Will Jet's fire sale of 7 lakh tickets kill competition?

**New Delhi:**Is it a fire sale or a mere smokescreen created by Jet Airways?

Competitors are terming Jet’s latest sale as “predatory pricing”, saying the airline is trying to set the tone for coming busy season when it is entirely likely that prices will be suddenly jacked up after weakening the competition with a fire sale. That the domestic airline industry is in the red is no secret, which is perhaps why the latest fire sale by Jet has set alarm bells ringing in the industry.

This weekend, Jet Airways announced on its website a seven-day sale of seven lakh tickets at three fare slabs: Rs 1,777, Rs 2,777 and Rs 3,777. The tickets are to be booked on or before August 9 and meant for travel after August 10.

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Kapil Kaul of aviation consultancy CAPA says that Jet will now (after Etihad’s investment) have the financial muscle required to play an aggressive but strategic domestic game. “There is more to come from Jet and industry needs to be prepared for the battle.” He says that while discounting in the second quarter was expected “but the level of discounts offered is surprising given the cost environment . We are, possibly, heading for a worst Q2 results ever.”

CAPA is already saying there is increased financial pressure on some of the existing domestic airlines “which could reach threatening levels if such pricing aggression continues.”

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So in effect, some in the domestic aviation industry believe Jet’s latest fire sale is aimed at finishing off at least some of the competition in domestic market. Is it really that simple to wipe out other airlines, by launching just one sale of only 7 lakh tickets?

First of all, industry watchers say since Jet’s fire sale fares do not include taxes, it is surprising that the airline is calling it a sale since the Delhi-Mumbai all inclusive one way fare is anyway close to Rs 5000, same as in this scheme. In other words, the fares advertised are no different from existing slabs across all other airlines and therefore there is nothing that Jet has done differently in terms of pricing. Hence, the sale in a mere smokescreen.

But the number of seats on offer makes it count. Seven lakh seats is a substantial portion of Jet’s domestic capacity and will force competitors to also keep fares low. So if not because of fares, the latest sale will adversely impact the domestic airline industry because Jet is perhaps trying to flood the market with cheap fares so that competitors with weak balance sheets begin to feel the heat.

An official at a competing airline says Jet first began these pricing games in June end when it suddenly slashed prices to the same levels, which is a discount of 15-20% and was coming 12-18 months after the market got used to higher fares. In July, industry yields (which means revenue per passenger) declined 20% on an average when load factors (number of occupied seats on an aircraft) were in low 70 per cent range.

This situation of lesser seat occupancy and lower yields is unsustainable at the best of times. But now, when Jet is making a habit of keeping fares discounted, airlines like SpiceJet or GoAir may begin to feel the crunch.

The official at a competitor airline quoted earlier said Jet is offering more than a 50% discount on some flights like Mumbai-Kolkata and on many days, it sells tickets on other routes which are even lower priced than the slabs advertised in the fire sale.

CAPA’s Kaul adds that the expected industry losses and continuing structural challenges which includes the increasing regulatory intervention might keep away even the most optimistic strategic investors away. Which means if such foolish pricing continues, not only will Jet gain an upperhand in market share dynamics, it might succeed in keeping other interested foreign investors at bay.

So till now, 2013 has been the tale of two fire sales by domestic airlines. The first and most talked about was launched by erstwhile CEO of SpiceJet, Neil Mills, in January for 10 lakh seats and its debacle is being seen as one of the many reasons for his eventual exit from the airline. The second has been launched by Jet Airways over the weekend. Will it lead to decimation of competition?

Already, some in the domestic industry are insinuating that the fire sale needs to be referred to the Competition Commission of India (CCI). Some others say clearly shows the pitfalls of allowing large overseas airlines with deep pockets gain access to a structurally weak Indian market (they are obvously referring to Etihad Airways’ 24% investment in Jet).

So while flyers are a happy lot, it remains to be seen if dire predictions of the domestic airline market collapsing because of unrealistic pricing by one airline actually come true.