The airline industry, to put it mildly, is in a very tricky space. In May this year, we can covered a piece on the airline fare caps - where the government had imposed price floors and ceilings to avoid both firms overcharging for the seats to make up their losses (thereby protecting the customers) and undercutting competition via lower charges (thereby protecting the weaker competition from under-cutting. You could read more on that here. You could also read our more detailed post on aviation unit economics for more context.
In a tricky spot
Spicejet, one of India's leading airlines has been facing financial issues for a while now, exacerbated by the recent COVID pandemic. Auditor, SR Batliboi recently raised concerns over the firm's ability to continue as a going concern - a lot of which the market seemed to have already priced it based on the firms precipitous drop since COVID began. Cash is the need of the hour, and the sooner the customers pay it, the better!
Negative working capital
For most goods and services you consume you do not prepay. The company makes the good, ships it to your nearest store from where you buy it. The shop from where you buy it will generally pay the firm sometime after the item is sold.
The airline industry is one of the rare places where you will pay for the service first (via your ticket fare) and travel later. Many industries that typically worked on the pay later model (restaurants for example) have attempted to switch to the pay upfront model given the COVID backdrop, offering customers vouchers that they could redeem anytime over the next year. This provides the business cash to proceed through a tough time and the customer to get more value for their money (firms that come out with these schemes will generally give you 1.5x-2.0x of the voucher value).
Doubling down
Sometime last week, Spicejet tried a 1+1 scheme, offering customers coupons for future travel on buying a ticket from them now. The hope was that the attractiveness of the scheme would help them bag more customers, gaining precious market share, while also getting customers to pay them slightly earlier.
A brilliant tactic in most market conditions. Just one small pitfall! The price floors that we had discussed earlier could possibly be circumvented. The coupons the firm offered made the effective price of the second trip extremely low, thereby circumventing the price floor set up by the regulator.
As the survival of many of these airlines hangs in the balance, it would be interesting to see how the regulators react, striking the delicate balance between maintaining affordability for the customers and maintaining competitive intensity via helping firms survive.