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Home > Business > Special


No more cheap airline tickets?

Surajeet Das Gupta | January 28, 2006

The last year has seen a bloodbath in the Indian skies, but one about which no one - and certainly no frequent flyer - has been complaining. On the contrary, they've been on a roll, wooed for the first time in their life with airlines dropping tariffs by half in the last 12 months.

Middle-class consumers have been shifting in droves from making arduous train journeys to discovering the joys of air travel - often at rock bottom prices. And new low-cost carriers have taken flight with increasingly lower fares, which has only enticed the market to grow further. But is the party in the air nearing an end? Will air tariffs become costlier. Will some low-cost carriers close shop, unable to stand the pressure of competition?

Will the Sahara deal help Jet?
Jet Airways buys out Air Sahara

It's a question that wouldn't have bothered you just a month ago. After all, there was hot competition for butts to put into those seats. And the big boys of aviation, challenged by the intense competition from low-cost carriers, were losing market share.

Jet Airways had seen its share of the domestic skies plummet from 44 per cent in 2004 to 39 per cent. And Indian Airlines, which enjoyed monopoly over the Indian skies till some years ago, has a market share of a mere 30 per cent. And these carriers too, caught between a rock and a hard place, have had to slash tariffs and offer customers cheaper tickets.

But all this may be of the past. Last week, in a dramatic attempt at consolidation, Jet Airways bought out Air Sahara (the second-largest private carrier) for a staggering Rs 2,500 crore (Rs 25 billion). And with that, it has been able to push up its (now joint) market share to over 53 per cent.

But is the deal good or bad for you? That's the question millions of air commuters are asking, as the spectre of market dominance has raised its head, along with fears that the combine will use its clout to corner a large part of the airport infrastructure, stifling other low-cost carriers (and therefore, the other real possibility: that it could compel air tariffs to rise once again).

The Left went on the offensive against the deal, demanding that it be investigated for the near monopoly-like situation it would create. But there were others who supported the move, even as Praful Patel, civil aviation minister, said that consolidation was good for the industry, and officials in the Monopolies and Restrictive Trade Practices Commission said there was nothing anti-competitive about the merger.

Competing airline companies, unusually, were quick to respond too. The country's top low-cost carriers went into a huddle on Tuesday at liquor baron Vijay Mallya's residence in Mumbai (including Jeh Wadia of GoAir, Captain G R Gopinath of Air Deccan, and Rahul Bhatia of IndiGo) on how to take on their now tougher rival.

The concern in the meeting was clear: the Jet Air and Air Sahara combine (in the absence of a regulator) could well stifle competition by grabbing infrastructure, exactly as they have done in the major metros of the country - especially if the ministry of aviation decides to turn a blind eye to it.

Is the party over for the Indian flier?

The concern echoed was clear: unlike in telecom where the independent regulator could be petitioned for any wrongdoing, the aviation ministry (which also controls an airline) was hardly going to give a fair hearing. And the government has been using infrastructure shortages as an excuse to force newer airlines to fly non-metro routes by not giving them parking bays in the metros.

Says a vocal Vijay Mallya, chairman of Kingfisher Airlines, who lost out in the bid to take over Air Sahara: "Take the example of Mumbai-Delhi, which constitutes 50 per cent of total traffic. The merged Jet will have over 50 per cent of the parking bays, and Indian Airlines has 35 per cent.

"As a result, the new airlines that need overnight parking bays will be severely constrained by having to make do with limited expansion." He voiced his opinion that Jet Airways too should shift part of its operations to non-metro airports and release infrastructure in the major metros among the newer players. He added: "New airlines cannot be the sole victims of transfer to non-metro airports."

Even GoAir is unhappy that it is not getting needed infrastructure, which is adding to its costs. Says Jeh Wadia, "GoAir has two parking spaces each in Mumbai and Ahmedabad, and one each in Chennai and Ahmedabad. This is adding tremendously to our cost. If we want to set up a dedicated parking bay, GoAir needs at least six aircraft, but I cannot own a parking bay with two aircraft."

These are, of course, genuine concerns. That is why the low-cost carriers have mooted the idea of forming an association to ensure that they don't lose out in the scramble for air seats. But they are also looking at ways to cut costs, which can only happen if they share resources.

That is why the new alliance is putting up a blueprint for sharing infrastructure among its members, getting into interline agreements between themselves, and also avoiding conflicting departures on routes so that they can fight the likes of Jet more effectively by not fighting among themselves.

But it is an uneasy alliance. Cracks have already started to show just a day after the four decided to agree upon the structure of the association, with Deccan's Capt Gopinath deciding to walk out. Capt Gopinath, who controls 12 per cent of the Indian market and is the largest low-cost carrier, says he decided to stay away because he thought the association was directed against only one player: Jet.

Says Capt Gopinath: "It was clear that the association is meant only to take on a certain airline. I am against such cartelisation." Capt Gopinath, instead, is in talks with his rival Jet Airways for a possible alliance that would include sharing resources as well as interline agreements.

Underlying the allegations and counter-attacks is the question everyone is asking: Will the merger of the two airline biggies reverse the air tariff wars in the sky? And how are the low-cost carriers re-strategising the new realities on the ground?

For starters, it's bad news for customers. The free fall in air tariffs is probably over. What you might see is some price stability, and even a hike, should fuel prices continue to rise.

