More on pricing of air tickets

More than a week back, I had written in my blog that the airports need to change the fee structure of user charges, etc. so as to drive the marginal cost down to zero so as to ensure more efficient usage of seat space and better revenue management. It seems like I didn’t? do my research too well. Out of the approx. Rs. 2800 in “fixed charges”, about Rs. 500 only is user charges, the rest being levied by the airlines as “fuel surcharge” (remember that airline fuel isn’t subsidized like petrol or diesel).

An editorial in Mint written three days after my blog post talks about the competition commission’s observation that there might be some kind of cartelization in the industry. The data that the CCI member has used for this is quite simple – how can all airlines have the same fuel surcharge for all routes when it is clear that costs for each route and each airline are different?

At this point of time, I think i’ll buy the CCI’s argument. There seems to be an implicit arrangement between airlines in which they would use the surcharges in order to set a floor price for an airline ticket. If it’s indeed true, it seems like the airlines are forcing inefficiency among themselves, and not making good use of their capacities. They are also denying a large number of passengers the option to fly.

It would also be interesting to study the changes in this fuel surcharge across different airlines and then see if there’s any correlation between this and the acquisition of a stake in Deccan by Mallya. My gut feel is that the Gopinath-run Deccan would’ve refused to participate in a cartel such as this. With him out of the way, and most of the other low cost airlines being run by either big guys (such as the Wadias) or slightly obscure guys, it’s been easy for the airlines to agree upon this arrangement.

The bottomline is that this kind of an arrangement is not going to be healthy in the medium-long run. Yes, for now it may help airlines from bleeding themselves by constantly undercutting, but this is not good either for the industry or for the passengers. The faster one of the airlines tries to break away from this surcharge business, the better it will be for the industry in India.

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