Wednesday, December 31, 2014

Do airlines "fleece" passengers?

For over two decades, the Ministry of Civil Aviation has presided over the demise of many an airlines in the country. As one more airline prepares to breath its last, a series of measures are being “considered” in an effort to “do something”. Among the proposals being considered is a ridiculous proposal to cap airfares“…to prevent airlines from both over-charging passengers in spot fares while at the same time ensuring that airlines do not offer very cheap fares below the cost of operation….the ministry sources had recently indicated that there could be a cap of about Rs. 15,000 on maximum fare on any sector. The ministry sources are exploring the possibility of linking fares to the distance per km. Civil aviation minister Ashok Gajapathi Raju is currently examining the proposal which could be cleared by the ministry very soon…”. 

In fact, every time airfares go up, the myth of airlines ‘fleecing’ air passengers rears its head. What is shocking is that even the DGCA subscribes to this view. Its high time this myth about fleecing air passengers is busted.

Can the Ministry of Civil Aviation explain why - since 1991 – aviation has done so badly while every other industry in the country has prospered ?

Aviation is a difficult business
An aircraft is a complex machine. An average commercial aircraft takes 6 months to build and costs a million dollars. A popular airplane such as a Boeing 737 is made up of 6,00,000 parts while the bigger ones like Boeing 777 may have them in millions. Malfunctioning of a single part can prove fatal, as the plane flies in inhospitable conditions 30,000 feet above the earth’s surface.  Modern day planes carry ‘autopilot’ modes that use computer software to control & guide the aircraft, eliminating human errors. Aviation consumes billions of dollars in R & D expenditure, and has over the years made our flying experience safer, faster and better.

Notwithstanding some recent incidents, air travel is remarkably safe and punctual. Most flights take off and land on time, and accident rates are near zero. Boeing reports that in more than half a century of commercial flights (1959-2013), there have been less than two thousand accidents across the globe, of which only one third had fatalities. Compare this with accident statistics on road, where more than 1.1 million people have died in road accidents in India in just the last ten years (2003-2012) alone.

For all this, and the sheer speed of travel, the passengers have to pay.

The economics of aviation business
Running an airline is highly capital intensive. Aircrafts are expensive, specialized technical staff such as engineers and pilots don’t come cheap either. An inventory of spare parts needs to be kept at all times. Maintenance facilities are few and expensive. India’s aircrafts reportedly fly to places like Singapore and Abu Dhabi for maintenance. More than 50% of the operating costs of an airline are fuel costs alone. All these costs are recovered mainly from sale of tickets and booking of cargo. But in India the business is taxed heavily under the faulty notions of “taxing the rich”. A large chunk of the ticket price you pay never reaches the company and is pre-empted by the government.

Once a flight has been “scheduled”, all the costs are almost fixed. Whether the flight takes off with ten passengers or a hundred, it costs the same to the airline. In other words, the incremental cost of flying an ‘additional’ passenger is almost zero. This lends the airline industry neatly to a dynamic pricing model, where empty seats in a flight can be sold off cheap – every additional rupee directly adds to the recovery of the fixed costs. If and only after all the fixed costs are recovered can the airline turn in a profit. For any business to be sustainable, it needs to make a profit.

The myth of 'fleecing' air travelers
In the short run, supply of seats is largely fixed, as flight routes and schedules are announced in advance. It is therefore the demand for seats which drives airfares. When the demand is high, the airfares rise. Higher airfares help airlines earn revenues which compensate for low fares when the demand is low. The notion that airlines “fleece” travelers with high fares is therefore flawed and misleading. The 'fleecing' allegation is impossible to accept when most airlines are making losses. A 'fleecing' business would typically be a monopoly and make super-normal profits. If an airline demands fares which are exorbitant, travelers have an option of using some other airline, other modes of transport, or even not travelling at all. It is the traveler who decides whether she values the travel as much as the price of the ticket, and takes a decision. Also, high fares apply to a small number of seats that are sold closer to the date of flight, passengers who plan their travels well in advance can usually buy 'reasonably' priced tickets even in peak season. However, the media sensationalizes a few isolated instances of high spot fares and misleads the public. 

If there is any fleecing that occurs, it is due to the high taxes that are imposed on every aspect of the business. A huge chunk of the ticket price that the buyer pays doesn’t go to the airline. If high airfares in peak season are banned, it will impact the ability of the airlines to offer low airfares in slack season, and no one will be any wiser. 

On the death bed - again
The aviation sector in India was first opened up in the early 1990s, but most airlines which came up at that time have failed to survive. A second lot that came up in the early 2000s with the entry of low-cost pioneer Air Deccan has done no better.  The main contributor to poor mortality of India’s aviation sector is the regulator itself. The sector has been “…choking on high taxes, poor regulation and bad airports…”, to quote Capt. Gopinath. The DGCA seems to have taken upon itself the mandate to regulate airfares. The Narendra Modi government has come to power on a platform of 'good governance'. The PM has often espoused the cause of 'minimum government, maximum governance' and claims to have a business friendly image. That such a government can even think of regulating airfares sends a shiver down my spine. 

(See also "Our airfares are too low" on what are "high" and "low airfares)

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