The stink of a sink

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Ask Binit Somaia, the Sydney-based Director of Centre for Asia Pacific Aviation (CAPA) and he is quick to condone the Kingfisher-Jet alliance in view of the pathetic state of aviation businesses in the country. “This alliance will rationalise capacity and in turn should improve the financial performance of all players. There will be an increase in prices, but fare increase and higher load factors will improve the health of the industry,” he told 4Ps B&M. Clearly in favour of an increase in overall air fares, Somaia is obviously disturbed by the obscenely high operating costs in the industry.

But critics believe that the overriding fear of Jet and Kingfisher coming together is that of a price rationalisation, along with route rationalisation. They argue that the deal may invariably result in some sort of price fixing between the two, which will eventually lead to steeper air fares. Goyal has been in any case rooting for a hike in air fares from time immemorial. And if these full service carriers increase fares, then their respective low cost interests (JetLite and erstwhile Deccan) which they had acquired sometime ago will also reflect the upward pricing graph.

Now consider a situation that the combine (which controls over 60% of the domestic market) has upped prices in tandem. Obviously others will follow suit, including the till-now independent low cost airlines – Indigo and SpiceJet! So is this the end of the low-cost flying model that the country had embraced only a few years ago? Already due to fuel surcharges, the fare difference between a low cost carrier and full service airline has trickled down to as low as 6-7% on may routes. Any route rationalisation by Mallya and Goyal will mean cutting down supply further, automatically boosting demand and thereby prices. So, even without the high fuel costs, the low cost model seems to be in a flux of sorts.

Avers Narula, “Financially troubled low cost airlines would not be able to compete with the Jet-Kingfisher combine who control over 60% market,” adding that state-owned Air India too would hardly be a match for them.

But Harshvardhan, Chairman, Starair Consulting differs. “First of all this is not a cartel, it is just a short term alliance. And second, it can’t kill the low cost model. Low fares require cost reduction and taxation on fuel can play an important role. When this is reduced, low costs carriers will benefit disproportionately.”

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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