Marginal cost of flying

The problem with all these 1 rupee – 2 rupee offers in indian aviation is that they aren’t really that cheap. On top of this you have the various taxes and user charges which come up to some Rs. 1500 (I’m not sure of the exact number). What has effectively happened is that these charges have put a floor on the price of airline tickets in India.

It is very likely that you would’ve read an economics book where airlines are taken as an example for marginal cost pricing. What this Rs. 1500 of taxes and charges has ensured is that the marginal cost of flying an extra passenger is Rs. 1500. So whatever the airline does, if it is interested in making money, it can’t price a ticket lower than that.

How about changing the structure of the fees, taxes, etc. so as to not make it proportional to the number of passengers? Such as keep it as a fixed fee per aircraft or something like that? I agree that in some cases it may not really reflect the way the actual costs are incurred. However, what they help achieve is to push the marginal cost of a passenger to zero. And this might have some important effects on the way airline tickets are priced.

The key here is that the floor is going to actually drop to zero, and we might see some really low numbers in the fare column. This might just result in much higher numbers for the top slabs but then that’s usually the inelastic part of the market, so it shouldn’t be too hard on them. So this seems like a win-win situation.

The only challenge is to find a revenue-neutral pricing structure so that the current per-user charges can be converted to “wholesale” charges. However, I believe that if the government is sufficiently committed towards making flying affordable for the common man, this change is definitely well worth it.

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