This title is odd, no doubt. No matter how much interest I have in military matters – this is not a blog about the military. Possibly the last blog post of the year is about pouring my thoughts out instead of analysing a route, network or airline.
As Akasa Air expands and I write intermittently about the airline, I get peculiar questions and comments directed on the blog and social media. When will the airline start a particular route, why is this sector not yet operational, why do the planners not look at something as obvious as this and so on. This is a repeat of how the responses were when I wrote about Vistara in its early years.
More often than not the questions that get asked are – This is a monopoly or a near monopoly, why doesn’t this airline enter? We have only three flights in this sector, why doesn’t this airline enter? The basis for each argument are ticket prices. The prices are so high, a new airline’s entry will make it cheaper. These arguments are absolutely valid from a passenger point of view. Now let us look at the market and airline point of view.
How do airlines behave and markets respond?
Let us assume that carrier A is charging a high fare (Say INR 12,000) on a monopoly route with a load factor of 95%. Another carrier sees this as an opportunity and jumps in. From monopoly, it becomes a duopoly, there is an increase in capacity on the route. Carrier A responds with two things – First, it also adds a frequency on the route and second, it drops the fares from INR 12,000 to INR 3,000.
At best, the market stimulates 1.5x times immediately and beyond that it takes time to build the market – no matter how high the population of the city.
The new entrant is already at a disadvantage since the business plan was on the basis of a certain discounting to INR 12,000 and market stimulation. But what exactly happened? The fares were cut by a fourth and the market stimulation cannot catch up to the sudden addition of capacity in the market.
We have seen this in multiple markets and multiple times in some markets. Take the Kolkata – Agartala market. SpiceJet vacated that market after fares reached new depths. IndiGo, with a duopoly could spike the fares leading to a huge hue and cry which included even the state government writing to the central government to look at the fares. AirAsia India entered the market, only to be at the receiving end like SpiceJet and vacated.
Surat – is another example. There was a sudden spike in flights. From a sole operator (Air India) to adding SpiceJet, followed by AirAsia India, IndiGo and Go FIRST – just about everybody entered Surat. But the capacity outpaced the market growth – even with low fares. The load factors dropped and pressure on yields meant, airlines started vacating one by one, leaving just a player or two on the route – which led to a shortage and thus a hike in fares, yet high load factors – leading to the city demanding more flights again.
A small example is Vistara on the Bengaluru – Coimbatore leg in the recent past, where there were 3x IndiGo flights and Vistara entered with 2x more. The sudden spurt in capacity is not something which the market can absorb. IndiGo reduced fares to take on competition, capacity was high and stimulation much lower – leading to lower load factors and losses. Vistara pulled out and IndiGo could hike the prices again, thanks to the monopoly route.
If a route is a monopoly route – so be it! It is not the responsibility of a new carrier, or for that matter any carrier to break a monopoly and service a city or save it from the excess air fares. Airlines are in the business of making money and sadly they have not been able to for a long time now! What also helps is a comprehensive plan to come in with more than one route. I have closely tracked Go FIRST’s entry to Amritsar, AirAsia India’s entry into Lucknow and Vistara’s entry into Coimbatore – all have had different outcomes.
As for cities trying to win airlines – the slot position at metros is so precarious that when an airline gets a slot, it has to look for the most profitable route to operate and not look for ways to break a monopoly somewhere.
Does that mean that a monopoly route will never see competition? How does a rival break into a monopoly? No it does not! When a route has the same capacity for a long time, there are higher chances of the sudden spike in capacity being absorbed faster. Breaking the monopoly is not enough. A station should give ability to scale, profitability. That involves having deep pockets and patience to invest for the longer run and just see eye to eye, for a limited period and that is why I say – You can’t get a gun in a battle of tanks.
Over to 2023 with more routes and mature networks!