Friday, March 25, 2005
The Air Fare Wars have begun
The Telecom wars in India settled the issue of whether competition was good for the consumer. I have been predicting for a while now that civil aviation will go the telecom way as new airlines learn to compete not just among themselves, but also with the Indian Railways. Air Deccan started the trend with Rs 500 tickets, but the battle has now been joined in earnest by Spice Jet, a new low-cost carrier that is expected to start flying in May. Apparently, their introductory offer includes tickets priced at Rs 99.
Though this is clearly an introductory offer and prices will eventually climb to A/C II or III class levels, this is still great news for the Indian consumer. Indians travel in very large numbers. The Indian Railways carries about 11-13 million passengers a day. Assuming that about 1% of these passengers pay upper class fares, that's about 110,000 passengers a day or about 40 million passengers that the airlines can potentially persuade to take to the skies. This is on top of the 20 million passengers flying currently. Of course, at Rs 99-Rs 500 levels for no-frills flying, the airlines can potentially capture the upper end of the second class passenger market too.
Finally, if the airlines start to compete with the railways, the railways will have no option but to cut fares on its upper class seats, which means more people will be able to travel upper class.This is all back of the envelope stuff and may well be off-target, but it still gives you an idea of what could occur in the civil aviation sector if liberalisation goes the path of the telecom sector.
PS: The caveat to all of these expectations is that to fly these many passengers, you need a hell of a lot of planes. Jet Airways has 42 planes and Air-India has about 34. Even if you ball-park the numbers for all the private airlines, I don't think there are more than 200 commercial aircraft in India today, compared with 6000+ in the United States. This obviously means that India needs a LOT more aircraft, and buying them will require a LOT of money. Maybe it's time to revise those FDI norms for the aviation sector where foreign investment is capped at 49% and foreign airlines aren't allowed to invest?
Though this is clearly an introductory offer and prices will eventually climb to A/C II or III class levels, this is still great news for the Indian consumer. Indians travel in very large numbers. The Indian Railways carries about 11-13 million passengers a day. Assuming that about 1% of these passengers pay upper class fares, that's about 110,000 passengers a day or about 40 million passengers that the airlines can potentially persuade to take to the skies. This is on top of the 20 million passengers flying currently. Of course, at Rs 99-Rs 500 levels for no-frills flying, the airlines can potentially capture the upper end of the second class passenger market too.
Finally, if the airlines start to compete with the railways, the railways will have no option but to cut fares on its upper class seats, which means more people will be able to travel upper class.This is all back of the envelope stuff and may well be off-target, but it still gives you an idea of what could occur in the civil aviation sector if liberalisation goes the path of the telecom sector.
PS: The caveat to all of these expectations is that to fly these many passengers, you need a hell of a lot of planes. Jet Airways has 42 planes and Air-India has about 34. Even if you ball-park the numbers for all the private airlines, I don't think there are more than 200 commercial aircraft in India today, compared with 6000+ in the United States. This obviously means that India needs a LOT more aircraft, and buying them will require a LOT of money. Maybe it's time to revise those FDI norms for the aviation sector where foreign investment is capped at 49% and foreign airlines aren't allowed to invest?
