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Saturday, 06 June 2015 00:00
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That’s the lesson from the DGCA analysis of air fare

For quite some time now, the ministry of civil aviation has been toying with the idea of putting some kind of curbs on airline ticket pricing including the possibility of price bands. The argument made by top officials has been that, by charging more for last-minute flyers, the airlines were, in a sense, indulging in price-gouging—never mind that, in even the public sector railways, the same system of dynamic-pricing based on time of purchase is being used. None of the arguments ever made any sense considering the number of players in the airline space. Indeed, most regulators, such as the telecom one, regularly look at the Herfindahl–Hirschman Index to judge market concentration and, if there is sufficient competition, do not regulate tariffs—this is why, in the case of telecom, after the initial regulation, tariffs are market-determined.

 

Not surprisingly, when the Directorate General of Civil Aviation (DGCA) analysed air fares on 18 routes including high density routes (Delhi-Mumbai and Bangalore-Mumbai) and low-density ones (Kolkata-Port Blair) during the four quarters of 2014, it found much the same thing. While there is a large difference between the minimum and maximum fares, the DGCA found the average was closer to the minimum fare, indicating the bulk of tickets were sold at near the minimum fare. In the fourth quarter of 2014, on the high density Mumbai-Delhi route, high fares accounted for just 2.6% of Jet Airways revenues, 1.4% for Indigo and 0.5% for Air India; low fares accounted for 9% (Jet Airways), 22.2% (Indigo) and 0.3% (Air India). Bucket fares accounted for the balance 88.4% (Jet Airways), 76.4% for Indigo and 99.2% for Air India. Considering that low and bucket fares account for the bulk of revenues of all the airlines, the government and DGCA must leave it to the market to discover the right price for air tickets. Indeed, given how much ATF prices and government taxes cause ticket prices to rise, the ministry would do well to focus on ways to reduce these imposts—India is in a unique situation where, while fares are amongst the lowest in the world, costs are among the highest. Sadly, the problem of lack of trust in the market is not restricted to the aviation ministry alone—in the case of pharmaceuticals where the number of players is many times higher, much of the industry remains under the rule of one price-control mechanism or the other.

 
 

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