Let the Aviation Sector Live in PEACE!!

Blast from the Past

I believe most of our first flying experiences would date back to the times when the Indian Aviation sector was revolutionized with the introduction of Air Deccan - India's First Low Cost Carrier. That was one such time in the Indian History which threatened the normal functioning of Indian Railways - people going by First Class in Railways started taking flights, maybe by paying a little extra, but with the added advantage of reaching their destination much much earlier. The value that they derived from paying just a little extra than the First Class railway fare outweighed the marginal difference of the same from the flight fare. It was also perhaps the First time when the Railway officials would have heard about the word Strategy - how to retain their customers. This is a classic example of cross - elasticity of demand - wherein an increase in demand of a service caused a decrease in demand of the other and vice versa. This is also an important landmark where we saw the aviation sector changing from a Duopoly to Oligopoly. Before the advent of Air Deccan, there were only 2 players in the Aviation Sector - the erstwhile Air India and Jet Airways.

Present Times..

Recently, we have been hearing and reading a lot about the so called "Predatory Pricing" of the Aviation sector. The Govt. is accusing the players of the Aviation sector of forming a kind of cartel wherein they are charging exorbitant rates to the consumers during the peak season of Christmas/New Year. They have even asked all the players to fix their price bands so that the consumer knows at the time of purchasing the ticket whether he is buying the cheapest or the costliest ticket. One would say that Govt. is doing this in the interest of common people. Agreed. This would bring in more visibility for the customers, and would help them in turn to take more informed decisions. That's the kind of perfect world that we dream of living in, and that’s what the Govt. is trying to provide. Bravo!!

Airline Industry Woes.. Hear Them Out

Now, let us understand this from the point of view of the airline players. The Govt, indirectly, is trying to fix the profit margins of the players. Which kind of business would like to operate in this scenario? The Govt. doesn't come to the rescue of the airline players during the lean season and want to compensate any loss that the airline players incur at those points of time. This move of the Govt. is only trying to rationalize the profits of the players, not their losses. One needs to keep in mind that this business is seasonal in nature, and not like that of an industry where demand doesn't fluctuate much throughout the year - like FMCG. At the same time, airline players are unable to increase their flying capacity as and when they want, because the lead time between placing an order and getting a new plane delivered runs into years, and it also requires a lot of CAPEX. Hence, the players have to do a financial analysis of whether they should actually buy a plane or lease it. Having recently witnessed the financial meltdown, the players would have preferred to go with conservative forecasts and hence, would have ramped up their capacity accordingly. But the response of the consumers has been spectacular (thanks to the confidence the customers have shown in the economy). A few players had also given a statement saying that some of their aircrafts were not operational and under maintenance. Hence, due to the supply-demand mismatch, prices are bound to rise.

It’s Time to Take a Stand..

I would have loved to support this move of the Govt, but am unable to do so, because of the following couple of examples that I could think of:

• It's a known fact that during the time of Diwali, every year, year-on-year, gold and silver prices touch the peaks, and have always followed an upward trend.
• The prices of Real Estate have always been a concern of the common man (except during financial meltdown)

Everyone knows that gold is precious. If one asks why that is, there is only one answer - it is a scarce resource. I believe that it’s only a perception that has been created in the minds of the consumers that it is scarce. Same is the case with diamonds. As there is uncertainty over the fact whether additional sources of the same would be found in future, hence the high value associated with it. Without further arguing on the topic whether gold/diamond is scarce or not, let’s focus on the consumers now. At the time of Dhanteras, there are people who believe that they have to buy gold on that day, as it’s considered auspicious. Whether the price was 20K this year or whether it would be 25K next year, it’s a known fact that people would buy gold - come what may. This is because people believe that they are/would be deriving more value from the ownership compared to the price they have to pay.

In the case of Real Estate, the same theory applies. People believe that the value of their property would always appreciate - as in the case of gold. 

But there is reason for us to believe that the profit margins in both the above businesses are very high. Why doesn't the Govt try to regulate the profit margins in these cases as well? I believe it would provide greater respite to a larger population, rather than just concentrating on the aviation sector. Whether a person would like to fly or not, he/she would always want to have a house of his/her own. Any person's yearly expenditure on flight travels would surely be much less compared to his yearly outgo towards home loans. Also, Real Estate as well as Gold gives you tangible products, whose value is supposed to increase over time, unlike travelling by flight - which is a service, intangible in nature that one consumes in a very short span of time.

In the case of the peak time of aviation sector around New Year, although the prices have supposedly risen "sky-high", still there is a demand from the customers. This is because the customer believes that they would be deriving value greater than or equal to the price that they are paying for. If such is the perception, then why unnecessarily interfere with the system?

Change is NOT Always for the Better..

I know all this sounds illogical, isn't it? How can the Govt keep tracking all the sectors and fix their profit margins. It isn’t right and it isn’t feasible for the Govt. as well. After all, businesses are running for providing good returns to the shareholders. If the shareholders come to know about the profitability of each and every sector in an industry, there would be a crowding out effect wherein the all investments would rationally flow to the sector giving the highest returns to the shareholders, while other sectors would remain under-financed. To cut short the imagination, it would result in utter chaos. So, let’s not try fixing the price bands of any sector in an industry - be it a goods or a services industry. Let things take their natural path, and all would be well in the end. Amen. :)