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BW Businessworld

Being Fair On Fares

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Let me start by stating that i hold no brief for the airline industry, and am as affected as anybody else if fares touch exorbitant levels. But this allegation of cartelisation whenever fares tend to rise makes little economic sense.

To know why, one has to understand how fares are determined in a free market. Seats are grouped in buckets aligned with fares that range from low to high (with attendant fare conditions). During high demand, seats in low-fare buckets are taken up fast, and what remains are only those in high-fare buckets. Buckets and fares are always there in the global distribution system (GDS), from the time a flight is opened for sale 300 days before departure. As one fed-up industry representative told me: "The fares are not jacked up as we see demand rising."

The airline industry's take is that in a free market enterprise, there is a willing buyer and willing seller. The product or service is priced at a level that reflects the market's ability to absorb. It is difficult for a cartel to operationalise in a competitive market for a perishable product and the right price of any commodity or service is what the market will bear, assuming the market is competitive.

Prices going up during the peak season is not evidence of cartelisation. It shows that market forces — demand and supply — are operating. That fares of different airlines are similar does not indicate cartelisation either. As everyone knows what their competitors offer, fares for similar distances will tend to converge around a common band.

This is how it works all around the world, and India is no exception. If you log on to book a ticket on, say, easyJet or Ryanair for the same route on the same day at the same time, chances are you will pay similar fares. The fare for the same route, however, may change many times a day, so a fare you pay in the morning could differ a lot from a fare you pay in the evening. Moreover, in India, the industry cut capacity significantly in the past two years. Currently, Kingfisher Airlines and Air India are not able to fully utilise their available fleet. This is tightening supply in peak season. In the third quarter (October-December), both business and leisure traffic peak.

In the past weeks when fares rose, the regulator — Directorate General of Civil Aviation (DGCA) — suddenly woke up and asked airlines for all kinds of information. How can airlines give them an upper and lower band on specific routes on each route when the market determines that? How can this be of any use when fares change many times a day? I don't think the regulator even understands what it is asking for — it just needs to be seen as taking some action to appease the public.

Further, the credibility of DGCA as a regulator is very low. Can anyone in DGCA tell me how much compensation has been paid by airlines to passengers for flight delays as a recent DGCA circular had stipulated? My point is that no regulation is better than such silly, ineffective regulation. Any move to control prices through babus will only lead to greater corruption and inefficiency.
That said, there is surely a case for more transparency. While airlines' pricing slabs are transparent, their utilisation is opaque. When one books a Delhi-Mumbai flight, for instance, one gets a quote of, say, Rs 10,000. The passenger has no way to know whether the entry slabs were actually sold out or whether they were sharply reduced in number (supply can be artificially tweaked). It may be advisable for airlines, though they may not be too keen on this, to indicate on their websites or through GDS how many seats are available in a particular slab when a customer tries to book. This way, the passenger knows the availability of seats at a particular fare, and what fare he may have to pay subsequently, and how many seats are available at the next fare slab. It may need some new technology, but can be done in today's tech-savvy world. This may be better than asking airlines to display their highest fares for specific distance bands, which they have now — under duress I may add — agreed to do.

Secondly, there are instances of near-monopoly and fares becoming exorbitant. On many routes such as Delhi-Dehradun, Delhi-Dharamsala and Delhi-Shimla, there are very few airlines with fewer flights, and one pays through one's nose to fly. But on board, you often find empty seats. What does this indicate? Airlines are exploiting their monopoly to their best advantage. If they kept the fare reasonable, they may attract more train and road traffic, and manage to make the flight viable without charging the moon. Someone has to keep airlines' predatory instincts in check through more effective regulation. I'm just not sure DGCA is equipped to do the job.