Interesting insights on Airlines Industry dynamics by Chief Commercial and Strategy Officer, Vistara
But, aren’t low fares necessary to avoid wastage of seats?
Suppose an airline’s capacity is 85 per cent and wants to make it 90 per cent. It will need to price attractively to sell the extra seats, but those should be sold in advance, and not at the last minute. Attempts to build advance base loads are not working anymore, as passengers now expect fares to drop close to the date of travel. As a result, a virtual bank run happens close to departure as all airlines try to dump excess seats at steep discounts, given the less-than-normal advance build-up. Also, there is no incentive for passengers buying tickets.
There was sufficient ability in the past two or three years to stimulate the market to fill empty seats and to add capacity at major airports such as Mumbai, which were not fully slot-constrained. The growth in the sector that has occurred is due to the pent demand and capacity addition, stimulated by low fares. But, I think demand has been taken to its limit now.
Even if you drop prices below a certain level, you cannot increase demand. You are not going to make more people fly; you are only going to reduce your yields. What we are witnessing is a fare war to steal share to fill up the planes, with all airlines fighting for the same pool of passengers. In a lean season, it will only lead to destruction of yields and it is difficult to recover operational costs with such low fares. Airlines need to bring in some pricing discipline. A flyer is not going to change his mind about flying from Delhi to Bengaluru tomorrow if the fare changes by Rs 500 or Rs 1,000. If he has to fly, he will fly. It has come to such a pass that sometimes even a meal at the airport restaurant might be costlier than air fares!
There is something called consumer surplus — pricing below what customers are comfortable paying. Airlines in India are taking the concept of consumer surplus to an entirely new level.