Airlines - what are they upto

By | 12:08 PM Leave a Comment
Recently I visited Bangalore. I had managed 11 days of leave so I had decided to take the train both ways, what with the flight rates and all. But as the holiday neared, my urge to quickly check out the fares forced me to check the online fares. For one thing, the taxes have gone up. For another, airlines dont charge Rs. 0, like they used to. These days the minimum fare starts at Rs. 500. Another difference - these fares dont seem to change at all. I checked a month in advance and up till a week before the flight. It didn't change at all. A flight that used to cost Rs. 2525 now costs Rs. 4890. So i did what any lazy IT Bangalorean would do, I booked the flight an cancelled the train ticket. 

So i'm at the airport and its much less crowded. The flights are not full even on a Wednesday night (when Thursday was a holiday. That means you take Friday off and you get 4 days off). The first thought that went through my head was how much were these flight operators bleeding. Is it causing them to cut cost too much? Have they performed all the necessary tests before the flight takes off? Have they overrun the same plane to save cost? Ok maybe i'm getting paranoid but who really checks on them ... 

The other day I heard of 2 major collaborations Jet and Kingfisher and then their extension to Air India. Is this natural consolidation happening in the industry or premature consolidation. I belive it is the latter. The increase of fuel prices is unwarranted right now. It is a backlash of the currently unsteady US economy.

This is causing a shortage of fuel supply, leading to increasing of flight prices. But the Indian consumer has a very steep elasticity curve (ok im getting technical here). Basically it means that if the price increases by a factor of 2, the number of people buying tickets decreases my more than 2. In this case it might be as high as 4. So if the price doubles (as it has), the number of buyers decrease by 4.

This has undoubtedly led to a consolidation wave. Lets pause at consolidation for a second. When do consolidations happen - when there is saturation. When the market has too many players and they're bleeding each other out, players begin to consolidate to scale up and leverage strengths. Why is our airline industry running into a premature consolidation? The main reason is because they have no way out. They can't increase prices because the Indian consumer will fall back into alternate transport. The biggest support (government) is not helping them out. To support the industry the government must step forward and ensure continuation of competition.

Why do we not want to let airlines consolidate?
The main reason why competition helps is that it encourages innovation and fair price determination. If your economy has a lot of players and everyone fights a lot, there's a good chance that people will reduce unnecessary costs, reduce their profit margins and give more value to the consumer. Also players will find innovative ways to differenciate and offer better services to the consumer. In either way the consumer gains. But when the players consolidate, it settles into 2 or 3 big companies that make up the entire airline industry. They all enjoy fair profit margins and enjoy big chunks of the consumer pie. So there's no need to fight with competition, rather they all collaborate to enjoy the profits.

Our airlines are modelled on the US airlines. With the growing airline industry, I would have loved to see a lot of innovation for the Indian consumer. Today we operate like any American airline. We have not innovated enough yet so guys please dont consolidate already. This really is bad news for the airline industry today.

Is there some hope:
The good thing still is that airlines today are still competing with the railways and road transport. So they'll still need to lure the consumer with good value. Also we have mostly Indian domestic airlines. The government can encourage other foreign airlines to enter the Indian scene and compete. But this time around, lets make sure that we let the players compete.

Just for the record, the return train journey was more than 24 hrs but a flight was only 2 hrs. Still it was managable. End of the trip you're happy you saved around 4 grand and maybe plan another holiday ....