Friday, November 26, 2010

Our airfares are too low

was amused to see the following report in the papers:

Read this or this or this.

Ostensibly, the airfares have gone up. And the Civil Aviation Minister Mr. Praful Patel and the Director General of Civil Aviation (DGCA) is preparing to ‘take action’ against this ‘loot’.

“Civil aviation minister Praful Patel on Thursday asked airlines to price fares in pre-notified “bands” and avoid any kind of predatory pricing……….. Warning erring airlines, he said the government and the Director General of Civil Aviation (DGCA) had taken serious note of ‘exorbitant prices’ being charged on most routes in the last few days.

“DGCA has already sent notices to airlines ... it can invoke special powers if required .... it will discuss with airlines on ways to regulate fares in low and high bands.””

To be sure, the Airfares have certainly gone up. I flew from Bangalore to Mumbai last week, and the cheapest ticket on the sector for a Friday night (ostensibly, a peak period) was upwards of Rs.12,000. Reports suggest tickets on the Delhi – Mumbai sector have gone up to as high as Rs.25,000 on some days. For those used to flying for a couple of thousand bucks from one corner of the country to another, this would seem certainly high.

But is it?

Come to think of it – what does an airline do? It transports people (and goods) from one place to another. In this respect, it does nothing different from what any other transport operator does – such as a bus, train, taxi or a rickshaw. In fact, an airline actually competes with these other modes of transport (i.e. bus or a train) to get its passengers. When airfares went down a few years back, passengers actually shifted from trains (especially Ist class / IInd A/C) to flights. And this is what led to the aviation boom in the country. Airlines, such as Air Deccan created a ‘taste’ for air travel among those who had never flown before.

But they did it at a throwaway cost.   At prices which were unsustainable in the long run. (For example, between 2005 to 2008, I flew several times between Mumbai and Bangalore (a distance of 860 km) paying fares of Rs.2,000 - Rs.3,000). In the process, they made huge losses and shut shop. Air Deccan, which pioneered low cost flying became bankrupt and was taken over by Kingfisher. Air Sahara was gobbled by Jet. Paramount is grounded. Those who are still running (or flying), are also making losses. For example, Kingfisher’s entire capital has been wiped out, and it is surviving solely on the largesse of the Banks and Financial Institutions. Air India runs on tax payer’s money. All other airlines are also making losses. Even a chaiwala will tell you, for any business to survive, it should be self sustaining – it should generate atleast some amount of profit. Doesn’t the Aviation minister and the DGCA know this?

Now, look at the ‘exorbitant' airfares that the Minister and the DGCA have been talking about. In Mumbai, an auto rickshaw costs Rs. 6.50 per km. Taxi costs Rs.10 per km. (Rates in some other cities such as Bangalore are even higher). And we don’t find these rates high. Now compare the operating costs of a rickshaw or a taxi to an airline. An aircraft costs a bomb, they are forced to hire highly specialized pilots and aviation engineers and pay them huge salaries, they keep the airline spic-and-span. They buy expensive non-subsidized fuel and maintain a huge inventory of spare parts – even a single screw missing from the plane can cause the aircraft to crash. How much does it cost to run an auto rickshaw business? Compare the comforts of flying vis-a-vis the comforts (actually, the lack of) travelling by road. Also add the money value of the time saved. Don't you think you should pay more per kilometer for travelling by air, than travelling by road?

Mumbai – Delhi distance is around 1100 km, Mumbai Bangalore is around 850 km. Thus, theoretically, if we were to travel Mumbai – Delhi in an auto rickshaw, it would cost us Rs.7,000 (Rs. 6.50 per km X 1,100 km), Mumbai – Bangalore would set us back by Rs. 5,500. If we took a taxi instead, Mumbai to Delhi fare would come to Rs.11,000, and Mumbai to Bangalore Rs.8,500. We won’t find these rates ‘high’, this is the normal rate he would charge 'by meter'. But we expect that an airline which flies us these distances in luxury in a couple of hours should do so for Rs.3,000? What are the minister and the DGCA ‘warning’ about? Can they please explain?

I am surprised Praful Patel, a businessman himself, does not understand this simple economics. Perhaps he does, he is just playing to the gallery. But you and I should not  be fooled. If airfares have gone up, they better be. If the airfares come down, the airlines will come down too. Don’t crib. Buy airline stocks instead. That is what I am doing.

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