Collaborative competition: It happens only in India!!

The last month and a half has been rather hectic-speaking from a travel perspective. Almost four days out five, sometimes even more have been spent outside of base. My boss (actually my family's) and the airlines' gain.

Talking of airlines, we've witnessed some interesting stuff on that front-the hike in fares by Jet Airways. That in itself isn't really interesting. We're used to price hikes all the time, especially since India decided to liberate itself from the shackles of the old economy thought process. (Funny how you can use even a progressive idea in a regressive fashion. You would have expected the government and other monopolies to bring about greater efficiencies to actually bring down prices. But then that would have been taking the difficult route.)

So what's interesting about this hike? Well, unlike previous occasions when hike in price by one would be a signal for others to follow suite, this time Indian Airlines actually decided to hold its own and not increase its fares. The even more interesting thing is that even after a considerable lapse of time, Jet and Indian Airlines have stuck to their respective guns. (My apologies to Air Sahara for not bringing it into the picture. Even more so because I'm flying Air Sahara right now as I right this. Just that I'm wanting to keep it simple and not get into a major name crunching exercise. I'm sure they'll understand!).

What's making them both stick to their stand?

(Maybe we'll have some basics of economic theory revisited here. Well, just to make things clear, I really do not know the real reason. Just guessing. And as to why I'm talking 'Economics' and not IT, well, everybody needs a break. So I guess you won't judge me mine. Looking at it more positively, there may be lessons to be learnt-even for guys with the halo around their heads!)

So lets' get back. Usually it is Indian Airlines, which raises fares, and then the others follow suit. That's pretty safe for every one. But here we had Jet taking the lead. So I guess they must have done their homework. What could have been the logic?

Scenario 1: Jet raises fares. Indian Airlines does the same. That would have been cool. No problems anywhere. Therefore decision is to raise fare.

Scenario 2: Jet raises fare. Indian Airlines doesn't. Under what circumstance would Jet be willing to still take this risk? First, it is banking heavily on the loyalty of its 'frequent flyers' and expects that it will not face erosion of its customer base. If that happens, decision is right. So go ahead and raise fare.

Second, fall-out is that it actually loses customers to competition. Here is where some mathematical jugglery would be involved. Jet would have done a sensitivity analysis (just doling out this credit to them, even if they didn't) to see what would be the impact on loss of revenues due to reduced customers versus gain in revenue due to increased fare. They would have done this at different levels of passenger loads and compared revenues at the old fares and new fares to arrive at the some kind of break even point where the revenue from less number of passengers in the new scenario is the same as revenue from its earlier customer base at old fares.

Here is where they would have had to take a judgement call. Do they expect to lose the number of customers that the analysis throws up due to increased fares. If no, the decision certainly is to increase fare. (If yes, decision would be otherwise.) Since they did increase fares, I guess the analysis would have supported the decision.

Could some analysis have supported the judgement call? I would say yes. For instance, Jet would (as part of its homework) have collected data to see how many customers it was not able to service due to capacity limitations. (This data would emerge from an analysis of wait listed passengers).

If the anticipated in customer base were to be less than the number of wait listed passengers Jet was generally not able to fly, it was a clear win situation for Jet. It's revenues would really shoot up. The cushion factor would therefore have been a key contributor in the decision making process.

All things considered, therefore, it would appear that Jets' considered approach (I wouldn't call it gamble) has paid off. I assume this to be so because they haven't reverted to lower the fares. Also look at the timing of the decision. This is peak tourist season time. So passenger traffic anyway was expected to go up. So they had a choice. Increase flying capacity by investing in more aircrafts to cater to the anticipated traffic increase, or, simply raise prices and thus achieve same level of increase in revenue as from increased traffic without making any investment. They did the smarter thing.

(I hope what I'm saying is true. The other possibility could be that Jet has actually lost out, but has not revoked its decision, as that would mean loss of face. I'm sure in business you don't have place for such emotions!)

So what about Indian Airlines? Why did it not increase fares? Well, may be Jet's more has caused shift of several customers to Indian Airlines and is helping them fly more full flights. What it might be losing earlier due to lower 'occupancy rates' is now being made up. So its revenues too would have gone up. So why increase rates?

Talk of competition creating a win-win situation-well that's really rare, isn't it. But then as guys at Indya.com would say-It happens only in Indya! 'Shabbash' India!! (IT guys! Is there something to be learnt?)

Sumit Sharma is Associate VP, Microland and the author of the book titled `The Corporate Circus.'