Kingfisher is desperate for cash flow. Spicejet is aiming at market share. Jet desires to get back to its old profit-making habit. IndiGo wants to win through discounting. And Air India is simply paralysed. In such an unstable environment, will the formation of a cartel to control price satisfy the varied agendas of our aviators?
Economic crises breed dark ideologies. That is as true for Indian domestic carriers as it was in the case of global financial powerhouses that were forced to fall to their knees when times got tough.
Years of competent planning and incompetent execution caused havoc in the Indian domestic airline circuit. Bleeding financials, consolidations in the name of survival, illogical price wars and millions of rupees worth of checks defaulted are proof of this. And in the past few years there have been many-an-instance when the Competition Commission of India (CCI) was sent an alert that an enquiry into the activities of domestic airlines needed to be activated to check whether ethically, they are headed in the right direction. Both in 2010 and 2011, CCI gave a clean chit to airlines in India in this respect. But doubts still prevail.
Even today (in October and November this year), wisemen claim that in their attempt to turn over a new leaf, the carriers are involving themselves in an act of monopoly creation, setting floor prices, killing demand and working together behind closed doors to earn fat margins.
Such claims make it hard for onlookers to live peacefully. That the full-service carriers (FSCs) make it hard for no-frills (LCCs) to decide independently on entry price slabs isn’t amusing. There is some truth in their claims. In the past quarter (Q3, 2012), demand fell due to price hikes by airlines in the country (traffic stood at 12.61 million - a 11.16% dip y-o-y). This fall in demand, which experts claim is alarming, actually, isn’t. And the fact that demand hasn’t shrunk despite floor fares rising anywhere between 15-80% across various sectors y-o-y is good news for airline cartels operating in the country.
Various studies have attempted to arrive at a conclusive benchmark figure to explain price-demand elasticity (Ep) in the airline industry. As per a December 2007 report titled, ‘Estimating Air Travel Demand Elasticities’ by InterVISTAS, elasticities of air travel range between -1.24 to -2.34 (as concluded by Oum, Zhang, and Zhang). Another study by Oum and Yong of the Unversity of California, Berkeley, titled, ‘Concepts of Price Elasticities of Transport Demand and Recent Empirical Estimates’, puts this figure between -1.15 and -1.52. IATA adopted an econometric approach to bring out a more accurate estimation. The figure arrived at? -1.3 to -1.5 for the Intra-Asia market. At present, the busiest Delhi-Mumbai, Delhi-Bangalore, Delhi-Kolkata and Mumbai-Bangalore routes account for over 60% of domestic traffic. Air fares on these routes have increased by over 50% since December last! How should this translate into demand fall? Going by IATA’s calculated Ep of -1.3, price hikes on these four routes alone should have caused demand to fall by 65%. Assuming that prices across other hubs and spokes have remained the same since the start of 2012 (which obviously isn’t true, given that a one-month advance air ticket price on a hub-spoke route like Delhi-Guwahati has increased by 55% in the past year), the four busiest routes alone should have caused overall air demand to fall by about 40% (39% to be precise). That obviously hasn’t happened. For the first nine months of 2012, demand has fallen only by 0.99% y-o-y. Conclusion: economics fails to explain why the fall has been marginal. If the conspiracy theory is true, and airlines actually are functioning in a cartel and fixing prices, then it has benefitted them. Not a bad outcome for a loss-making sector! But as we said before, it’s a theory on paper. At least till the CCI proves someone guilty.
Economic crises breed dark ideologies. That is as true for Indian domestic carriers as it was in the case of global financial powerhouses that were forced to fall to their knees when times got tough.
Years of competent planning and incompetent execution caused havoc in the Indian domestic airline circuit. Bleeding financials, consolidations in the name of survival, illogical price wars and millions of rupees worth of checks defaulted are proof of this. And in the past few years there have been many-an-instance when the Competition Commission of India (CCI) was sent an alert that an enquiry into the activities of domestic airlines needed to be activated to check whether ethically, they are headed in the right direction. Both in 2010 and 2011, CCI gave a clean chit to airlines in India in this respect. But doubts still prevail.
Even today (in October and November this year), wisemen claim that in their attempt to turn over a new leaf, the carriers are involving themselves in an act of monopoly creation, setting floor prices, killing demand and working together behind closed doors to earn fat margins.
Such claims make it hard for onlookers to live peacefully. That the full-service carriers (FSCs) make it hard for no-frills (LCCs) to decide independently on entry price slabs isn’t amusing. There is some truth in their claims. In the past quarter (Q3, 2012), demand fell due to price hikes by airlines in the country (traffic stood at 12.61 million - a 11.16% dip y-o-y). This fall in demand, which experts claim is alarming, actually, isn’t. And the fact that demand hasn’t shrunk despite floor fares rising anywhere between 15-80% across various sectors y-o-y is good news for airline cartels operating in the country.
Various studies have attempted to arrive at a conclusive benchmark figure to explain price-demand elasticity (Ep) in the airline industry. As per a December 2007 report titled, ‘Estimating Air Travel Demand Elasticities’ by InterVISTAS, elasticities of air travel range between -1.24 to -2.34 (as concluded by Oum, Zhang, and Zhang). Another study by Oum and Yong of the Unversity of California, Berkeley, titled, ‘Concepts of Price Elasticities of Transport Demand and Recent Empirical Estimates’, puts this figure between -1.15 and -1.52. IATA adopted an econometric approach to bring out a more accurate estimation. The figure arrived at? -1.3 to -1.5 for the Intra-Asia market. At present, the busiest Delhi-Mumbai, Delhi-Bangalore, Delhi-Kolkata and Mumbai-Bangalore routes account for over 60% of domestic traffic. Air fares on these routes have increased by over 50% since December last! How should this translate into demand fall? Going by IATA’s calculated Ep of -1.3, price hikes on these four routes alone should have caused demand to fall by 65%. Assuming that prices across other hubs and spokes have remained the same since the start of 2012 (which obviously isn’t true, given that a one-month advance air ticket price on a hub-spoke route like Delhi-Guwahati has increased by 55% in the past year), the four busiest routes alone should have caused overall air demand to fall by about 40% (39% to be precise). That obviously hasn’t happened. For the first nine months of 2012, demand has fallen only by 0.99% y-o-y. Conclusion: economics fails to explain why the fall has been marginal. If the conspiracy theory is true, and airlines actually are functioning in a cartel and fixing prices, then it has benefitted them. Not a bad outcome for a loss-making sector! But as we said before, it’s a theory on paper. At least till the CCI proves someone guilty.
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