2010-12-21
As tariffs on most domestic routes climbed up, the Union civil aviation ministry and the sector regulator sprang into action to give private airlines a rap on the knuckles for jacking up tariffs. Was this a legitimate government intervention? We examine the issue, as always, in a simple Q&A format
How do airline fares get determined? It must be stated at the outset that pricing of airline tickets is not within the purview of India’s aviation industry regulator, the Directorate General of Civil Aviation (DGCA). And airlines are free to fix the price of their tickets. This is subject to DGCA’s Route Dispersal Guidelines, which require airlines to fly 10% of their trunk routes in remote areas like J&K, the North-East, Andaman, and Lakshwadeep Islands. Within this framework, airlines determine their own fares. However, under Aircraft Rule 135, framed under the Aircraft Act of 1934, the DGCA has the obligation of oversight of ticket prices. I quote the relevant sub-sections of this rule: Subsection 4: Where the Director-General is satisfied that any air transport undertaking has established excessive or predatory tariff under sub-rule (1) or has indulged in oligopolistic practice, he may, by Order, issue directions to such air transport undertaking. Subsection 5: Every direction issued under sub-rule (4) shall be complied with by such air transport undertaking.
Airline pricing is an intricate exercise in marketing. The ticket price does not necessarily have anything to do with distance travelled. A long-distance ticket can be cheaper than a short-distance one. Three persons sitting in a row could easily be paying three different prices for the same journey. Date of purchase will also vary the ticket price. The day of travel, say weekend vs week day, will vary and impact price. The ticket price is a marketing exercise based on demand and supply. In addition, it also takes into account how to attract customers from other airlines and to create customer loyalty. It is based on complicated computer programmes, taking into account various factors like the ones mentioned above, to maximise profit and create customer loyalty.
However, in developing a perfect airline price search engine, there have been many problems and little success. The problem gets even more complicated in real life when thousands of fares may play out in a journey involving changes and halts. Are there trend issues involved? If there is indeed a predictable seasonality, did the Indian government get involved at a misleading juncture, in so far as fares will start going up again around Christmas?
Yes, trend issues are involved as different seasons have distinct demands. Christmas-New Year is one such season; school holidays bring their own demand. During the ‘high season’, one can expect an increase in price due to demand and supply playing out in a free market environment. But the recent surge in prices was not really based on any established trend. The growth in the economy led to an increase in demand.
Is there an airline cartel operating in India?
Cartelisation is never done openly and announced. But cartelisation in the airline sector is a known phenomenon. Due to strong anti-trust legislation and compliance pursued in western countries, there have been many proven cases of cartelisation by airlines. What constitutes cartelisation? Cartelisation can be defined as an ‘abuse of dominance’ when dominance can be considered at 50% market share. How does one define ‘abuse’? Abuse of dominance will involve collusive action by airlines, to jack up prices from their position of dominance. Is the present case of high ticket prices one of cartelisation and abuse of dominance or is it a simple case of changing demand and supply? As per a recent newspaper report, the ratio of the number of ticket sales to the number of seats available per day does show that the sudden hike in prices may not have been a simple case of demand and supply. There is evidence that ticket prices shot up very high for flights that actually carried a significant number of vacant seats. If this is correct, it suggests the creation of an artificial shortage in the face of rising demand. A working analogy would be to wholesalers hoarding potatoes to jack up prices and make windfall profits. But before we come to this conclusion, we need to properly check up on the statistics. This can be best done by the Competition Commission of India. Can a cartel exist in a sector that has the participation of a government player? Air India, in this instance.
Certainly. Public sector monopolies have often abused their monopoly or dominant position. In the airline sector, Indian Airlines was a monopoly to begin with and then went on to become the price leader in the nineties. At that time, ticket prices did go up due to monopolistic or oligopolistic conditions. While government approval was taken in advance, high overheads and allowances ensured that the airline needed to charge higher ticket prices to make a profit or even break even at times. Any way, even in the nineties, the dominant player and market leader would set the trend and others would follow. It was only after the advent of low-cost carriers that free market-determined pricing based on demand and supply became operational in the Indian skies.
Was civil aviation minister Praful Patel being fair in asking for a reduction in private airlines’ fares? On the other hand, can private airlines cry foul when they keep going to the government for one kind of bailout or another?
As already stated, Aircraft Rules of 1937 do put the responsibility on DGCA to ensure that there is no predatory or excessive pricing of tickets. The regulator also has to ensure that there are no oligopolistic tendencies in civil aviation. All this has to be to the subjective satisfaction of the DGCA. The Aircraft Rules have thrust this responsibility on the DGCA. It is, therefore, for the DGCA to determine whether the sudden jump in prices was a simple case of demand and supply or a case of oligopolistic developments by which airlines were creating an artificial shortage and making prices jump to make windfall gains. It may also be pointed out that private low-cost carriers have set the trend that keeps down prices and have been instrumental in the lowering of ticket prices in general. In the present case, it has been noticed that not only were the ticket prices of low-cost carriers as high as those of full service carriers, they were actually higher in some cases. This new tendency gives an indication that there might have been an oligopolistic trend in the market. Airlines seeking bailouts and fiscal concessions from the government is a separate issue and has no connection with this matter.
Is it the DGCA’s responsibility to keep a watchful eye on the pricing of airline tickets in spite of the sector having been deregulated?
Yes, it is. The DGCA of India is required to maintain a surveillance over prices to ensure that there is no predatory pricing, no excessive pricing or formation of cartels. The Competition Commission is the right forum in case cartelisation is taking place and collusive pricing of tickets is being done. In case DGCA finds prima facie collusion between airlines, it should recommend the case to the Competition Commission of India for investigation and disposal.
