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?
That demand hasn’t shrunk is good news for conspiring airlines – the purpose of cartelisation is being served. But airlines argue otherwise. Their claim – fair pricing strategy is being followed, no union has been formed to cheat fliers, and the overall increase in fares only happened because two airlines Kingfisher and AI have shed weight. [In the first 9 months of 2012, KFA’s flight count fell y-o-y by 65.19% and AI’s 39.31%.]
They have a point. A reduction in supply causes price to rise for market to be in equilibrium. And that is one reason why prices have skyrocketed since January this year. In the nine months leading to September 2012, the number of departures fell y-o-y by 28.45% (to 421,883), and the number of seat units supplied fell by 25.74% (to 58,880,373). How much of the price increase does this fall in supply justify? As per the paper titled, ‘An Airline-Based Multilevel Analysis of Airfare Elasticity’, by Castelli, Pesenti & Ukovich, the price elasticity of supply (frequency) is 0.862. Another study by Jorge and Calderon, titled, ‘A Demand Model for Scheduled Airline Services’, puts the figure at 0.79 to 1.26. Giving airlines the benefit of doubt, we take 1.26 as our figure. Calculations prove that as supply gets reduced by 25.74%, prices could rise by 32.43%. Market dynamics does therefore explain a significant portion of the price rise. Blaming airlines of colluding to fix price isn’t sufficient an argument.
Those who argue that cartelisation is in vogue in the Indian aviation industry might also want to consider the rise in count of players. As compared to a decade back, we have double the number of airlines today (eight), which makes cartel formation less likely. Adds Gordon Bevan, VP, UM Aviation, to B&E, “Cartels are most effective when there are fewer players. There are too many players at present in the Indian airline circles for them to conform to a cartel pricing regime.” There is too much to gain by the profitable market leaders by pricing competitively rather than throwing a cartel-style lifeline to those that really need price stability. Ask yourself – why should a SpiceJet or an Indigo provide KFA or AI an extended period of competitive relief?
There is the claim that FSCs are influencing the LCCs to set floor prices, which creates very little difference (less than $9 in some routes) between their entry fares. At present, LCCs account for 55.74% of the flights that operate on domestic networks across India (during Jan-Sept 2012), and 59% of passengers (September 2012). In short, LCCs dominate the Indian skies. How are FSCs arm-twisting the dominant no-frills lot into fixing their fares? Difficult to believe.
There is another argument that strongly goes against any possibility of a cartel in operation in India. Of the two airlines that made profits last year and are expected to make money again this financial year, both are LCCs. Had the FSCs been involved in fixing prices, they would have applied sounder mathematics to ensure their bottomlines do not bleed. Instead, it is the influenced group (LCCs) that is experiencing a positive cash flow. What manner of cartel is this that does not profit the supposedly ‘powerful, influential’ side?
That demand hasn’t shrunk is good news for conspiring airlines – the purpose of cartelisation is being served. But airlines argue otherwise. Their claim – fair pricing strategy is being followed, no union has been formed to cheat fliers, and the overall increase in fares only happened because two airlines Kingfisher and AI have shed weight. [In the first 9 months of 2012, KFA’s flight count fell y-o-y by 65.19% and AI’s 39.31%.]
They have a point. A reduction in supply causes price to rise for market to be in equilibrium. And that is one reason why prices have skyrocketed since January this year. In the nine months leading to September 2012, the number of departures fell y-o-y by 28.45% (to 421,883), and the number of seat units supplied fell by 25.74% (to 58,880,373). How much of the price increase does this fall in supply justify? As per the paper titled, ‘An Airline-Based Multilevel Analysis of Airfare Elasticity’, by Castelli, Pesenti & Ukovich, the price elasticity of supply (frequency) is 0.862. Another study by Jorge and Calderon, titled, ‘A Demand Model for Scheduled Airline Services’, puts the figure at 0.79 to 1.26. Giving airlines the benefit of doubt, we take 1.26 as our figure. Calculations prove that as supply gets reduced by 25.74%, prices could rise by 32.43%. Market dynamics does therefore explain a significant portion of the price rise. Blaming airlines of colluding to fix price isn’t sufficient an argument.
Those who argue that cartelisation is in vogue in the Indian aviation industry might also want to consider the rise in count of players. As compared to a decade back, we have double the number of airlines today (eight), which makes cartel formation less likely. Adds Gordon Bevan, VP, UM Aviation, to B&E, “Cartels are most effective when there are fewer players. There are too many players at present in the Indian airline circles for them to conform to a cartel pricing regime.” There is too much to gain by the profitable market leaders by pricing competitively rather than throwing a cartel-style lifeline to those that really need price stability. Ask yourself – why should a SpiceJet or an Indigo provide KFA or AI an extended period of competitive relief?
There is the claim that FSCs are influencing the LCCs to set floor prices, which creates very little difference (less than $9 in some routes) between their entry fares. At present, LCCs account for 55.74% of the flights that operate on domestic networks across India (during Jan-Sept 2012), and 59% of passengers (September 2012). In short, LCCs dominate the Indian skies. How are FSCs arm-twisting the dominant no-frills lot into fixing their fares? Difficult to believe.
There is another argument that strongly goes against any possibility of a cartel in operation in India. Of the two airlines that made profits last year and are expected to make money again this financial year, both are LCCs. Had the FSCs been involved in fixing prices, they would have applied sounder mathematics to ensure their bottomlines do not bleed. Instead, it is the influenced group (LCCs) that is experiencing a positive cash flow. What manner of cartel is this that does not profit the supposedly ‘powerful, influential’ side?
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