With an estimated 8 percent capacity shortfall between the number of flights India’s airlines planned to fly and the number of flights being flown airfares are on an upward trajectory. The situation reached a stage where the government called a meeting of airlines and told them to “self-regulate” – a mechanism that is being questioned to say the least. However, near term airfares continue to rise and outrage abounds.
Even so, there is no tapering of demand. Flyers continue to take to the skies. Booking flights for later dates is still within a reasonable range but mention this in a debate and the very definition of reasonable is questioned. This because of behavioural dynamics and because the market has been led to believe that low airfares are a norm and not the exception.
Soaring airfares and passenger disdain abound. It is a situation that will likely continue in the near term. Yet, it begs the question: in a price sensitive market like India, shouldn’t demand be thinning to account for the higher airfares?
Who are the flyers; where is the demand emanating from?
The structure of demand in the India market has always been quite peculiar. AT-TV estimates thataround 1 percent of the population makes up almost 50 percent of repeat air travel. Add to this the fact that demand continues to be concentrated in the metros and the skew is even more pronounced. This is confirmed by proxies such as economic growth and pockets of that growth; the volume of flights that have a metro city at either end; urban vs rural demand patterns; and current consumption patterns in metros versus other parts of the country.
Add to this the skew towards the services sector that is now well north of 50% of the economy and the per capita incomes in urban agglomerations. All of these point to a clear demarcation between those who can fly at these higher fare levels at those that cannot. Couple that with strong GDP growth; challenges in international travel; a resurgence of domestic travel amplified by media social or otherwise; and a stronger earnings cycle where corporate finance departments are finally being more lenient on purse strings -- and the answer reveals itself.
With current price levels, who is hurting the most?
Current pricing levels are impacting routes that have capacity constraints and routes that are seasonal in nature. The much maligned Rs 50,000 airfare to Leh has been cited repeatedly on prime time broadcasts.
However, this masks a greater challenge. Specifically that on a broader level, it is the first time flyer or the traveller who switched modes from rail to air or even road to air due to the lower fares that suffers the most. For these travellers the decision is often a go or a no-go decision. Because there just are no alternatives.
New trains notwithstanding, rail bookings are hard to come by. Road travel in many cases is not an option due to time and terrain. Thus, higher airfares effectively cancel out an entire segment of the population. This in contravention of policy goals but in better agreement with corporate goals. If this pricing is to hold with demand not tapering, airlines will start to see the ever elusive return on capital.
This would presumably also be in alignment with the health of the airline industry that is so used to selling below cost that current fare levels and the fact that they continue to hold surprise even the most seasoned folks. And with a market that is now clearly a duopoly with 2 airlines commanding more than 80 percent of the market, capacity and pricing discipline is likely to be the way forward.
Fare trends looking ahead
The primetime debates have been raging. Anchors are addressing the question of high airfares and what should be done about it from multiple angles. Several corners are echoing the same question: when do these higher airfares subside and settle to a more normal and “acceptable” range?
The answer is one not many are willing to hear or accept. Namely: not soon. This because of supply demand dynamics; because of supply chain challenges with OEMs; because one Indian airline is grounded while another in a weakened state; because the revival of Jet Airways didn’t quite work; because elections are to be held in 5 states; because India hosting the G20 that will provide a natural surge in demand; because of several long holiday weekends; because of a more temperate summer; because airline revenue managers are realising that demand can come even at higher pricing levels; and because of very strong forecast demand for the winter.
As airlines go into the monsoon season the natural call of action based on historical patterns is to reduce flights rather than increase flights. And come October and come September one is already looking at a supply demand mismatch. Fares are bound to reflect the same. There have been several calls from passengers and consumer forums and amplified via the media for the government to intervene.
After all, the government to aid airlines did institute a pricing cap for the greater part of 2 years where airlines could not sell below certain fare levels. But in the government's defence that was at an extraordinary time (post pandemic) which called for extraordinary actions.
Fast forward to today and while the government can intervene anytime it wants, for the intervention to translate into long lasting impact, officials have to look to the structural challenges that the industry continues to face. This includes the access to capital, exorbitant airport charges, irrational fuel taxes and demand for more targeted regulatory oversight including consumer protection. Only then can the pricing structure evolve to accommodate a greater portion of the population in a sustained, profitable and competitive manner. For now higher airfares are here to stay.
—The author, Satyendra Pandey, is Managing Partner of the aviation services firm AT-TV. The views expressed are personal.
Read his previous articles here (Edited by : C H Unnikrishnan)
