Financial Daily from THE HINDU group of publications
Monday, Jul 08, 2002
Will air fare cuts help bottomlines?
NEW DELHI, July 7
WHILE the decision of the two major players in the domestic aviation market Jet Airways and Indian Airlines to reduce fares across several sectors is a welcome step, their move leaves certain basic questions unanswered.
The immediate question that comes to mind is whether this reduction in fares would translate into higher bottomlines, especially at a time when there is a downturn in the market. The airline passenger market has remained more or less stagnant and growth has been relatively flat in the recent past.
The basic input costs for the airlines such as prices of aviation turbine fuel (ATF), which accounts for a substantial cost of operations, and landing and navigation charges have not moved southwards in the recent past to merit such a drastic slashing of fares. This raises the question as to whether these two main players in the domestic airline industry are now cutting fares to merely stay afloat during a troubled phase. For there was nothing that prevented these airlines from taking such a step earlier. While the consumer might wonder whether the airlines were over-charging earlier, corporate treasurers may enjoy the cash flow for three weeks.
But lower fares would mean that the revenue yield per passenger would come under strain, whereby the airlines would have to carry more passengers to break even.
It remains to be seen whether the airlines will allow passengers unlimited access to discounted seats or will create a separate booking code for the tickets which could automatically restrict the number of lower fare tickets being sold.
If the number of discounted tickets to be sold per flight is to be restricted despite the passenger booking 21 days in advance, what advantage does the passenger really stand to gain?
Therefore, is the fare reduction announced by the airlines a classic case of fleecing the customers when the going is good and then trying everything in the book to lure more passengers when the going gets tough?
What the airlines, and probably the public, need to do is to convince the decision makers at the Centre and the States that the need of the hour is not to consider the aviation industry as a milching cow and keep input costs so high that the airlines are left with little choice but to charge exorbitant rates.
Probably other States can take a cue from the Andhra Pradesh Chief Minister's decision to reduce the sales tax on ATF to 4 per cent.
Such a move alone will help IA save several crores annually. If more States follow the same route, the airlines will not have to resort to time-bound fare reductions, but can offer fares at more reasonable levels.
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