Indian Airlines, Jet Airways and Sahara Airlines co-existed peacefully until India's economic woes caused traffic to plummet last year. Following a rapid rise in passengers from 7.8 million in 1990 to peak at 12 million in 1995, the market began to contract. By 1998, it had dropped back to 10.5 million.
To make matters worse, domestic rivals of state-owned Indian have been growing their fleets rapidly, creating excess capacity. Privately owned Jet increased its fleet to 25 Boeing 737s. More recently, Sahara took delivery of a 737-700. The oversupply of seats squeezed Sahara hard, triggering India's first post-liberalisation fares war.
Ultimately, the war, which died a natural death with the start of the peak season in October, appears to have shuffled traffic around, rather than stimulating demand. During the first half of 1999, overall traffic actually fell by 0.5%, against an anticipated 5% rise.
The battle for market share has done little to boost revenues and profits. On the dense Delhi-Mumbai (Bombay) route, Indian and Jet cut their fares by 26%, from Rs5,110 ($118) to Rs3,800. Had Indian managed a 60% load factor at the original price, it would have generated overall revenue of Rs306,600 - ignoring travel agency commission. To achieve the same revenue at the Rs3,800 ticket price, it would have to achieve the near impossible task of an 81% load factor, a feat not made any easier by the fact that Sahara had cut its fare to Rs3,555.
Sahara is claiming "victory" in the bloodletting, yet it probably suffered the most. Even before last year's battle, Sahara was unable to achieve the necessary economies of scale to come near to profitability. Its entire overheads were spread over just five aircraft, two of them old 737-200s. It dropped the city of Varanasi from its network some time back, and now serves only nine destinations. Some flights involve intermediate stops, or even a change of aircraft. It also has low frequencies and punctuality is poor - a lethal combination.
Sahara made a major mistake in offering 10-20% discounts system-wide, and continuing with them for more than three months, up to the end of June, which cost it dearly. While it managed to boost its position in the market temporarily, it never achieved its target of 13%. Incentives such as hotel accommodation and gifts of electronic goods have also dented the bottom line. Sahara will be licking its self-inflicted economic wounds for some time.
Uncharacteristic adventure
By contrast, Indian and Jet reduced fares on only a few selected routes - although by a slightly deeper 25%. In doing this, state-owned Indian was being uncharacteristically adventurous. But its generous fare discounts and holiday packages have been costly. Indian also claimed by late August that its market share had edged up a few percentage points.
Once the fares war subsided, market shares reverted to close to their old positions - Indian at almost 64%, Jet at over 30% and Sahara at 6%. The only significant, unintentional, benefit of the fares war was that it woke the carriers up to the need for tighter cost control.
In the past, Indian and Jet had represented a cosy duopoly, with Sahara picking up the leftovers. They charged similar fares and whenever Indian raised fares to stay out of the red, the others gleefully did the same. They were unproductive, lax on costs and charged high fares, particularly on the domestic trunk routes. The Delhi-Bangalore 2h 30min flight costs Rs15,320 return, while the price of a return ticket for the 4h-plus Mumbai-Bangkok journey via Delhi comes to Rs16,540, only a fraction more.
The fares war had little effect on Indian's first-half 1999 profit of Rs60 million, which came against a projected Rs20 million loss. The surprise results were mainly due to cost control in areas such as "materials consumption", and staffing. Savings of Rs110 million were almost double the net profit. With plenty of room for additional cost-cutting and the peak season under way, Indian may even exceed the projected Rs140 million profit for the full year.
Unsustainable fare cuts have offered only short-term gains in market share in India and have proved particularly unwise for those carriers already in the red. Profitability is far more important than market share and it is unclear whether India's domestic carriers have understood that the only way to achieve it is to tighten cost controls, maximise yields and offer punctual, non-stop services to the largest number of destinations at the highest possible frequencies.
Source: Airline Business
