Airlines hit air pockets because of own mistakes

Instead of worrying about competition from AirAsia, domestic players should resist temptations to resort to predatory pricing strategy aimed at grabbing market share

Asking any company if they would like a new competitor, the obvious answer would be ‘no’.

So, when the Directorate General of Civil Aviation, the aviation regulator, asked for a feedback on Tata Sons’s low-cost airline joint venture with Malaysia-based AirAsia Bhd, the Federation of Indian Airlines (FIA) and the largest player in the country, IndiGo, raised objections.

 

The objection can be shrugged off as obvious and routine, but not the reasoning behind it. The existing players say that giving AirAsia a permit would drive them further into losses.

Apart from objecting to the predatory pricing strategy of AirAsia, FIA members question the logic of granting permission under the FDI policy, which they claim was introduced to benefit only the existing airlines. 

 

 

The Delhi High Court has thrown the ball back in the government’s court, saying the issue of FDI in airlines was a matter decided by the government and it had the right to interpret it the way it wanted to.

The government made it clear that the FDI policy for airlines is meant to allow foreign airlines to invest in both new and existing domestic airlines. With the issue of validity of FDI behind us, let us look at the other claim of FIA members.

 

Apart from IndiGo, and at times GoAir, all other airlines operating in the Indian airspace are making losses. It is their own predatory pricing strategy to grab market share that has led them to the current state. Only a few days back, airline companies were jumping over each other to announce huge discounts in airfares.

 

Indian airline companies have bloated their balance sheets by making losses on account of high operating costs and financing their losses by taking more debt. It is on account of their faulty cost structure that they need high prices to stay afloat. IndiGo and GoAir have demonstrated that profits in the industry is possible despite high fuel prices and airport taxes, provided you have the right cost structure and provide quality service. 

 

The only reason people are willing to travel by IndiGo despite it being a no-frill airline is because of its service in terms of its high on-time flights. This is probably the only reason why Indian Airlines is not a preferred airline, even though most of the time its fares are the lowest.

 

These two airlines have over the years demonstrated that it is the quality of service that is the differentiator, not fares. 

 

What Indian airline companies fear in AirAsia is that it combines the best of both the worlds. AirAsia is globally known for its short turnaround time (time between landing and departure), high on-time operations and low operating cost. The company is among the lowest fare as well as cost operator in the routes it operates on globally. 

 

IndiGo has till date capitalised on the inefficiency of its competitors. SpiceJet used to be its toughest competitor following all the good practices of a low-cost airline, but under the new management (Kalanithi Maran) it is now continuously posting losses and has become a basket case in the airline space, requiring regular dose of capital. IndiGo objecting to AirAsia is a clear sign that the company feels threatened over the possibility of lower profits going forward. 

 

If survival of the fittest is the norm in every industry sector in the country, then the same should be applicable to airlines. Nothing stops other airlines to source a partner under the new FDI norms. Nor is anyone stopping them from cutting costs. They should stop complaining and fearing the new smart kid on the block, especially since it will benefit the customer, who, they say, is the king.