The author is chairman, International Foundation for Aviation, Aerospace and Development (India Chapter)
As tariffs on most domestic routes climbed up, the Union civil aviation ministry and the sector regulator sprang into action to give private airlines a rap on the knuckles for jacking up tariffs. Was this a legitimate government intervention? We examine the issue, as always, in a simple Q&A format
How do airline fares get determined? It must be stated at the outset that pricing of airline tickets is not within the purview of India’s aviation industry regulator, the Directorate General of Civil Aviation (DGCA). And airlines are free to fix the price of their tickets. This is subject to DGCA’s Route Dispersal Guidelines, which require airlines to fly 10% of their trunk routes in remote areas like J&K, the North-East, Andaman, and Lakshwadeep Islands. Within this framework, airlines determine their own fares. However, under Aircraft Rule 135, framed under the Aircraft Act of 1934, the DGCA has the obligation of oversight of ticket prices. I quote the relevant sub-sections of this rule: Subsection 4: Where the Director-General is satisfied that any air transport undertaking has established excessive or predatory tariff under sub-rule (1) or has indulged in oligopolistic practice, he may, by Order, issue directions to such air transport undertaking. Subsection 5: Every direction issued under sub-rule (4) shall be complied with by such air transport undertaking.
Airline pricing is an intricate exercise in marketing. The ticket price does not necessarily have anything to do with distance travelled. A long-distance ticket can be cheaper than a short-distance one. Three persons sitting in a row could easily be paying three different prices for the same journey. Date of purchase will also vary the ticket price. The day of travel, say weekend vs week day, will vary and impact price. The ticket price is a marketing exercise based on demand and supply. In addition, it also takes into account how to attract customers from other airlines and to create customer loyalty. It is based on complicated computer programmes, taking into account various factors like the ones mentioned above, to maximise profit and create customer loyalty.
However, in developing a perfect airline price search engine, there have been many problems and little success. The problem gets even more complicated in real life when thousands of fares may play out in a journey involving changes and halts. Are there trend issues involved? If there is indeed a predictable seasonality, did the Indian government get involved at a misleading juncture, in so far as fares will start going up again around Christmas?
Yes, trend issues are involved as different seasons have distinct demands. Christmas-New Year is one such season; school holidays bring their own demand. During the ‘high season’, one can expect an increase in price due to demand and supply playing out in a free market environment. But the recent surge in prices was not really based on any established trend. The growth in the economy led to an increase in demand.
Is there an airline cartel operating in India?
Cartelisation is never done openly and announced. But cartelisation in the airline sector is a known phenomenon. Due to strong anti-trust legislation and compliance pursued in western countries, there have been many proven cases of cartelisation by airlines. What constitutes cartelisation? Cartelisation can be defined as an ‘abuse of dominance’ when dominance can be considered at 50% market share. How does one define ‘abuse’? Abuse of dominance will involve collusive action by airlines, to jack up prices from their position of dominance. Is the present case of high ticket prices one of cartelisation and abuse of dominance or is it a simple case of changing demand and supply? As per a recent newspaper report, the ratio of the number of ticket sales to the number of seats available per day does show that the sudden hike in prices may not have been a simple case of demand and supply. There is evidence that ticket prices shot up very high for flights that actually carried a significant number of vacant seats. If this is correct, it suggests the creation of an artificial shortage in the face of rising demand. A working analogy would be to wholesalers hoarding potatoes to jack up prices and make windfall profits. But before we come to this conclusion, we need to properly check up on the statistics. This can be best done by the Competition Commission of India. Can a cartel exist in a sector that has the participation of a government player? Air India, in this instance.
Certainly. Public sector monopolies have often abused their monopoly or dominant position. In the airline sector, Indian Airlines was a monopoly to begin with and then went on to become the price leader in the nineties. At that time, ticket prices did go up due to monopolistic or oligopolistic conditions. While government approval was taken in advance, high overheads and allowances ensured that the airline needed to charge higher ticket prices to make a profit or even break even at times. Any way, even in the nineties, the dominant player and market leader would set the trend and others would follow. It was only after the advent of low-cost carriers that free market-determined pricing based on demand and supply became operational in the Indian skies.
Was civil aviation minister Praful Patel being fair in asking for a reduction in private airlines’ fares? On the other hand, can private airlines cry foul when they keep going to the government for one kind of bailout or another?
As already stated, Aircraft Rules of 1937 do put the responsibility on DGCA to ensure that there is no predatory or excessive pricing of tickets. The regulator also has to ensure that there are no oligopolistic tendencies in civil aviation. All this has to be to the subjective satisfaction of the DGCA. The Aircraft Rules have thrust this responsibility on the DGCA. It is, therefore, for the DGCA to determine whether the sudden jump in prices was a simple case of demand and supply or a case of oligopolistic developments by which airlines were creating an artificial shortage and making prices jump to make windfall gains. It may also be pointed out that private low-cost carriers have set the trend that keeps down prices and have been instrumental in the lowering of ticket prices in general. In the present case, it has been noticed that not only were the ticket prices of low-cost carriers as high as those of full service carriers, they were actually higher in some cases. This new tendency gives an indication that there might have been an oligopolistic trend in the market. Airlines seeking bailouts and fiscal concessions from the government is a separate issue and has no connection with this matter.
Is it the DGCA’s responsibility to keep a watchful eye on the pricing of airline tickets in spite of the sector having been deregulated?
Yes, it is. The DGCA of India is required to maintain a surveillance over prices to ensure that there is no predatory pricing, no excessive pricing or formation of cartels. The Competition Commission is the right forum in case cartelisation is taking place and collusive pricing of tickets is being done. In case DGCA finds prima facie collusion between airlines, it should recommend the case to the Competition Commission of India for investigation and disposal.
The author is chairman, International Foundation for Aviation, Aerospace and Development (India Chapter)
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