SpiceJet Fire Sale: Why is Govt Threatened by Low Fares?

Alarm bells began ringing within the government last week when SpiceJet announced a fire sale of 10 lakh seats at an all inclusive fare of Rs 2,013, which was at least a 50% discount over normal fares.

The sale offer was for three days beginning January 11 and valid for travel between February 1 to April 30. And SpiceJet justified the offer by pointing out that this was a novel way of getting aircraft loads (passengers to fill up aircraft) in a traditionally lean period when travel is at an all-time low.

Within hours of SpiceJet announcing such a sale, IndiGo and some other airlines also began advertising similar fares but then stopped abruptly. This wasn’t because common sense suddenly prevailed upon competing airlines but because top government officials picked up the phone and spoke to  CEOs of all airlines on the evening of January 11.

Sources close to these developments told HNN the phone calls were intended to not only ask airline CEOs informally to desist from any such parallel fare sales but to also make them see how filling up seats on their aircraft could leave them in an even more precarious financial position than they already face.

“We spoke to the SpiceJet CEO first and he told us that this fire sale was a sure shot way to attract fliers. He said typically, a fourth of the aircraft flies empty during the lean March quarter and this sale has attracted 25% of flying public which would have otherwise not booked with the airline. It was left to us to point out that the mad rush for tickets during the sale days was likely from those very 75% people who would have anyway flown and that SpiceJet may have failed to attract the elusive 25% fliers it was chasing. Besides, its yields (revenue per passenger) would be dangerously low for these 10 lakh seats,” government officials involved in this exercise said.

These officials said that SpiceJet CEO Neil Mills did appreciate their point of view but expressed his inability to withdraw the sale offer since he had committed to sell 10 lack tickets at the price of Rs 2013; he could not stop it mid way.

But the CEOs of other airlines obviously saw sense in the government’s arguments. Air India, which is state owned, was probably issued a veiled threat by these same government officials to not follow in SpiceJet’s footsteps but other privately-held airlines also desisted, isolating SpiceJet on the fare sale.

But why is the government so worried over short-term fare sales? It’s quite clear that the Indian airline industry is bleeding with immediate solutions of stanching the blood flow.Kingfisher Airlines, which bought low-cost pioneer Deccan Aviation, has gone bust; Air India’s performance has improved but not enough to reverse overall losses; IndiGo is profitable but not at the operational level (largely through its sale and lease back programme and other initiatives) and Jet Airways continues to report losses.

The single largest factor affecting the bottomlines of all these airlines is low yields in a high-cost environment. To make matters worse yields have been lower by 15-20% even during the peak months of November and December 2012 for most airlines (when compared to year ago periods) despite normal ticket prices since less and less people are flying.

In this scenario, had all airlines followed SpiceJet and begun offering discounted fares, their yields would have fallen to dangerously low levels, leading to more bloodbath.

Already, there are murmurs in the corridors of the Civil Aviation Ministry about its reluctance to approve a plan for low-cost airline pioneer Captain Gopinath for starting a new airline. Reason? The ministry is threatened by Gopinath’s legacy of unleashing Re 1 fares through Deccan Aviation in the last decade, which many believe to be the genesis of the current bloodbath in the Indian aviation market.

If the ministry is scared of  allowing Gopinath another shot at low fares, it’s obvious it will scuttle any attempts by existing airlines to go down the low fare path. Though the avowed policy of the Ajit Singh-led Ministry has been not to interfere in fares by airlines, it seems there are subtler minds at work in the ministry to tackle the pricing menace.