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Home > India > Business > Business Headline > Report

Low-cost carriers should not raise fares: Gopinath

Surajeet Das Gupta in New Delhi | June 20, 2008 11:11 IST
Last Updated: June 20, 2008 11:34 IST

The pioneer of India's low-cost airlines G R Gopinath said budget airlines are flying themselves out of business by raising fares and sacrificing passenger growth.

Gopinath's statement runs contrary to plans of most of the country's low-cost carriers, including Air Deccan, the country's largest budget airline that he sold to Kingfisher Airlines last year for $135 million.

The only result of this strategy, he said, was that airlines were eating into each others' market share instead of growing the market.

"It's a shortsighted strategy. They are shooting themselves in the foot," said Gopinath, 51, who is the vice-chairman of the company to be formed after Kingfisher and Air Deccan merge.

He thinks budget airlines should fill up the seats and stimulate demand instead. "That is a better way to reduce the excess capacity in the market."

"Both low-cost and full-fledged airlines are starting from the same fares, so it is obvious that the passenger will prefer the latter and budget airlines will have more vacant seats and a lower passenger load factor," Gopinath pointed out.

Budget airlines account for roughly half India's 38 million domestic passenger market. Last year, the market grew 30 per cent mainly on the back of cheap fares. This year, with oil companies raising aviation turbine fuel prices 18 per cent, airlines were forced to raise fares 10 per cent, causing domestic passenger growth to slow to 11 per cent.

Most airlines have been facing losses on account of higher operating costs, forcing them to abandon the low-cost strategy. The industry is expected to make accumulated losses of over Rs 9,000 crore (Rs 90 billion) this financial year. Top aviation leaders like Vijay Mallya have said that the key need is to reduce excess capacity.

Gopinath said that low fares and high losses could be reconciled with increasing the volume of traffic and reducing cost per passenger. "The telecom industry cut call rates and made losses but volumes went up dramatically and after five years they started making profits" added Gopinath.

Gopinath admitted that one of the major problems for budget airlines is that they did not shift passengers from competing modes of transport (chiefly the Railways) to air travel as fast as was anticipated. "Moving more and more people to travel by air is the biggest challenge for low-cost carriers," he said.

Defending low-cost fares, Gopinath said the model was perfected in the retailing space by Wal-Mart and is not specific to any industry. "In any business there are consumers in different segments and you need products to target them. That is the case with airlines also. If fuel prices go up it does not mean that everyone will buy a Tata Nano and not a Honda or Merc."

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