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Goodbye low fares?

The consolidation in the Indian airspace will put an end to predatory pricing.

By Kushan Mitra | Print Edition: July 1, 2007

The Indian aviation sector has certainly hotted up over the past three months. Jet Airways finally took over Air Sahara, bringing to close a tumultuous year-long saga; the government finally gave the green light to the merger of the two national carriers, Air India and Indian, bringing to close an even longer saga. But the most remarkable "Will he? Won't he?" episode-that included name-calling and cake-cutting-was when Vijay Mallya's UB Holdings paid Rs 550 crore for a 26 per cent stake in the financially-troubled Air Deccan, effectively taking control. Now, these three large groupings control around 90 per cent of domestic air travel and all of Indian flag carrier international routes.

 
Mallya (Left) & Gopinath:All’s well that ends well
The effective takeover of Air Deccan by Kingfisher was one of four proposals placed before the Air Deccan board, according to Venkat Ramaswamy, Executive Director, Edelweiss Capital, who advised Air Deccan on the deal. "The board felt that this was the best deal for the airline." Why? This was the only deal that allowed Air Deccan's founders, including its CMD G.R. Gopinath, to retain a say in the airline which pioneered low-cost air travel in India.

But great news for Gopinath and company may turn out to be bad news for air travellers. Mallya has said that Air Deccan will look closely at its fare structure to ensure that its bottom line stops leaking the gallons of red ink that it is doing now. This means there will be no Re 1 and Rs 99 tickets that Air Deccan routinely issues by the thousands every week. This forced other carriers to follow suit. In May, for instance, SpiceJet offered lakhs of tickets at 99 paise each.

Then, the Wadia-promoted GoAir is offering tickets at Rs 525 on the Mumbai-Delhi route; and tickets on the Mumbai-Ahmedabad route are available for less then Rs 100. Such prices are obviously suicidal and no airline can hope to make money with such a strategy. Domestic airlines are still struggling to break even, and in certain cases are losing as much as Rs 300 per passenger. Says Ajay Singh of SpiceJet: "Air Deccan and Air Sahara were hurting overall industry yields by offering artificially low prices. I really hope that things will improve now that professional managements, who aren't in the game to lose money, have taken over at the two airlines."

At the time of going to press, the grapevine was rife with speculation that south-based regional airline Paramount is sniffing around for an acquisition. Its target: GoAir. Jeh Wadia, MD, GoAir, has issued a categorical denial, but Paramount's M. Thiagarajan who was in the capital to meet Brazilian President Luiz Inácio Lula da Silva (Paramount operates a fleet of Brazilian-built Embraer aircraft and plans to place a $2-billion, or Rs 8,200 crore, order shortly for more Embraer jets), dropped a tantalising hint: "I do not want negotiations to proceed through the media, but yes we are expanding our presence to the western part of the country and would like to buy out a carrier which already has significant resources in that region," he said. With SpiceJet and IndiGo, the two other low-cost carriers certainly not on the selling block, Thiagarajan's guarded comments could point to only one carrier.

Further consolidation will mean less competition and consequently, less attractive ticket prices; and the lower price-elasticity might lead to fewer air travellers.

However, according to one analyst: "A firming of air fares will not mean increases of Rs 1,500-2,000, but more moderate increases and given the convenience of air travel, it is unlikely that growth will take a big hit."

Does this mean the end of the low-cost dream? Probably not. But what it does signal is the end of the irrational and predatory air fares that are currently doing the rounds.

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