PRICING A BOON OR BANE- AIR DECCAN ?

The article discusses the use of Price in the marketing Mix in the Airlines Industry. We discuss Deccan Aviations single point obsession with price and the present turmoil in the Airline Industry. Is the First Mover advantage sustainable for the Airline in the Low cost no frill airline space . Who would trump in the end ‘a Customer focus approach by full service airlines’ or ‘Price penetration by low frill airlines’. The article explores the competitive forces in the Airline Industry and steps taken by Deccan Airlines to remain on top.

The Current Scenario….

Deccan Airways has blazed away to become India’s second largest airlines with a 21.2% market share in June. Over the past one year, the number of passengers flown by the airline has swelled 230% from 2 million in September, 2005, to the current 6.6 million. With better services, new colours and an attitudinal shift, the pioneer plans to unseat Jet.

The picture on the ground in the aviation sector looks very different from that in the books. After Jet reported a disappointing performance, and warned of yet another tough year ahead, Deccan Aviation’s results seem to indicate that India’s aviation sector will take some time before it turns profitable.

Deccan’s turnover is a respectable Rs 1,352 crore during the 15 months ended June ’06, but comes with a sizeable loss of Rs 340 crore. During the June quarter, its income was Rs 430 crore and loss Rs 110 crore, indicating that more than a third of the loss was incurred in the last quarter. At an EBITDA level, Deccan’s loss was Rs 95 crore.

Deccan’s load factor for the past fiscal has been 75% with lowest operational cost. That is a good occupancy level for an airline, and compares well with the market leader Jet. But if Deccan cannot make money at these occupancy levels, then the key to profitability does not really seem to lie in filling more seats. Given the current capacity of airline companies and planned additions in the Indian market, it seems unlikely that domestic airlines will have pricing power in the near future.

Air Travel has grown by 230% since 2002 .It is unlikely that the demand growth rate is going to be better than the one shown in the previous years. That is, unless demand grows exponentially or some of the weaker players fold up the airlines would not turn profitable.

Pricing ‘The troublesome Marketing Mix”

In every Industry Prices are usually Sacrosanct and should not be dropped unless in Dire circumstances. The Marketers shall try all weapons in there arsenal such as Advertising, Trade and consumer promotions. However in the obscenely growth sectors the price takes a beating in view of the Top line growth .This is true for the Indian Telecom sector but the problem does not seem to be so acute with major players showing signs of profitability.

In case of the Airlines sector the future does not seem to be so promising. The sector is expected to grow at around 15-20 % in the next year. With competitors matching prices and bracing dog fight it is unlikely that there would be a substantial increase in topline or margins as compared to others. Air Deccan does expect its market share to move up by 25-28% in the next few years.

The Components of Pricing Includes

1. Basic fare
2. Fuel Surcharge (Rs 750/- per passenger)
3. PSF (Passenger Service Fee) Rs.225/- per passenger
4. Transaction fee of Rs 50/- if booked online through the website
5. Transaction fee (5% of basic fare) if booked through any other point of sale apart from the website

First Mover Advantage..Is it sustainable?

A first mover advantage can be simply defined as a firm’s ability to be better off than its competitors as a result of being first to market a new product category. We often find it difficult to distinguish durable first mover advantage and those that are short lived.

In the Airlines scenario where the market is leading (ie the pace of demand growth outstrip the total capacity of existing players) it is very important to dominate a category and hold onto your customer base.

To build a sustainable competitive advantage it is necessary to address all the market segments as they emerge. This would not be done by Air Deccan single point focus on price. New emerging segments such as ‘small businessmen’ travel would value on time flights and less flight cancellations. Here I believe that Kingfisher a late entrant (2004) which has 9% of the Indian market has taken a large chunk of this segment .

Low Cost Issue….A strategic Advantage

Air Deccan has built up a sustainable competitive advantage in the Airlines Industry. The case in point is that there is no way to squeeze more margins from existing operations to generate the savings that would justify the price charged.

Air Deccan utilizes an aircraft for close to 13 hours per day with an average load factor in excess of 70%.This is 10% higher than market leader Jet. This as also considered high when compared with International low cost Airlines such as Ryan Airways. The growth in this is limited.

Cost of fuel which is a constant for all airlines accounted for 33.7% of Jet’s expenses against 42% for Deccan’s. The obvious conclusion is that other expenses for Jet are higher.

Another area where Air Deccan scores is selling and distribution. For Jet, this cost worked out to 11.85% expenditure against 5.2% for Deccan. The latter sells most of its tickets online or via its call centre — which cuts out the commission paid to travel agents. The commission paid by the airline to travel agents is also lower.

