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Home > Business > Columnists > Guest Column > Deepak Khanna

Lalu's lessons for low-cost airlines

August 22, 2006

You have to hand it to the low cost airlines -- they have truly democratised air travel and in the bargain, generated hundreds of jobs, directly and indirectly.

But there's still a trick or two the low cost carriers could learn from the Indian Railways. Here's one that could help them move into a new orbit in terms of customer relationship management. What's more, it will help the airlines make some extra money, too.

As it exists, the dynamic air fare on any sector starts low. For these low fares, you need to book quite early, say, a month before the flight, and that means a well-planned itinerary.

Gradually, as a particular flight begins to fill up, the fare moves up. For those who have to travel at the last minute, the fare can end up being double or even more than the fare paid by the early birds.

Consider the case of a housewife who's bought a Delhi-Hyderabad ticket on the Internet for Rs 3,000, by booking about 30 days before the flight date.

On the scheduled date, provided seats are available, the fare could be as high as Rs 7,000 for the same journey. The key word here is "availability". So many flights fly full these days that it's a safe bet that at least a dozen people have been denied seats for lack of space.

Many of these were probably people in a hurry, who would willingly have paid full fare for the journey.

Now, suppose the housewife who paid Rs 3,000 for her ticket gives up her seat one day before departure.

The airline could now easily sell this seat for Rs 7,000, and earn a clear Rs 4,000 in the bargain.

The question is: how can the housewife (we're assuming she's traveling for pleasure) be induced to give up her seat?

If you've ever been accosted at international airports with offers of a hotel room (fully paid) and a ticket for the next day -- in exchange for your seat on the plane that's leaving in a few hours' time -- you'll be familiar with the bare bones of this concept.

What we're suggesting is a refinement on the scheme: the airline could start a formal, online "seat exchange" scheme. Under this, you could "buy" a seat for Rs 3,000 and its dynamic resale value could move up to, say, Rs 5,000 a day before the flight.

For the woman from Delhi, the difference of Rs 2,000 could be sufficient inducement to reschedule her departure to a later date.

For the airline, the differential between Rs 7,000 (at which it can sell the ticket) and Rs 5,000 (at which it will buy back the ticket from the housewife) is pure profit. For the last-minute traveler, the chance to make the journey is worth the Rs 7,000 spent on the ticket.

It is a win-win situation for everybody involved.

One obvious criticism of this concept is that those looking to make a fast buck will start booking tickets in bulk, only to sell them later.

Airlines can tackle this situation in two ways. The first is to not pay the housewife in cash. Of the Rs 5,000 due to her, Rs 3,000 goes towards her rescheduled flight -- she is merely postponing her journey. The balance Rs 2,000 could be offered as points redeemable against a future flight or taken as gifts for the same amount.

Further, since she will not be allowed to transfer her ticket to anyone else, profiteers will stay away. Only genuine travellers willing to travel at a later date will be rewarded for the "sacrifice".

A second option is to offer either Rs 5,000 in kind (as described above) or Rs 3,500 in cash.

Even if the original passenger chooses the outright money option, the airline still makes the same amount as profit when it resells the ticket for Rs 7,000.

To the genuine traveller, the "cash" option is worth much less than the "kind" option. For the airline, the cash option costs less than the kind option. An important rider is that the airline offers the seat buyback scheme only if it has last minute buyers on a waiting list -- the option does not exist across all sectors and on all flights.

A profiteer looking to make Rs 500 on his Rs 3,000 investment could well find there are no takers for the seat he wants to "release" -- in which case he loses his entire Rs 3,000.

That risk may be high enough to discourage speculators.

But what if there is a demand for only two seats a day prior to the flight, but there are five seats on offer from travellers willing to release their seats? In such a situation, the airline could set up a reverse bid and repurchase the cheapest two tickets.

Another option would be to buy back the tickets from its more loyal (read: regular) passengers. Of course, the converse situation is also possible, with only two tickets available for repurchase, but five travelers waiting on standby.

The tickets could then be auctioned to the highest bidder, or an extra inducement could be made to other travellers to "release" their seats.

Customer relationship management software will make it possible to offer these incentives only to the airlines' frequent fliers or other privileged customers.

There is nothing greedy about this seat exchange programme. It is just good business. The Indian railways also charges a premium for its tatkal seva for those who need to book their seats at the last minute.

Tatkal seva quotas are fixed for many trains, and are released just five days before the scheduled departure.

Just like the railways, low cost airlines must also keep some tatkal seats to be sold in the last few days at higher prices. The seat exchange programme would come into effect if the demand for the seats exceeds their normal tatkal quotas.

Since this concept moves airline seats from those who can travel later to those who are the most needy, it will make for a more efficient allotment under the principles of economics, utilitarianism and customer relationship management.

Deepak Khanna is a faculty member, ICFAI Business School, Jaipur.

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Number of User Comments: 12

Sub: Interesting article expressed in a confused manner.

This article shows that prices of commodities and services depend on demand or supply. This could be an innovative way to make money for airline ...

Posted by Peter De Souza

Sub: reply

The author is confused trying to confuse the people and the airlines. He is a business man for sure but got all the strings of ...

Posted by acharya

Sub: Lalu's tips and budget airlines

There you go again - I still fail to see the connection between the 'Lalu's tips' and 'budget airlines' - maybe I missed something, but ...

Posted by labrea

Sub: Great idea but needs a very complex

Great idea but needs a very complex CRM to handle it and only net savy consumers can avail of such facilities. Since net penitration especially ...

Posted by prahlad

Sub: What tips?

The author looks confused about what he has written and even left me in a confused mood. The suggestions are logical from the business point ...

Posted by Xavier



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