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Friday, December 29, 2006

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Air Sahara is taking the low price route to register market share gains, but it needs to do much more
Eleven months after Air Sahara had agreed to a sell-off bid to Naresh Goyal’s Jet Airways, and six months after the Rs.23 billion deal finally fell apart, the Subroto Roy-owned Air Sahara seems to be stopping at nothing to make up for the damage to its business as well as to its image. The airline recently announced on December 4, that it is currently in talks for a tie up with the upcoming low cost airline Indus Air, where it would provide operational support to Indus Air. For once, the company is also standing out in the face of all competition, as it is decidedly going against the current price fare hikes in the industry. And in the process, it has in fact pipped even the leaders of the price game to the proverbial post!

On one hand, even low-cost carriers have agreed to apply air congestion surcharge of Rs.150 per ticket (in addition to the Rs.750 per ticket ATF surcharge). Au contraire, Air Sahara has introduced a 30-day apex scheme (known as ‘Steal-a-seat’ scheme) on quite a few of the key routes which include Mumbai, Delhi, Hyderabad, Bangalore, Goa, Kolkata, Hyderabad and Chennai. The scheme will offer air travel services during the first three months of 2007 at prices which will be around 80-90% lower than normal carrier fares and 25-30% below what even the low-cost carriers would be charging on these very routes. Capt. G. R. Gopinath, MD, Air Deccan opines, “The economics is simple. Our costs are half of those of a scheduled airline. We will continue to sell tickets at a cost plus; if someone wants to sell at a lower price, he is welcome...” And Air Sahara (not that it needs an express invitation from the competition!), has clearly made up its mind to take up the challenge.

And while this is clearly a strategy to revive its frail market share which today stands at just 8.8% (as compared to a healthy 14% in December last year), this tactic by Air Sahara is certainly not giving its financials a shot in the arm for now. Looking at the simple cost plus premium relationship, this ploy looks quite misplaced but consider that even today, Air Sahara operates at a capacity of just 30-35%. Hence even if it sells tickets at prices lower than its cost, it still makes economic sense as it only means added revenues through much anticipated augmentation in sales. Alok Sharma, President, Air Sahara, asserts thus, “The discount is not being borne at the cost of profitability. The airline has set (for itself) a decent target of revenue generation...”

However, one does wonder how compromising on margins at this juncture was needed, given that the domestic aviation industry is already entering a peak season and excess capacity will hardly be the topic of discussion in corporate boardrooms! It will surely entice a lot of customers to fl y with Air Sahara considering that the other airlines have increased fares simultaneously. Is this a move strong enough to guarantee that the carrier gets some grip over the growing aviation industry?

As has been the case with the US aviation industry, low cost airlines in India too have been shedding a lot of ink; red ink that is. It really needs no rocket science to understand that going ballistic on a low price strategy in isolation, will not be the key to take Air Sahara back to those golden days, although it could surely lead to some short term market share gains. Rather than jumping on the bandwagon of Air Deccan, Go Air et al, Air Sahara needs to create more sustainable differentiators that will firmly entrench its position in the mindset of customers. The company has already borne the brunt of one major debacle with the failed Jet Airways deal. Certainly it would not want to come face to face with another one anytime soon.

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Source :
IIPM Editorial, 2006

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By the way, anybody home?!

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