Low fares didn’t work, so airlines take the high road

Low fares didn’t work, so airlines take the high road
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First Published: Tue, Feb 10 2009. 10 19 PM IST

Defying logic: Consumers say airlines are unwilling to pass on the benefits even though fuel prices have fallen. Ramesh Pathania / Mint
Defying logic: Consumers say airlines are unwilling to pass on the benefits even though fuel prices have fallen. Ramesh Pathania / Mint
Updated: Tue, Feb 10 2009. 10 19 PM IST
Mumbai: Low fares, sometimes even pitched as no fares, didn’t work for them, so Indian airlines are hoping that the reverse strategy works for them.
The move comes even as jet fuel prices, tracking oil prices, have plunged, helping airlines cut costs.
Defying logic: Consumers say airlines are unwilling to pass on the benefits even though fuel prices have fallen. Ramesh Pathania / Mint
The companies, which are together expected to lose around $2 billion (Rs9,740 crore) in 2008-09, have increased fares by 15-20% after the low fares, announced early this year, failed to generate the anticipated increase in demand.
So-called full-service airlines—those that offer passengers facilities such as on-board meals, blankets and unlimited bottled water—have increased fares by between Rs1,200 and Rs1,800, while discount airlines, which were losing more money, have increased fares by Rs2,000.
The decision of the airlines to cut costs hasn’t gone down well with passengers. “Airlines were crying foul when the jet fuel price were higher. Now the fuel is so cheap, airlines are not willing to pass on the benefits,” said A.K. Pradeep Kumar, who is a frequent flyer and works with Aims International Pvt. Ltd, a city-based manpower recruitment firm.
Kumar added that there was no logic behind the pricing strategy of airlines, and that their offer of free tickets or those priced at Re1 had only served to confuse customers.
Both full-service carriers—National Aviation Co. of India Ltd (that runs Air India), Jet Airways (India) Ltd, Kingfisher Airlines Ltd and Paramount Airways Pvt. Ltd—and discount airlines such as SpiceJet Ltd, InterGlobe Aviation Pvt. Ltd (that runs IndiGo) and Go Airlines (India) Pvt. Ltd (that runs GoAir), were affected by jet fuel prices that soared to record highs in the middle of 2008.
Jet fuel, which accounts for 40% of the operating cost of an airline, now costs around Rs31,175 a kl against its peak of around Rs73,673 a kl in August. Despite this significant fall, most airlines have deemed it fit to raise prices.
A travel industry executive, who did not want to be identified, said that Air India had increased its fares by around 40% in some cases. He added that some discount carriers had replaced their Re1 fares with those that start at Rs2,000.
A Jet Airways spokesperson admitted, albeit not in as many words, that the airline had increased fares: “Jet Airways adjusts its fares on a regular basis depending on market conditions. Recently fares have been adjusted on certain sectors and fare buckets. The effected changes are a day-to-day practice in the revenue management of the airline. Full-fare business and economy fares remain unchanged as well as the fuel surcharge.” Fare buckets refer to ticket groups priced differently depending on when they are purchased.
Prakash Mirpuri, a spokesperson for the UB Group of which Kingfisher Airlines is a part, toed a similar line: “Fare buckets and fares on offer on each specific route are reviewed several times a day. We confirm that on flights that can sustain higher revenue, we have closed low fare buckets and are concentrating on selling higher fare buckets. Kingfisher Airlines’ focus is on earned revenue and not seat factors.”
SpiceJet and IndiGo executives were not immediately available for comment despite repeated efforts to reach them.
The increase in fares would help the airlines increase yields, or the profit on each ticket. Regi Philip, who runs Cosmos Agencies, a Mumbai-based travel agency, said airlines have already assured themselves of minimum load factors for the coming lean season by offering cheaper prices.
Load factor refers to the occupancy of a flight. One with a higher load factor loses less money, or earns more profit. The January-March period is typically a lean season for Indian airlines. “Carriers are now trying to increase yields by increasing the fares as the travel season is round the corner,” Philip added. The months between April and July are busier for the airlines.
“It’s good for airlines. Probably, this will help them reduce the losses and up (profit) margins slightly,” said an aviation analyst at an international brokerage, who did not want to be identified citing company policy on media interactions.
The low-fare ploy, one airline executive said earlier, didn’t work. Although Indian airlines reduced the number of flights they operated late last year—reducing capacity by around 15%—this was accompanied by a fall in the number of passengers, by around 18%, in the wake of an economic downturn.
And so, in early January, the airlines cut fares. For instance, Jet pruned rates by 10-15% in an effort to attract more passengers. Other airlines did the same.
On 4 February, SpiceJet’s chief executive Sanjay Aggarwal said the response from passengers wasn’t encouraging. He added that his airline preferred lower loads than lower yields. Aggarwal said the impact of the fare increase would be minimal. There would be “no positives as the load factors of the carriers were not that great since January 2009, and no negatives either as passengers are staying away from carriers”, he said.
According to the Centre for Asia Pacific Aviation, an aviation consulting firm, yields for India’s full-service carriers have fallen by at least 50% since the beginning of 2009 after airlines slashed prices to lure back passengers. For low-fare carriers, the firm said, yields fell 40%.
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First Published: Tue, Feb 10 2009. 10 19 PM IST