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

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Price war goes international
Published: The Kathmandu Post, 1 April 2005
By: Ratnakar Adhikari

As a concerned consumer and an advocate of competition, I was pleasantly surprised to see an advertisement clip of Royal Nepal Airlines Corporation (RNAC) on 26 March 2005 titled: Flying Delhi has never been so tempting before. It was not too long back that after the arrival of Fokker jets, Cosmic Air - one of the leading private sector airlines of Nepal - started it flights in Kathmandu-Delhi sector with a bang. It offered return air tickets on this sector for a meager Rs 8,000, as opposed to the then on-going regular fare close to Rs 13,000. This strategy closely followed the fare reduction by Cosmic Air in the domestic market.

Fearing the possibility of loss of market share, this fare was more or less matched by reduction in airfare by all other airlines, but RNAC has gone one step further. It has reduced its fares on this sector to a rock bottom level. For example, for Apex (most economical) 10 days advance non-refundable purchase, the return airfare is just Rs 6,000. Though it has provided this offer for a limited period - 25 March to 31 May 2005 - this may continue forever. This is how most promotional programs operate.

Notice that no airline operating on this sector has permanently reduced its fare. When one competitor provides time extension of the offer, it would not take time for others to join the bandwagon. "Due to popular demand, we have extended our offer for another three months" is a standard excuse for them to extend the offer. This is being done deliberately because a permanent reduction in airfare would create two additional problems. First, the airline could face sanction or tacit boycott from the passenger when fares are increased again. Second, it gives the impression to the passengers that they were being cheated by the airlines. Remember that this allegation could become even more powerful when fuel prices are going up globally and price rise is imminent in the domestic market too.

Be that as it may, the question of sustainability of price war is bound to arise. How on earth is it possible for RNAC to provide return ticket at 6,000 and get contained with the net receipt of 5,580 (after providing seven percent commission to the travel/ticketing agent)? RNAC is offering this fare with a claim that it would provide full course meal and choice of drinks. This message has been given prominence (note the bold, underline and italics fonts used) in the advertisement clip, because this is something Cosmic Air does not offer. Since I am not aware of the cost of meal and drinks, I would not hazard a guess. However, I would assume that it is not very low. Added to this would be the fuel cost (mentioned above), landing fees, flying allowance for the crew and other costs.

Given this scenario, one would even wonder whether it is a feasible option at all to sell all the tickets at such a cheap rate rather than applying the principle of price discrimination, which all the international airlines follow. Since there is a huge element of fixed costs associated with airlines operation, and negligible element of variable costs, it would make perfect sense for the airlines to sell major portion of its tickets at normal rates and residual tickets at throw away prices. This is because empty seats on the aircraft do not provide any return, but selling those seats at "some" prices would help the company improve its bottom line.

One major problem is that given its notorious record of RNAC - of canceling flights at the last minutes that too without notice, obliging passengers to miss their connecting flights, meetings, religious ceremony etc. - the flights with the reduced fare may not be regular.

However, if RNAC does operate these flights regularly, it would be doing a great service to the passengers. It will not only be able to attract usual airline passenger, but also those passengers who are sick and tired of long and often monotonous bus and/or train journey from Kathmandu to Delhi and vice versa.

With seven flights operating daily on this sector (and eight flights thrice a week with the addition of Druk Air flight from Paro to Delhi which transits via Kathmandu), one could only imagine more competition of this nature. Now, passengers can sit back and relax (as is often announced by the airline crew once the aircraft reaches cruising altitude), because the burden and/or pressure is on the airlines companies to improve their efficiency by identifying innovative ways to reduce costs. Those which are not able to do so would be voted out of the market by the consumers, just the way incompetent politicians are voted out of power.

I cannot wait to see this happen in other sectors also - Mumbai and Bangalore to name a few. One thing is certain, however, that all these airlines will not be able to survive in the long run - only the efficient ones will. But then consumers will still have ample choices; and airlines will have no choice but to respect formers' sovereignty in the market.

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