Since AI’s losses, including from slashing fares, is back-stopped by a govt guarantee, it leads to unfair competition...
The glaring headlines in a leading Indian financial daily spoke about the massive price reduction in Air India tickets to destinations across India. The start of the lean period, which will last till April-end, is used to seeing price cuts, but never quite like this. Air India’s 50% ticket-price reduction might well entice customers away from other airlines, but in the process puts the Indian aviation industry in a more precarious position than it already is. A Delhi-Mumbai flight which generally costs between R6,000-9,000 is now as cheap as R2,500. Delhi-Bangalore is now about R1,800. Until Wednesday morning, Indigo tickets were priced between R4,000 and R5,000 for the Delhi-Mumbai sector. While Indian air travellers might rejoice these fare cuts as a sign of easing air travel costs, the rationale and implications of these cuts for the larger aviation economy can be quite disastrous.
The timing of the price cuts is what stirs the pot. While the Air India management will insist this is to attract travellers in the lean period, it is well known that these price cuts come at a time when a new airline is entering the market. The Tata-Singapore Airlines owned Vistara has just announced its first flights, pricing their Delhi-Mumbai ticket at R6,000 for January and R5,500 for February. Air India was alone in slashing its fares so drastically initially, undercutting not only the new airline, but every airline in both the low-cost and full-service segments. The prices are so low that most aviation experts believe that they are not even enough to cover fuel costs and for a full-service airline such as Air
India, such low fares will surely bring it deeper into the red. This will put additional burden on the already stretched fiscal situation that the government finds itself in.
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Air India’s financial woes are no secret. In FY13, Air India posted R5,490 crore in losses; in FY14, it posted R5,388 crore in losses. The financial troubles of the state-owned airline has even raised the debate of privatisation, cost-cutting and lay-offs, none of which have deterred either the Air India management or the government in taking economically-unsound decisions like this new fare cut. Moreover, if the company is making such decisions based on the high of achieving a meagre profit of R14.6 crore in December 2014, it is either fooling itself in thinking that this profit is enough to justify the massive undercut or that it marks the end of its loss-making streak. Knowing Air India, it could well be indulging in both such fallacies.
What Air India is doing is not new for the Indian aviation industry. Another luxury airline used the same predatory pricing strategy to undercut Kingfisher Airlines, reducing the airline to bankruptcy. Undercutting was rampant during the financially turbulent times of Kingfisher, but Vijay Mallya seemed to have only blamed low-cost airlines, in his letter to DGCA in 2006. Air India may not be targeting a failing airline in this case, but its predatory pricing strategy is clearly focused on the arrival of Vistara to Indian skies. Predatory pricing, in simple terms, is a strategy used by dominant players in an industry or one with deep pockets to stave off fresh entry by making it financially infeasible for the entrant to compete with established players.
It won’t be the first time the government and other airlines are trying to monopolise the Indian aviation market or spoil the chances of a Tata venture. Both the entities had previously blocked Tata ventures into the Indian commercial aviation, once in 1996 and then again in 2000. Now, after successfully launching Vistara, the Tata group faces a new tryst with the public-sector airline.
What is most troubling here though is that the new government, which is publicly very keen to boost domestic investment and increase investment by India Inc, is actively allowing such predatory pricing to take place. More than that, the government is allowing Air India to undercut to a level below its operating cost, which, in the long-run, is bound to increase its losses and impose a heavier burden on the Indian taxpayer. Dumping, as it is known in economic terms, is not only worrisome in terms of the losses the company is bound to make in the future, but is a violation of globally established business norms that are policed by the WTO in international trade. Competition is a basic tenet of the Indian economic system, such that it ensures the common man has access to the broadest range of goods and services at most competitive prices. Air India’s move to destroy competition by slashing its prices, thereby effectively indulging in dubious dumping and predatory pricing practices is not only bad for the aviation industry, but more than that it is unethical and illegal in an economy that wants to promote investment.
Therefore, this move by Air India must be investigated immediately by the Competition Commission India. The commission’s mandate is to protect the accessibility to the range of products for the common man while maintaining a healthy competitive structure to the Indian economy. Ideally, the Indian government should immediately stop this pricing strategy if it wants to remain being seen as serious about raising investor confidence. One wonders, however, if the move by Air India has the prior approval and blessing from the Civil Aviation Ministry. That would not bode well either for the aviation industry or for economic growth under the present dispensation.
By Prashant Kumar
The author is Associate Fellow, Observer Research Foundation and a former Kingfisher pilot