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Apply your knowledge of economics to understand this article. How has this exit affected the market and with what effect ? (Max Marks: 5)

Domestic Airfares have constantly risen to unaffordable levels from the beginning of 2012 since Kingfisher Airlines, India’s second largest airline by market share at one time, plunged into crisis. Fares peaked in October-December when the airline went belly up. Basically the exit of Kingfisher caused the supply to reduce (66 out of 400 odd commercial fleet).This allowed the airlines to charge higher prices.

Because of this price increase the demand for Air travel started decreasing. A part of the demand seen in earlier years was artificial and was backed by deeply discounted fares. The exit of Kingfisher has taken excess capacity out, and the yields of all airlines have gone up. Though there has been a reduction in demand by 8 % the increase in Yield has been much higher (25 %) Also because of the increase in price people started to choose substitute modes of travels such as Train and bus which decreased the demand even further.

And there has been a steep increase in Business class fares compared to economy fares. While the economy fares have gone up by 15 % the business class fares shot up by 25 %.This was mainly because of the monopoly enjoyed by jet airways in this sector that they were able to charge this much. This is cross subsidizing where they are gaining more revenue from Business class to cover the operating costs of running Economy class. And this demand is relatively inelastic due to the monopoly enjoyed by Jet Airways and absence of substitutes.

Fares are headed for correction as demand for air travel is declining due to prohibitive fares, and the current lean season has added to the problem. Now with the lean season going on the demand has gone down rapidly with about 30 % of seats being empty. So…...

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