The stampede of cut-throat fares, which commenced Tuesday, when low fare carrier SpiceJet announced up to a 50 percent discount for 30 and 60 day advance purchase fares is reminiscent of 2008 when airlines went berserk on pricing in a mad rush for growth. This time too, almost every carrier including full service Air India, has joined this madness. Credit must go to Jet Airways which has maintained its sanity, at least till now.
In 2012, it appeared that Indian airlines had learnt their lessons of 2008, when they maintained and in some case increased fares in the face of a slowing economy even if it meant a drop in passenger load factors. However, it was a short-lived pyrrhic victory. Last year, SpiceJet broke the industry discipline when it offered hundreds of thousands of tickets at a fare of Rs. 2,013 coinciding with the year 2013. Earlier this year, SpiceJet once again offered 90 day advance tickets at discounts of up to 65 percent. Once again fellow airlines followed.
The “why?” is rather simple. It is to do with capacity. In 2012 and early 2013, the implosion and grounding of Kingfisher Airlines, pulled significant capacity of out the market, and airlines found they could charge higher fares and still achieve break-even load factors. 2013, though, also saw significant capacity expansion with many aircraft being inducted in to the fleets of the three low fare carriers, GoAir, SpiceJet and the largest, IndiGo, which has been adding at least one aircraft per month to its fleet for a long time.
In the last year, the capacity withdrawal of Kingfisher has been augmented many times over, despite the Indian economy being all but in a recession. For the year 2013 air traffic grew a mere 4.43 percent, and if one follows the industry accepted norm that air traffic grows at twice the economic growth rate, the outlook for the Indian economy remains gloomy. Add to this the expected entry of AirAsia India, hopefully in the March April time frame, and the Tata Singapore Airlines joint venture promoted airline later this year; capacity growth will remain unconstrained for the foreseeable future.
Given this glut of seats, to fill their aircraft for the upcoming lean travel period, airlines in India, are resorting to tactics that border on desperate. By mortgaging their future, they aim to bring in current revenue. All this at the expense of shareholder value and in the case of Air India, tax-payer funded bailouts. It is tantamount to the airlines eating their young just to survive.
How long can airlines indulge in these tactics? It would behove for them to remember not just Kingfisher, but earlier failures like ModiLuft, East West, NEPC Skyline, Damania Airways, Jagson and others. And as 2012 taught us passengers, we may get some cheap fares now, but in the long run, it costs us a lot more, directly and indirectly.
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