Why Jet Airways is facing a classic Catch-22

Will Jet Airways benefit by shutting its low-cost carrier in a highly price-conscious market?

It can only be a coincidence that Jet Airways chose to finally exit the low-cost, no-frills segment and concentrate on full service operations on a day that the full-service Tata-SIA joint-venture unveiled its new brand, Vistara.

As it is, Jet’s Konnect brand had been facing competition from the other low-cost carriers but has recently gotten its most aggressive one yet in the form of the Tony Fernandes-run Air Asia.

The bigger question, though, is: Will Jet Airways benefit by shutting its low-cost carrier in a highly price-conscious market and as more fliers take to the skies?

Jet Airways currently operates about 270 domestic flights, nearly 60 per cent of which offer no-frills service. In the June quarter, Jet Airways has managed to reduce its losses on account of higher turnover (spreading of overheads) and restructuring benefits with Etihad despite fares being offered at a discount.

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Jet Airways benefited from a 86 per cent jump in its international operations because of a 157 per cent surge in codeshare traffic, which grew to 118,253 passengers in the June quarter, according to a report in Mint newspaper.

In a press release issued Monday, the airline said international operations are expected to grow as the codeshare expansion with Etihad Airways and Air France, activated only halfway through the quarter, takes hold and as its “…planned international network expands and more codeshares come online.

By exiting the no-frills segment Jet Airways is freeing resources to feed Etihad for the international operations. The company knows that it cannot compete in the price-conscious market with its current cost structure.

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But Jet faces a classic Catch-22. Even now there is a very small difference between tariff rates of a no-frills airline and a full-service one, which means that Jet would have continued to bleed on its low-cost carrier. And by moving into full service segment, Jet Airways will be adding costs to its books. But since it does not have the pricing power of charging higher rates, the company will have to incur more losses.

However, by moving out of the no-frills segment, Jet Airways is conceding itself to be a feeder to Etihad. It is taking itself away from the battleground where price wars are hurting airlines. It is now no longer be directly competing with other airlines but will focus on filling Etihad’s seats.

Jet Airways has shown courage in admitting its mistakes and correcting its path, which hopefully should make the company profitable sooner than later.