Menace of Predatory Pricing

Volatility in air fares has been a characteristic feature of the Indian airline industry that has been tethered to a free market economy since the emergence of private carriers. Frequent spikes in air fares constitute a major dilemma especially for the large segment of the travelling public who are not elitist or belong to the affluent sections of the society. This phenomena is witnessed invariably during the holiday season or during festivals when passenger traffic is generally inclined to peak. The heavy demand during these seasons comes as a bonanza for the Indian carriers who during lean periods are normally engaged in a struggle to remain viable in the face of reduced demand and cut-throat competition. In the long run however, exorbitant fares during the travelling season tend to inhibit growth in passenger traffic as the cost of air travel becomes clearly unaffordable for many. In the final analysis, this phenomena is counterproductive for the airline industry as high cost becomes a deterrent for many a potential air passenger.

In March this year, some Members of Parliament raised a demand in the Rajya Sabha to regulate air fares as, in their perception, the pricing of air tickets by the Indian airline industry was arbitrary and the charges were inordinately high. They also put forth a suggestion that the government consider the setting up of an authority to regulate fares charged by private airlines. Also, the government ought to define the parameters for the structuring of air fares.

One of the factors that in the past has led to high air fares was the continuously rising price of aviation turbine fuel (ATF). As expenditure on ATF constitutes around 40 to 45 per cent of operating cost of an airline, any rise in the price of ATF does seriously dent the finances of an airline. In the recent past, thankfully, the price of ATF has been registering a significant downward trend. However, in the last one year, even though the price of ATF has come down by around 35 per cent, the benefit thus accrued has not been passed on to the travelling public by the Indian carriers. Air fares have continued to remain high and often unaffordable for the middle class. On the other hand, even the slightest increase in the price of ATF is passed on by the Indian carriers to the hapless air passenger without any time lag.

While the air passenger is normally at the receiving end of the fallout from volatility in the price of ATF, when viewed in the global perspective, the Indian carriers themselves are at a serious disadvantage. Compared to international price levels, the price of ATF in India is significantly higher. Besides, the price of ATF in India does not reduce in the same proportion as the fall in the global price of crude oil. But above all, what pushes up cost of ATF is the tax structure that is generally seen as being somewhat irrational. Apart from central taxes, every state government has its own formula for taxation because of which the cost of ATF is not only high, it is also not uniform throughout the country. These factors make it difficult if not impossible for Indian carriers to compete with their foreign counterparts operating in or through India. India holds the dubious distinction of offering perhaps the highest price levels for ATF that are in stark contrast to prices prevailing in Dubai and Singapore, the two major hubs in the region for the global airline industry.

One of the priorities in the regime of civil aviation enunciated by the NDA Government was focus on expanding regional aviation for which the government has indicated intentions of developing a large number of airports in Tier-II, Tier-III and even Tier-IV cities and towns to improve regional connectivity and make air travel available to larger segment of the society. However, the population inhabiting these cities is largely from the middle or lower middle class and unless air fares are affordable for them, it would not be possible for regional carriers to sustain profitable operations.

The menace of high air fares has even drawn attention of the Prime Minister of India who has expressed concern and has invited suggestions on how the issue could be addressed without forcibly capping fares. Although in a free-market economy, for the airline industry to prosper, controls are not desirable and the market ought to remain de-regulated to encourage free and fair competition. However, too much of freedom for the airline industry is also somewhat unhealthy and the best results can be obtained through close supervision and a degree of pragmatic regulation. In a meeting on September 15, the Ministry of Civil Aviation had asked the Indian carriers to come up with suggestions for a model for self-regulation.

Finally the government has stepped in and is contemplating measures to reign in tendencies of predatory pricing of air tickets by the Indian carriers.