Fare wars over India: You win, airlines lose
(Any opinions expressed here are those of the author and not of Reuters)
Indians like it cheap — be it a car, a phone call or airfare. If that plane ticket is about 25 percent cheaper than a train ticket, you can imagine the rush to buy.
Airlines in India are doing just that. Jet Airways, until recently the biggest Indian carrier, offered 2 million tickets at nearly half price in a “goodwill gesture”. Its website crashed soon after, just as SpiceJet’s did when it offered a million tickets for just 2,013 rupees last month. That led many to believe the offer was a hoax.
I was lucky to book a New Delhi-Guwahati return ticket for March, paying just 3,578 rupees compared to the 13,047 rupees I paid for a one-way ticket as recently as November, and 4,420 rupees for the cheapest round-trip ticket on the Rajdhani Express, India’s premier long-distance train.
No doubt reduced fares are excellent news for consumers. But does it make business sense?
Indian airlines hardly make money, and everyone knows the fate of Kingfisher Airlines. High fuel prices and expensive airports make India a tough sell for airlines, with tickets usually priced below cost. State taxes up to 30 percent make jet fuel more than 50 percent more expensive in India compared to the global average, one of the reasons why foreign carriers prefer to stay away from the local market.
In this “fare sale”, airlines seem to betting on volume. They argue that offering seats at cheaper prices helps them sell more tickets. The plan is to get more fliers, enough to offset the lower fares.
But there’s no data to support such optimism. The latest figures show that passenger traffic fell 3 percent for January to November in India last year. And it doesn’t make sense for airlines to slash fares by as much as 75 percent and hope for higher traffic volumes at the cost of lower yields — a measure of average revenue per user.
Some airline executives have called such ideas “suicidal” and “absurd”, although Indian carriers have a history of trying them.
Perhaps, there is a lesson to be learnt from the telecom industry. In 2009, all mobile operators slashed prices to attract more customers. Result: most of them took on huge losses. Indian regulators had advised airlines not to follow SpiceJet’s move to “protect the industry from bleeding any further.”
However, fares are not regulated in India, and going by Tuesday’s developments, airlines do not seem to pay any heed to the regulator.
Raising fares, and not slashing them, seems like one of the more rational ways to preserve airlines. But there is a difference between what is prudent and what is popular. Such a move would lead to an unpopular conclusion: in India, where the average citizen earns just 60,603 rupees a year, flying is still not for everyone.
(You can follow Anurag on Twitter @anuragkotoky)