South Asia Watch on Trade, Economics & Environment (SAWTEE)

« View All Articles

Long live the price war!
Published: The Kathmandu Post, 2 November 2004
By: Ratnakar Adhikari

When Cosmic Air broke the news that it was going to slash airfare, I did not get too excited. Even when Yeti Airlines decided to reduce its airfare for the upcoming festive season, I did not get excited either. Taking the risk of being blamed as cynical, I dare say that consumers need to take these offers with a pinch of salt.The reasons I smell rat in these offers are many, but let me only outline three of them. First, I have serious doubts about the sustainability of the on-going price war. Let us go back to not-too-distant history. In 2000, Necon Air, the then leading domestic airline, had announced special fares for off-season in the domestic sector. But its arch rival Buddha Air reacted to this move by placing an advertisement in the leading national dailies stating "Consumers should opt for one thing: Either lower fare or safe and reliable journey," as if they cannot have both; and as if Buddha Air was the only airlines providing safe and reliable journey to the passengers.

Reacting to Buddha Air’s arrogance, Cosmic Air, an upcoming airline at that time, which too had matched the reduced fare offered by Necon Air, came out with another advertisement clip with the slogan: "Sometimes, the best air service is also the least expensive." They indicated that despite having one of the best aircraft maintenance setups, proficient crews, and professional management coupled with the maintenance of adequate inventory of spare parts, they could manage to charge lower fares to their passengers. They claimed that such a fare was made possible because of sound financial planning and excellent negotiation with aircraft suppliers.

However, a good and probably well-intentioned move by Cosmic Air did not last long and they also became a part of the fare cartel at a later date. Therefore, even after offering lower fare upon arrival of their new jet aircraft – the first of its kind to operate on domestic routes – there is a serious doubt that Cosmic will be able to provide continuity to the newly announced fares.

Second, following the reduction of fares by another airline, namely Yeti Airlines in the same three sectors in which Cosmic Air had reduced, smaller airlines feel threatened. They feel that this could be a move by big players to drive away smaller players from the market. It could be a predatory pricing strategy – as is well recognised in competition law jargon – which will only provide temporary relief to the consumers. If there is an existence of that strategy, the big players will make it unprofitable for the smaller ones to operate and once the latter exit the market, they could again come back to normal fare. Since this strategy violates the cannon of competition it is outlawed by competition laws in most jurisdictions. However, due to lack of competition law in Nepal coupled with apathetic attitude of the government, such big players can go scot-free.

Third, the two airline companies, which have reduced the fare, are the ones which joined hands with other members of the Airlines Operators Association of Nepal (AOAN) to pressurise the Civil Aviation Authority of Nepal (CAAN) to allow them increase airfare by six percent just a few months back, when there was a rise in fuel price. The logic at that time was that even with the increase in air fare, they would not be able to break-even. If they were so cash-strapped, how on earth they could reduce their fare now. Agreed, Cosmic could do so due to the arrival of a bigger aircraft, but what enabled Yeti to do so?

What consumers want from the mushrooming airlines companies is a fair and healthy competition. They want a competition that enables price sensitive passengers (mainly traveling through bus), who are sick and tired of security checking and bad road conditions to switch over to air travel. They crave for a competition, where despite the rise in fuel prices, the airlines companies absorb the cost escalation and do not raise prices. They yearn for a healthy price war between airlines operators, as opposed to a cartel being operated under the banner of AOAN, which will force the companies to adopt cost-plus pricing and allow inefficient operators to exit from the market, ensuring the survival of the most efficient ones.

Efficiency is what rules the world in the present day of survival of the fittest. In order to remain efficient and cut costs, a number of no-frill airlines have emerged in the world. An interesting feature of most of these companies is an innovative pricing strategy that does not only depend on cost factor, but also on the demand and supply in the market. For example, they offer lowest fare for earlier booking and increase the price as the demand for air seat increases. They offer lowest fare during normal days and highest fare during weekends when demand for air seat is high.

In order to save on the cost of providing services, they do not offer any food or drinks to the passengers, but rather generate revenue by selling food and drinks on board. Similarly, in order to save the training and maintenance costs as well as cost of maintaining spare parts inventory, it maintains a fleet of only one version of aircraft. In order to save the cost of selling ticket and transferring such saving to the passenger, they have simply eliminated the intermediaries. One can only buy their tickets online, not through travel agents. This has helped them not only cut the cost of printing and managing tickets, but also save nine percent commission they would have otherwise been compelled to pay to the travel agents. Moreover, such no-frills airlines tend to choose the cheapest landing slots – typically early in the morning or late in the evening when landing costs are the lowest in otherwise busy airports.

Given the intellectual ability of the people managing domestic airlines in Nepal and their exposure to foreign airlines systems, it is difficult to believe that they are not aware of strategy of cutting costs and trying to increase the size of the cake (airline industry). Yet their attitude of remaining complacent and shying away from indulging in healthy and sustainable price war is not easy for competition observers to comprehend. Nor can their practice of forming a cartel be logically explained.

As the theory of Industrial Organisation tells us it is easier for a cartel to coordinate its activities without the threat of splintering when the number of participants is limited and they are homogenous. As the number increases and members become heterogeneous, cartels tend to break away. The good news seems to be that airlines cartel has outlived its utility, but the bad news seems to be that it is still alive and kicking. Only time will tell as to what is the exact strength of the cartel. The touchstone is nothing but the longevity of the ongoing price war. Both as a consumer as well as competition observer, I can only wish that the price war lives long enough to make a noticeable impact. Long live the price war!

« View All Articles