By Jitender Bhargava
Former Executive Director, Air India
AIR TRAVELLERS, accustomed to paying low fares since the advent of low-cost airlines, have been up in arms at being ‘fleeced’ by airlines during the recent weeks. High fares on certain sectors for last-minute ticketing has compelled the DGCA and the civil aviation ministry to intervene and reportedly force the airlines to roll back the fares.
As all of us would naturally be interested in low fares, the justification of supply-demand determining fare levels advanced by the airlines hasn’t found acceptance. They have been described as greedy and engaged in exploitation. As the dust on the issue settles with fares returning to almost normal levels, it’s time to take a dispassionate look at the issue. Which of the two sides has been right and to what extent?
It needs to be understood that the airline industry is in the unregulated sector and market forces should therefore logically determine the fare levels, like in other sectors of the industry. It also needs to be appreciated that the airlines are here for business, not charity. The industry is seasonal in character and passenger loads are not uniformly even year round. India has witnessed low fares not because they are economical and give adequate returns on investment to the airlines, but because the new players, who entered the market in the 2004-06 period, first offered low fares to garner marketshare. The subsequent years of economic downturn compelled the airlines to keep fares at low levels — thus making them, though uneconomical from the airlines’ point of view, look like ‘realistic’ fares.
All airlines, irrespective of their geographical location, follow a revenue management system like the Indian carriers. Seats on a flight are segmented in various sub-classes at different fare levels. If you buy the initial few seats you pay less. By the same logic, if you buy close to the flight’s departure time, you pay more and this fare is at the core of the controversy. Airlines have worsened their case by listing fares at Rs. 30,000-Rs. 40,000 at the upper end of the price band. The media has largely focussed on these ridiculous fares rather than presenting the realistic scenario of fares being high only during peak periods when flights operate with high occupancy and last-minute travellers are buying the last few seats. Fewer the number of seats available, higher the value of tickets. Nothing unique about this principle.
If a section of the media and some passengers had been unreasonable in accusing the airlines of charging exorbitant fares during peak periods, airlines recovering from the losses incurred during the economic downturn of 2008 apparently began feeling that these happier days may not last very long and hence should boost their bottom line by charging whatever they can get a passenger to pay. This action is clearly indefensible. As passengers are the bread and butter for an airline, the latter need to maintain long-term relationships rather than enhance revenue manifold by taking a myopic view. What’s been surprising is that it has been the low-cost airlines that have jacked up their fares to astronomical levels, giving the entire industry a bad name.
Considering that the number of passengers has been growing and the augmentation of capacity in the domestic market hasn’t been keeping pace, airlines are expected to continue recording high load factors and therefore be in a position to manipulate the market. The ministry should logically monitor capacity and not fares. Induction of capacity periodically by either the existing airlines or new airlines will be the safest guarantee against exorbitant fares.