What drives airlines to slash fares?

Context: What drives airlines to launch sales? How do they benefit? Do they work?

A sale by airlines - when they slash ticket prices -- is now as common as one by retailers. But how similar are they to discounts by modern stores? Apparel brands, for example, typically tempt shoppers with "up to 50% off" signs, but showcase far more costlier clothes. 

We now have a monsoon sale, with IndiGo, India’s largest airline by passengers carried, joining AirAsia India, SpiceJet and Vistara in offering passengers cheaper fares.    

Sales no doubt are helpful for airlines. The monsoon sale help lure passengers in what is typically a lean travel period in India, though in IndiGo’s case it increasingly appears to be a strategy to undercut competitors (it also increases the frequency of flights in several routes to squeeze out competitors; it can afford to because of its financial muscle and huge fleet).

Sharat Dhall, COO (B2C), Yatra, a travel booking site, said over the last few years, airlines have been coming up with special monsoon fares to drive the passenger traffic during this lean travel period. “The current flash sale by SpiceJet and IndiGo is definitely going to drive up advance bookings for the rainy season.We anticipate that other airlines will soon follow suit and announce their own airfare sale."

Does It Work? 

No doubt, these sales help passengers who have made up their mind about travel or were reluctant to travel because of high prices. These fares will also be cheaper than last-minute fares. 

A Delhi-Mumbai flight ticket that normally costs Rs 6,000-8,000 could ratchet up to nearly Rs 15,000 if the purchase was delayed until the eleventh hour. Ergo, sales are a great way to lure customers. 

But sales are most often gimmicks and airline sales are no different. The IndiGo sale, for example, says fares start at Rs 899, for three days from June 12 to June 14, 2017 at “all-inclusive fares”. Under this offer, 5 lakhs seats are available across its 39 domestic destinations for travel between July 1 and September 30, 2017, the airline said. 

But the fare of Rs 899 is available only for the Bagdogra-Guwahati  route. The rest of the fares range between Rs 999 and Rs 4599.

The fares also aren’t necessarily “all-inclusive”. IndiGo said Delhi-Pune fare under the sale is Rs 2399, but if one were to add taxes, the actual fare rises to Rs 2699, when we tried to book a ticket for July 11.    

Of course, this search is hardly exhaustive. Fares were cut for hundreds of flights on many routes. 

Airline revenue and inventory management algorithms are actually complex and vary across airlines. We had previously asked  executives of Ixigo, an online and mobile travel search and planning website, to examine if the sale by airlines in March 2014 was for real.  

Ixigo then had analysed the offers by Jet Airways, IndiGo, GoAir and SpiceJet (Air India joined rivals later) on the busiest air routes in India, including Delhi to Mumbai. The slashed fares were compared with the average fares prior to the sale.

 Rajnish Kumar, co-founder and CTO of Ixigo, said data analysis of fares during the three-day sale indicated that even the lowest fares were lower by only 15-25% than average fares on most sectors, contrary to the perception created by the airline marketing campaigns. 

Conditions, Conditions! 

A genuine sale also depends on the routes and dates. Early birds, as the 'sold out' signs indicated, may have landed great deals, especially on routes such as Delhi-Mumbai, where fares have long been hovering at Rs 4,500-8,000. But as Ixigo's research revealed, customers were hardly grabbing huge discounts on most routes.

No doubt, some would see the merits of a sale because of a misplaced belief that airfares have been climbing steadily in recent times. But as our own little research showed, one doesn't have to wait for a sale to bag great fares.  

Truth is one needn’t wait for a sale to bag cheap fares. Yet, flyers assume a sale is the best time to buy tickets.  

Aditya Ghosh, president of IndiGo, had once told us that his airline has a simple pricing policy — book early and you get a low fare but as the plane fills up, fares will rise. "When my mother asks me how she will get a cheap fare or 60,000 passengers ask me the same question, it is the same story." 

