'Even if you drop prices below a certain level, you cannot increase demand. You are not going to make more people fly; you are only going to reduce your yields.'
'There is something called consumer surplus - pricing below what customers are comfortable paying. Airlines in India are taking the concept of consumer surplus to an entirely new level.'
Unplanned, last-minute pricing is hurting the aviation sector, as is evident from the balance sheets of Indian carriers. Sanjiv Kapoor, chief commercial and strategy officer at Vistara, tells Arindam Majumder and Sahil Makkar that Vistara prices its seats at a premium, in line with the experience the airline offers. Excerpts:
Why are airlines engaged in a pricing competition?
Mismatch between demand and supply. Most of the demand is limited to a few metro cities and all players are competing there. Capacity at big metro airports such as Mumbai is already at saturation, while smaller but popular airports such as Dharamsala or Shimla cannot accommodate large aircraft and, hence, can’t absorb the overcapacity. So, airlines are fighting over whatever is left.
But, aren’t low fares necessary to avoid wastage of seats?
Suppose an airline’s capacity is 85 per cent and wants to make it 90 per cent. It will need to price attractively to sell the extra seats, but those should be sold in advance, and not at the last minute.
Attempts to build advance base loads are not working anymore, as passengers now expect fares to drop close to the date of travel. As a result, a virtual bank run happens close to departure as all airlines try to dump excess seats at steep discounts, given the less-than-normal advance build-up. Also, there is no incentive for passengers buying tickets.
How sustainable is the fare war? Will it lead to increase in volumes?
There was sufficient ability in the past two or three years to stimulate the market to fill empty seats and to add capacity at major airports such as Mumbai, which were not fully slot-constrained. The growth in the sector that has occurred is due to the pent demand and capacity addition, stimulated by low fares. But, I think demand has been taken to its limit now.
Even if you drop prices below a certain level, you cannot increase demand. You are not going to make more people fly; you are only going to reduce your yields. What we are witnessing is a fare war to steal share to fill up the planes, with all airlines fighting for the same pool of passengers.
In a lean season, it will only lead to destruction of yields and it is difficult to recover operational costs with such low fares. Airlines need to bring in some pricing discipline.
A flyer is not going to change his mind about flying from Delhi to Bengaluru tomorrow if the fare changes by Rs 500 or Rs 1,000. If he has to fly, he will fly. It has come to such a pass that sometimes even a meal at the airport restaurant might be costlier than air fares!
There is something called consumer surplus - pricing below what customers are comfortable paying. Airlines in India are taking the concept of consumer surplus to an entirely new level.
Are you saying Vistara will never join the price war?
We will from time to time come out with promotional offers but in a manner not destructive to the bottom line. On an average, we price our product at a premium to other airlines, and people are willing to pay a reasonable premium for the Vistara experience.
We are looking at ways to incentivise our customers to buy in advance and build up our loads, rather than offer unsustainable fares at the last minute.
But, the difference between low-cost carriers and full-service carriers is blurring and even Vistara is sometimes pricing close to the level of other airlines...
Tactically, at the last minute, pricing is very competitive. Across the world, the economy class is considered a commodity. We are trying to change that. Our pricing has a premium but there is a limit to the premium that people will pay for economy class.
The domestic market is very price-sensitive. We are positioning ourselves right in terms of branding, services and pricing. We are glad to see customers prefer to fly with us at a premium for the experience we offer.
Vistara recently added locations such as Srinagar and Andamans to its route. Is the focus shifting away from busy routes?
We recently added Port Blair, Srinagar, Jammu, Kochi and Chandigarh to our network. We have also added Kolkata. While the focus is still very much on corporate routes to cater to the growing demand of our customers, it is the obligation of airlines to fly in more non-trunk routes as mandated by RDG (Route Dispersal Guidelines). So, our new routes are a balance of the two.