Traffic on off beat routes has been growing at 50%, albeit on a smaller base. Air Deccan flies to 55 airports out of which 35 are small airports. At present, besides Jagson Airlines Ltd it is the only other carrier tapping this market. Coimbatore-based Paramount Airways operates all-business class flights to small-town destinations with its 50-seater Embraer regional jet ERJ 145. Kingfisher Airlines, which will soon be taking deliveries of ATRs, is also eyeing this sector. SpiceJet wants to keep out of this market because of the hassles involved in maintaining two types of aircraft. So, for the moment literally has the entire market to itself as Jagson is an insignificant player.

Air Deccan is partnering with government to increase air travel. States like Andhra Pradesh and Karnataka have announced a reduction in sales tax for no frills regional airlines to improve air connectivity in those states. While Andhra has completely abolished sales tax, Karnataka has reduced it from 25 per cent to just 4 per cent.

With all avenues cost already low, an easy way to improve profitability would be to hike prices, but that would affect what Air Deccan epitomizes

Customer Focus…The new paradigm

The Airline has planned for a rapid expansion. It plans to overtake Jet with the kind of operation expansion his airline has planned over the next few years. For this it needs to set its flight path to it is higher service standards and a complete makeover of image.

It goes way beyond just switching the colour of tee-shirts worn by employees from blue to yellow. The airline is now looking at improving its on-time performance and passenger service; reduce number of cancellations and customer complaints even as it maintains the lowest fares in the market. Being the best, however, may take tremendous effort on the part of Deccan; not just in terms of financial investment but also in terms of attitudinal shift.

Nonetheless, the airline has already kicked off the exercise.

Over the last nine months, the airline has brought down its flight cancellations to less than half from 597 in January to 234 in August. It has also improved on-time performance during the same period from 58.61% within 15 minutes and 87.11% in an hour to 76.40% and 98.33% respectively.

Last three months have seen its on-time within 15 minutes range between 76% and 79% and within an hour, it is hovering at around 98%. The no-frills airline has also pruned the percentage of complaints per 1000 passenger from 13.6% (on 3.19 lakh passengers) in January to 6.82% (on 4.21 lakh passengers) in August.

Such performances are giving it the confidence to commit to passengers on service standards. It is kicking off a month-long WOW campaign beginning September 19 under which, if an Air Deccan flight is delayed over three hours flyers would unconditionally be getting a free ticket (except in cases of delay due to fog), and in case of cancellation, he would be put on another flight, subject to availability.

And as it embarks on the campaign, the airline has entered into Rs 460 crore ($10 million) agreement with Lufthansa for component and maintenance repair and overhaul (MRO) support and another Rs 230 crore ($5 million) agreement with aerospace companies — Airbus ($3 million) and ATRs ($2million) — for engineering support. It has also bought a hanger at Chennai airport.

Customer Lock-in are being used effectively .The airline has introduced two new schemes, Super Flier and Super Flier Plus, which offer 30 and 36 tickets, respectively, at reduced rates to passengers. Under the Super Flier scheme, a passenger gets 30 tickets for Rs 50,000, which can be used in any of the short haul sectors that the company operates with the ATR aircraft. The Super Flier Plus scheme comes with 36 tickets for Rs 1,00,000 which can be used in any of the sectors that the airline operates. The tickets are valid for 12 months from the date of purchase of the package. The packages can be used for business or personal use and includes family members as well.

Continuing with its strategy of strengthening its distribution through
new channels, India's low-cost carrier is gearing up to launch an option
of booking, payment and re-scheduling of flights through SMS. The airline had tied up with Reliance WebWorld to offer an option of booking air tickets through a nationwide retail chain of 241 real broadband centres across 104 cities in India. The initiative
is being termed as the "first ever and a major e-ticketing initiative of
its kind in the country, leveraging the retail presence and broadband
capabilities of Reliance WebWorlds."

Outlook

Deccan Airways continues on rampant capacity addition by adding five aircrafts. This would affect load factors and also the yield and the expenses will be up for these five aircraft operations. If one looks at the past twelve months, Air Deccan introduced seven airbuses and around eight ATRs, last year based on growth rate of 280% in the last year. This year industry expects to grow around 15-25% , the repeat looks unlikely by Air Deccan.

The load factor would improve as the flights start achieving maturity. Hence load factor always depends on how the mix is skewed, whether it is skewed towards the newly introduced routes or the mature routes, which determines the average load factor and the average yield. With Air Deccan initiative to start new sectors the load factor might not improve.

It needs to be seen whether it is able to maintain its competitive edge and break even keeping the prices at current level. Although the airline is moving towards a more customer centric approach rather than a single point price strategy, It needs to be seen uptill how long the investors and debtors are willing to wait for the return on their investment or would allow Air Deccan to keep losing money.