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)

An extraordinary mission for safety of air travel

On 1^st June 2009, an Air France aircraft flying from Rio de Janeiro in Brazil to Paris, and carrying 216 passengers and 12 crewmen disappeared over the Atlantic. After close to two years of intense search, the debris of this aircraft are believed to have been found, more than 12800 feet under the sea. Read the extraordinary story here, don't miss it.

Investigators will now try to recover the flight recorders, lying at a place “.....here the sea is perfectly black, temperatures approach freezing and water pressure is equal to the weight of a car on a postage stamp......”. Hardly anyone has gone to such depths before, and the challenges the investigators face include “.....the presence of numerous bodies, some still strapped into their seats and preserved by the cold water and lack of oxygen or light.....”. Will the investigators bring up only the flight recorders, or also the bodies and hand them over to their relatives? Heart wrenching scenes would result, old wounds would be uncovered.

Read the full history of flight AF447 here.

Why are the investigators doing all this? Their mission is to establish the cause of the crash and make future air travel safer.

Air travel is becoming safer in India too. Read our contribution to this here, or here.

Our airfares are too low

I 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.