Says Gopinath: "I think prices have reached the bottom and they might rise a bit, but the differential between low-cost carriers and full-service airlines will stay." Avers Ajay Singh, director of SpiceJet: "Consolidation always leads to stability of price. We hope the same will happen here."

Air Sahara, for instance, offered tariffs that were at least 20-30 per cent lower than Jet and competed well with low-cost carriers. Jet now will have to bring Sahara's tariffs on par with its own or else lose its brand positioning - so the cheap ticket option from Sahara will not be available in the market.

Says the CEO of a low-cost carrier, "Air Sahara was known for unsustainable drops in tariffs, and we had to respond to keep the differential. With Jet taking over, the pricing pressure will ease."

Then, airline companies expect a rationalisation of routes. For instance, instead of over 16 flights between Delhi-Mumbai, they may have 13. So the overall number of seats will go down temporarily (and remember the market is growing at 30 per cent) till, of course, low-cost carriers fill the gap.

That will ease the downward pricing pressure to some extent. Says Ajay Singh: "There is overcapacity in some routes like Delhi-Mumbai, which has 40 flights. So some rationalsation will ease price pressures."

Finally, on many routes the Jet-Sahara combine has a virtual stranglehold, as in the case of Mumbai-Delhi, Delhi-Hyderabad, or Mumbai- Chennai, where they control up to 60 per cent of the flights. Says a low-cost carrier executive: "In the short term, they could play up prices on these routes."

But what about new capacity that will come up this year? With all airline companies adding flights, won't it depress prices once again if supply outstrips demand? Industry estimates that the total number of seats to be added this year will be up by 20-25 per cent (about 30 new planes will be added) or 100,000 seats a day. But with the market too expected to grow at 25-30 per cent, it doesn't seem to be leading to a supply/demand mismatch yet.

The question then is: Are low-cost carriers worried about the challenge that Jet-Sahara poses? And how are they fine-tuning their strategies? Air Deccan does not see the merger having any impact on its growth plans. The reason is simple: It is working on a two-pronged strategy - get into uncharted routes, and tie up with rival Jet and share infrastructure as well as complement their international routes.

The company expects to carry over 4 million passengers at the end of this year. From its current operations to 48 cities, it wants to quickly move to operating flights to 70 cities.

Capt Gopinath says he already operates in 15 airports where Jet-Sahara are conspicuous by their absence, hence there is no competition. This number should grow to 20 by the end of the year, accounting for 20-30 per cent of his revenues. "We will create new demand. After all, there are 400 airports in India, many of which are in disuse. That is the market to tap," says Capt Gopinath.

Already, Air Deccan is talking to Tisco to help them open up Jamshedpur airport so it can start a Kolkata-Jamshedpur flight. Similarly, talks are on for starting flights to Bellary, which has a large potential market because of the tourist centre of Hampi close by, and also because it is becoming a major iron ore centre.

He is also working on a tie up with Jet Airways that will include an interline agreement. So Jet customers on a London-Delhi flight could land in Delhi and then board an Air Deccan flight to Jalandhar - seamlessly and without having to buy separate tickets. "An alliance makes sense with Jet as they also have a large network like us, and we complement each other on many routes. They will have access to our reservation system and we will have theirs."

That may well be an alliance that needs to be closely watched, for it might give them both a key advantage over their rivals who have smaller route coverage. Especially as some low-cost carriers are looking consciously to avoid competing with rival carriers to concentrate their attention on full-fledged carriers.

Spice Jet's Singh argues: "We consciously do not get into routes that are strong for another competing low-cost carrier, and on routes where we compete, we make sure the timing slots are different." That is why Spice Jet does not fly Delhi-Bangalore directly - a route dominated by Air Deccan - but does fly Delhi-Kolkata, where Capt Gopinath has flights but with different timings.

Kingfisher, on the other hand, wants to attack the core of Jet's business model - the business traveller. Mallya hopes to launch an inflight first class by March 1, and points out, "These travellers should get world-class service." But he is not giving out too much yet in terms of pricing of the product, or how he would like to take on Jet in that market segment.

GoAir, of course, is going ahead with its aggressive plans to hit 36 aircraft in three years and hopes to grab some of the routes, which might be freed after the Jet-Sahara rationalisation of routes. "Certainly, we will pitch for the additional routes following the route rationalisation of Jet Airways-Air Sahara combine," insists Wadia.

"There is no slowing down of acquisition plans. We have not concluded our talks with aircraft manufacturers." And says that ultimately it is "passengers who will benefit with this acquisition. Everybody will try to offer better rates in the light of intense competition."

The low-cost carriers so far have reasoned that to cut costs, they need to pool their resources, and have identified three key areas where they can share services - ground equipment, engineers and training instructors - and agreed on a flat fare for transfer passengers between each other in case of disruption of flights.

Says Ng Fook Meng, a director in Magic Air that has applied for a licence to fly in India: "You can save over $1.5 million at each airport if you share ground handling. Plus, you can negotiate better leasing rates with aircraft manufacturers if you negotiate together."

While many question whether this motley group of private carriers will be able to work together as a cohesive group, or whether growing competition and market growth will make it irrelevant, one thing at least is clear: For now, don't expect the tariffs to move any lower. And while they may not increase either, don't go looking for the laughable Rs 199 tickets any more.

Additional inputs from P R Sanjai.



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Number of User Comments: 1




Sub: When they got together the other day.

Such an outcome was anticipated.


Posted by chanakya




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