Air India wary about taking plunge into fare war

New Delhi: Only one domestic airline has not bitten the fare war bullet today - Air India. This morning, Jet Airways announced one of the biggest fire sales in domestic aviation with low ticket prices of Rs 2,250 on 20 lakh seats. Within hours, IndiGo had matched Jet’s fares on many sectors; SpiceJet has already completed a similar firesale last month where it sold 10 lakh tickets at Rs 2,013 each. Even Go Air is believed to be offering low fares on select routes. But Air India remains the last airline standing in this fierce fare war.

[caption id=“attachment_631668” align=“alignleft” width=“380”]  Why is Air India letting competition get the better of itself? Reuters[/caption]

Why is Air India letting competition get the better of itself? A senior airline official merely said the airline was monitoring fares and ticket sales closely to find out how many tickets are sold each day under this offer by each airline. But sources indicated that Air India may launch its own offer by late tomorrow even as airline officials agree that a firesale could well prove detrimental to the airline’s finances.

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According to back-of-the-envelope calculations, Jet has offered between 15-20 percent of its domestic capacity at cheap fares, which effectively means ticket prices are more than halved on most sectors. Under this fire sale, one can book a Delhi-Chennai ticket for Rs 3,800 when it would otherwise cost at least Rs 7,000-8,000. Similarly, Delhi-Bengaluru is Rs 2,850, again a discount of much more than 50 percent on normal fares.

Our calculations show Jet Airways is offering about 6,500 seats a day across its domestic network at low fares and could well earn close to Rs 600 crore if it succeeds in selling all the 20 lakh tickets by 24 February, when the sale is slated to close.

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But a story on moneycontrol.com said that with this initiative, Jet is likely to improve cash flows by Rs 450 crore on account of advance bookings.The story also quoted travel agents as saying that going by previous trends, there are atleast 30 percent cancellations by customers who indulge in impulsive buying only to cancel bookings later. As a policy, airlines do not refund amount on tickets purchased during offer period, they say.

The offer is divided into three parts: upto 750 km, fare on offer is Rs 2,250, between 750 and 1,000 km it is Rs 2,850, between 1,000-1,400 km it is Rs 3,300 and longer than 1,400 km it is Rs 3,800. The fares are all one-way fares and valid for economy class travel till 31 December this year.

An industry official said that Jet may have seen ticket sales jump as much as six times the daily average today because of the firesale while a prominent travel agency owner said Jet perhaps needs to show more revenue generation before the fourth quarter ends in March, which is why it is offering such a large firesale.

What ever be the reason, fliers seemed quite happy to avail themselves of this offer. Since the offer could only be used by booking on the websites of Jet and JetLite, the two websites crashed in the morning due to unusual traffic flow and the airline had to then assure buyers that it will rectify the sites soon.

Speaking about Jet’s firesale, an executive at a rival airline pointed out that its timing coincides with renewed uncertainty over an equity deal with Etihad Airways of Abu Dhabi, which has been in talks with Jet to buy up to 24 percent equity.

“I see a strategic shift in Jet’s strategy, with reference to the proposed deal. It seems Jet will now concentrate more on domestic operations. It has withdrawn some major long haul flights already but their impact on overall breakup between international and domestic business will be known only in the fourth quarter (current quarter). If the international:domestic ratio earlier was 60:40, it is now moving rapidly towards 50:50,” this executive said.

He pointed out that Jet has withdrawn flights to Johannesburg, New York (JFK) and Milan (Italy) and that the JFK flight alone could account for as much a 5 percent of the airline’s international operations.

Perhaps a firesale may improve the load factor (number of occupied seats) of Jet’s aircraft in the coming months, but it is sure to hurt the airline’s yields (revenue per passenger) significantly. Not just Jet, other airlines’ yields would also be impacted.