Yeah you read it right – It is warfare over ” Air Fare”.
It all started one fine day when SpiceJet sprang a surprise by offering 10 lakh air tickets for Rs. 2013 over a three day booking window (11th Jan – 13th Jan) with travel to be undertaken between 1st February and 30th April 2013. The mad rush for bookings brought down the SpiceJet servers which is another story, but what it did to air travel industry is more interesting. The timing of the offer was on the spot, the air fares were soaring, the Feb-April time duration is anyway slow period for airlines, enabling SpiceJet to sell a large chunk of its inventory, ensuring higher load factor for the airline in advance. A dream for any airline operator.
But what it also did was to disturb the status-quo in the airline sector. It was just a matter of time before others responded and Jet Airways did exactly the same. Jet Airways launched its promotion over a six day booking window (Feb 19 – Feb 24) for travel anytime till the end of year 2013 and offered twice the number of seats offered by SpiceJet. As soon as Jet unleashed its promotional offer, Indigo and SpiceJet retaliated almost instantaneously to lower their own fares, effectively bringing down rates to the same levels as the Jet.
This is the part of story we all know and have seen and heard. So, why this post. In this post I will like to use Game Theory to try and understand why no body responded to SpiceJet’s initial offer and what changed when Jet Airways came up with its own promotional campaign.
To understand this let us assume that there are only two restaurants operating in a locality, and any change in one’s strategy impacts others profits and let us say that following is each ones pay-off matrix, I will explain the payoff matrix in a moments
Restaurant A/Restaurant B (co-operates) (betrays)
(co-operates) 200,200 150,250
(betrays) 250,150 100,100
What this payoff matrix essentially means is that if both restaurants A and B co-operate with each other, they take in a profit of 200 each. Whereas if anyone of them cheats while the other continues to co-operate, the co-operating one suffers. The cheating one nets 250, higher than his co-operating time profit while the other takes a hit. In the third scenario, both betray each other and as a result profit for both plummet to 100 each. Something similar happened in this case. SpiceJet choose to disturb the equilibrium by getting its promotional offer off the deck, netting (hopefully!) more than its normal share of load factor. Once any one party disturbs the equilibrium it is a matter of time before other always takes the same path. That exactly happened when Jet launched its own promotions. SpiceJet had taken others by surprise, but by the time Jet responded other players were game. SpiceJet having initiated the game, was anyway going to retaliate as others were not going to trust it to hold to equilibrium. IndiGo on the other hand had to retaliate or risked loosing load factor to SpiceJet and Jet and that exactly happened leading to situation where all the players are playing for (100,100) scenario. Will it last long ? Unlikely. These are smart airlines and are likely to revert to (200,200) scenario. Till then it is industry’s hope that they will get more and more people to travel pulling them out of (100,100) scenario to a more profitable scenario, but will that happen.. We will come to know later once the dust has settled down.