Price war: Savouring int’l route amid frustrating domestic fare conspiracy

In the battle to capture the customer, companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice—and frequently the skirmishing degenerates into a price war. WOLE SHADARE writes that while travellers are excited about the London price war, the domestic sector is allegedly witnessing price collusion

Price appeal

Creating low-price appeal is often the goal, but the result of one retaliatory price slashing after another is often a precipitous decline in industry profits.

Most managers will be involved in a price war at some point in their careers. Every price cut is potentially the first salvo, and some discounts routinely lead to retaliatory price cuts that then escalate into a full-blown price war.

The recent fare war going on in the country’s aviation industry, especially for the international airline sector has been described as good for the sector and one that has seriously engendered competition as never seen in recent times.

Signs of fare reduction

Two factors such as the release of foreign airlines’ trapped funds by the Federal Government and the opening of lower ticket inventories by the carriers in the first instance led to a reduction of fares which means that air travel which was hitherto almost out of the reach of many went as high as N2.5 million and more fore economy seat for trips to Europe and costs almost double for trips to the United State, South America and Asia.

The strength of the Naira against the US dollar equally made it easier as fares are quoted in dollars. If the Naira depreciates, it means more Naira would be needed to match dollar fares. It is the same way if it is appreciated; it means air travel would be easier to come by.

Disruption

The coming of Nigerian flag carrier airline on the Lagos-London somewhat disrupted fare dynamics on the route.

At the time Air Peace debuted on the lucrative London route, international airlines like British Airways and Virgin Atlantic reduced their fares as a result of the opening of lower ticket inventories and appreciation of Naira, fares plummeted to between N1.2 million and N1.3 million from N2.1 million and N2.5 million for economy class ticket.

Catching in on the fact that as a new entrant, it had to compete on fare to make an inroad into a very competitive market, Air Peace announced N900,000 and N1 million for fares to London.

That singular action set the stage for what is currently going on the route and one that led the chairman of Air Peace, Mr. Allen Onyema to cry out that the foreign carriers had mapped up a strategy to frustrate him out of the route.

To be fair to Air Peace and Onyema, airlines usually come up with promotional fares any time they want to debut on a route because it becomes extremely difficult to displace operators that have been on that route for more than 60 years and know the business secret of the route and especially one that has a deep pocket and massively backed by its government and with a long history of airline operations across the globe.

It would be unfair to criticize the Nigerian carrier for lowering fares on the route as that is the best opportunity to be in the market. The carrier has yet to interline with any foreign airline to help it lift passengers beyond London. About 45 or 50 per cent of passengers go beyond London. So, it would be extremely unfair to expect Air Peace to charge the same N1.3 million as other carriers.

Price war spreads

The interesting thing is that the price hostility has equally spread to other carriers like Egypt Air, Ethiopian Airlines, Air Maroc, RwandAir and others that are now charging far less than what Air Peace is charging on a six-hour trip to London.

Egypt Air, Air Maroc, RwandAir and Ethiopian Airlines offer far cheaper fares even though they don’t go direct to London from Lagos but through their hubs in Cairo, Casablanca and Addis Ababa which is a longer trip. But most travellers do not mind as long as the fares are cheaper by more than 35%.

Egyptair as at Wednesday was charging- ($470) ₦585,620 to London; Air Peace – ($655) ₦816, 130, British Airways –  ($787.99) ₦981, 848, Virgin Atlantic – ($927.99) ₦1.1million Royal Air Moroc – ($456.99) ₦569,422.

Others are RwandAir – ($545.35) ₦679,070, Ethiopian Air – ($543.84) ₦677, 824, Turkish Airlines – ($647.84) ₦807, 408, Air France – ($915.99) ₦1.1m, and KLM – ($927.84) ₦1.1m

Competition missing on domestic routes

The type of competition seen on the international route is tragically missing on the domestic route as many of Nigeria’s domestic airlines charge about the same fare.

The carriers came under the searchlight two years ago when the operators allegedly rose from a meeting to declare N50,000 as fares from N35,000. Nigerians rose in unison to condemn the act, describing it as collusion which is a serious offence in the international airline business.

The action of the airlines forced the Federal Government to investigate to unravel the reasons for the sudden hike then in airfares by all domestic carriers, as the airlines, aside from  Green Africa Airways, raised the airfare for a one-hour flight in economy class to as high as N50,000.

Fares have since jumped to between N90,000 and N110,000 as the carriers charge almost the same fares on popular routes like Abuja, Lagos, and Port Harcourt.

All the airlines fly to Abuja and the fares are the same, making stakeholders curious about the possibility that could be.

The operators had complained of the high cost of operating in Nigeria and the reason fares are almost the same as they struggle to break even.

Price fixing

Industry observers argued that the email and other indications suggested that the airfare hike was a unanimous decision by domestic carriers to engage in price-fixing.

The email read in part, “This is to update you that effective today, February 18, 2022, the airline’s ticket fares have been reviewed with the lowest fare at N50.000 only across all our routes.

Federal Competition and Consumer Protection Commission (FCCPC) also had credible information that while attendees at the meeting may not have arrived at a consensus, the meeting ended in a resolution that encouraged, permitted or consented to the coordinated conduct.

Experts’ views

A former Executive Vice-Chairman/Chief Executive Officer of  FCCPC, Babatunde Irukera said it was against the law for competitors to coordinate and come together to discuss or agree on price. “That is forming a cartel and it is price-fixing”.

Aviation consultant, Dr. Daniel Young told Aviation Metric that there is obvious collusion among the local carriers.

“There is an unspoken assent not to be competitive. There is no science behind the pricing. On the international scene, no airline sits down to discuss pricing. It is a huge offence. You can never have competitive fares here in Nigeria because they are a cartel.”

‘This is the reason we can’t have this level of competition. They are not able to admit it openly, they do it underground.”

Aviation lawyer, Mr. Pekun Sowole said there is a need to know the operating cost of one-hour flights like B737, A320 and the ATR, Bombardier and other aircraft deployed on the route.

He, however, noted that the operational cost of ATR, Bombardier and other smaller aircraft is far cheaper than the other two big airplanes, stressing that it then amounts to ‘collusion’ if they charge the same fares.

A former Managing Director of the Federal Airports Authority of Nigeria (FAAN), Dr Richard Aisuebeogun rather went proverbial.

“In biological science, there is what is called parasitic resistance which is resistance to medication. There are new parasites that must have mutated from the ones. The domestic airlines are operating from Lagos to Abuja because of the natural traffic. Newer airlines should have redeveloped their operation to Yola, Sokoto, Akura, and Minna. Minna can be served from Kaduna or Kano-Ibadan.”

Last line

Price wars can create economically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a company, and industry profitability. No matter who wins, the combatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly fierce.

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