News reports suggest that Jet Airways (India) Ltd has started a fare war, having announced discounted airfares on domestic routes for up to 2 million seat bookings. But the company’s latest move is more of a marketing gimmick, which, if successful, will result in higher passenger load factors and an improvement in cash levels.
Not too long ago, SpiceJet Ltd offered similar discounts for tickets booked until April. Jet is allowing bookings until the end of the year, although, like SpiceJet, customers need to book tickets in the next few days. This is leading to an impression that airlines are getting aggressive with pricing.
But it must be noted that unlike a tariff cut in the telecom industry or a price reduction in consumer products, Jet’s and SpiceJet’s discounted fares apply to only a small portion of the total capacity. In 2012, for instance, Jet had a capacity of about 16 million seats on domestic routes. Assuming its capacity remains the same in 2013, the discounted rates will apply on only 12.5% of the capacity. That’s not really a big number. In addition, the fares Jet has announced aren’t very cheap either, considering that they are for advance bookings. Routes such as Mumbai-Bangalore, which fall within the 750-1,000km segment, are priced at Rs.2,850, which isn’t much lower than prevailing rates for advance bookings.
Needless to say, it makes far more sense to look at overall yields, measured by revenue per revenue passenger kilometre, rather than the rates that are applicable for advance bookings. In the last two quarters, Jet’s yields have risen by more than 30% year-on-year, thanks to a steady increase in air fares. Nothing has changed on the ground in the past two months for investors to come to the conclusion that airlines will suddenly unleash a fare war. Of course, this is not to rule the possibility of increased price competition in the future.
Malaysia’s AirAsia Bhd, Asia’s biggest budget carrier, is seeking approval for a joint venture with Tata Sons Ltd in India. This will result in an increase in capacity as well as competition, although it’s still not clear what strategy AirAsia will use in India. Also, the fact that the domestic economy is not showing any material signs of improvement, means passenger traffic growth is likely to remain muted.
Coming back to Jet’s discounted fares, the company’s load factors can improve if it is successful with its latest offer. Additionally, large upfront sales will improve cash levels to some extent. However, it must be noted here that some other airline companies have already matched or reduced fares to slightly lower levels.