This story holds true globally, conforming to the booking wisdom followed by frequent travellers. Airline analysts, travel experts and even economists too have arrived at the same booking principle. An economist, Makoto Watanabe, came up with the "eight-week rule", calculating that the optimum time to buy an airline ticket is eight weeks before flying. 

Experts also say buyers save a bundle if tickets are purchased midweek because Friday, the weekends and Monday inevitably see a rush. An airline is almost certain of a packed plane on a Monday 8 am flight. So it can afford to be miserly with discounts. But on a Tuesday, for the same flight, it has to reduce fares. 

Still, there is no hard-and-fast rule to air ticket purchases because management of inventory by airlines is complex (the bottom line is that alerts by airlines and travel portals on fares are the most useful tools). They could slash fares to gauge customer response and increase fares if demand spikes and again push through a discount if rivals copy their move.

Doesn’t Always Work

Despite these actions, a certain number of seats would still go unsold. Which explains why airlines launch sales, or to put it accurately, marketing gimmicks. At the heart of all these actions is the desire to maximize yields - the money a flight makes. Even if the load factor (a measure of occupancy) is high, a flight would make losses if ticket prices are low. 

The converse is true as well. Ankur Bhatia, executive director of Bird Group, a travel technology provider, said airline ticket pricing is based on demand-supply dynamics in an ideal scenario. "It would be easy for an airline to decide the fares for a flight that consistently shows a 60% load factor. So it would slash fares for more seats to attract passengers."  

Airlines more or less follow the same principle even during a sale. Dhall said  a good example of routes where load factors are normally high is prime time (6 am to 8 am and 6 pm to 8 pm) flights between metro cities, flights from metros to leisure destinations (Delhi-Goa, Mumbai-Kochi). Flights during festivals or holidays too are likely to be stuffed with passengers. Expect the number of discounted seats to be low on these flights.

Likewise, routes where load factors are likely to be lower (and hence the number of slashed fares higher) comprise mid-day flights on metro routes and flights during July to September. This is a lean season for airlines.

Due to competition, airlines are loathe to disclosing the number of discounted seats. Even travel website executives like Dhall and Magow say it would not be possible to put a finger on the volume of seats on sale.  

For its latest sale, IndiGo said 5 lakh seats are on sale. But that is an exception rather than the rule.

 "It is difficult for an agent to predict because airlines may add or remove seats during a sale. We expect 10-15 seats per flight at discounted rates though," said Magow. Airline executives and travel agents say the unsold inventory makes the launch of a sale necessary.

Travel agents say for most of the second half of a calendar year, airlines operate at a 75% load factor, which means that one out of every four seats goes vacant. "Being a perishable inventory (the irrecoverable loss of an empty seat), it makes sense to try and fill up more seats even at a lower cost." Sanjiv Kapoor, CSO, Vistara, had told us when he was COO of SpiceJet. He then said it makes no sense to fly seats that are hard to fill at the last minute.  

Vistara’s recurrent sales mean he still swears by that principle.

Herd Mentality

Airline executives and travel agents agree that stimulating early demand to fill seats that would otherwise fly empty is a win-win for all concerned. There are mainly two gains for airlines from a sale, according to Bird Group's Bhatia. "They get to increase cash flows and bring in indecisive passengers."

Clearly, such tricks work. Ixigo's Kumar said the low fares typically create quite a stir in an otherwise lean season.

Travel agents say searches and potential bookings spike during a sale.  

Not everyone swears by sales though. GoAir has always expressed discomfiture with sales. "Sales generate volumes and stimulate demand, but I am not after market share. But then it [sale] is a reality and I have no choice but match fares [of rivals], former GoAir CEO Giorgio De Roni had once told us.

Aviation consultancy Capa's South Asia CEO Kapil Kaul said in recent years, the (reduced) fares have played havoc with airline finances.

But there is no doubt that some airlines have managed to use sales for the right reasons, especially stimulate demand. It is only when they try to match or outfox competitors, that things begin to go wrong.