<p>With competition and new purchases of aircraft, the travellers had a great time flying on unbelievably low priced air tickets.<br /><br />The LCC overtook the Full Service Carriers and the Indian middle class started flying on holidays. But free market is not always the best model. Excess demand and limited supply do create high priced tickets when there is a scarcity. Today the growth of domestic air traffic is touching 20% and airlines are finding good times returning but with shortage of seat capacity the ticket prices are shooting through the roof, especially if you want to buy one at short notice. The Minister addressing a seminar has made a statement that these may be predatory prices and need to be checked. Mention has also been made of cartelisation and the need for Competition Commission (CC) to look into this. It’s easy to jump to such conclusions but, looking at about 20% growth in domestic traffic it may be neither. Do we then allow the prices a free float at the cost of consumers/travellers? <br /><br />Can this qualify as predatory pricing? Predatory prices apply when one airline tries to reduce the price to capture the market. This does not appear to be a case of predatory pricing. Can this movement in price be considered to be a case of collusion between airlines? This would amount to cartelisation, an oligopolistic action and would be subject of action by CC. It may be recalled that CC has taken suo moto cognizance on the alleged cartelisation between Jet Airways and Kingfisher Airlines and the matter is still sub judice. This also does not appear to be such a case from indications available. It then seems to be a result of demand and supply gap resulting from a 20% growth.<br /><br />Demand supply gap <br /><br />What would be the legal position in such a case? We must also remember that other means of transportation in India and abroad generally go for fixed prices like the railways and buses and are based on distance travelled. This is not applicable in air transportation as there is no government control on fixing of tariff. Airlines follow their own policies depending upon demand and supply. They take the risk of buying the aircraft and running them on a scheduled service. As there is no assured traffic and it can vary from season to season, between weekdays and weekends, holiday season to normal days, the airlines have to manage their bottom line and profits by “intelligent” ticket pricing. There is also the insidious outcome of uncontrolled pricing due to demand going up on account of unfortunate and unforeseen incidents. For example, during the recent two incidents of cloud burst at Leh and air crash at Mangalore, when next of kin were wanting to rush to these sites, the ticket price shot up very high.<br /><br />So we come to the ethical issue: Is price control of airline ticket by a government authority in public interest? Is free market not the best determinant of public interest? I think free market is an overrated concept based on demand and supply. Perfect market as provided in text books does not exist. How then do airlines in India fix their tariff? Earlier, Indian Airline as a public sector airline and market leader was the price setter. It is not clear now who is the market leader, especially with LCCs (in the present case some LCCs charged higher than regular airlines). With travel websites providing ticket prices online, it is the consumer who has a perfect knowledge in an imperfect market. The sudden blips in prices or anticipated increase during known season are based on statistical modelling. <br /><br />Limited powers<br /><br />The DGCA has limited powers. However the Aircraft Rules of 1937 framed under the Aircraft Act of 1934 has a provision which meets the requirement. Under rule 135 dealing with tariff, subsection 4 and 5 state:<br /><br />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.<br /><br />Subsection 5 - Every direction issued under sub-rule (4) shall be complied with by such air transport undertaking.<br /><br />The DGCA has correctly used this rule to consider the sudden high increase in tariff currently as ‘excessive’ as otherwise airlines are free to set their own fares and Ministry cannot interfere. Furthermore, Ministry cannot presume collusion. <br /><br /><em>(The writer is Chairman of International Foundation for Aviation, Aerospace and Development (India Chapter) and former Joint Secretary, Civil Aviation Ministry.) <br /><br /></em><a href="../content/118104/autonomous-regulator-must-passengers-body.html">Autonomous regulator a must: Passengers’ body</a><br /><br /><a href="../content/118106/pricing-mechanism.html">The pricing mechanism</a></p>.<p><a href="../content/118111/airborne-fares-may-hit-air.html">Airborne fares may hit air pocket</a> </p>
<p>With competition and new purchases of aircraft, the travellers had a great time flying on unbelievably low priced air tickets.<br /><br />The LCC overtook the Full Service Carriers and the Indian middle class started flying on holidays. But free market is not always the best model. Excess demand and limited supply do create high priced tickets when there is a scarcity. Today the growth of domestic air traffic is touching 20% and airlines are finding good times returning but with shortage of seat capacity the ticket prices are shooting through the roof, especially if you want to buy one at short notice. The Minister addressing a seminar has made a statement that these may be predatory prices and need to be checked. Mention has also been made of cartelisation and the need for Competition Commission (CC) to look into this. It’s easy to jump to such conclusions but, looking at about 20% growth in domestic traffic it may be neither. Do we then allow the prices a free float at the cost of consumers/travellers? <br /><br />Can this qualify as predatory pricing? Predatory prices apply when one airline tries to reduce the price to capture the market. This does not appear to be a case of predatory pricing. Can this movement in price be considered to be a case of collusion between airlines? This would amount to cartelisation, an oligopolistic action and would be subject of action by CC. It may be recalled that CC has taken suo moto cognizance on the alleged cartelisation between Jet Airways and Kingfisher Airlines and the matter is still sub judice. This also does not appear to be such a case from indications available. It then seems to be a result of demand and supply gap resulting from a 20% growth.<br /><br />Demand supply gap <br /><br />What would be the legal position in such a case? We must also remember that other means of transportation in India and abroad generally go for fixed prices like the railways and buses and are based on distance travelled. This is not applicable in air transportation as there is no government control on fixing of tariff. Airlines follow their own policies depending upon demand and supply. They take the risk of buying the aircraft and running them on a scheduled service. As there is no assured traffic and it can vary from season to season, between weekdays and weekends, holiday season to normal days, the airlines have to manage their bottom line and profits by “intelligent” ticket pricing. There is also the insidious outcome of uncontrolled pricing due to demand going up on account of unfortunate and unforeseen incidents. For example, during the recent two incidents of cloud burst at Leh and air crash at Mangalore, when next of kin were wanting to rush to these sites, the ticket price shot up very high.<br /><br />So we come to the ethical issue: Is price control of airline ticket by a government authority in public interest? Is free market not the best determinant of public interest? I think free market is an overrated concept based on demand and supply. Perfect market as provided in text books does not exist. How then do airlines in India fix their tariff? Earlier, Indian Airline as a public sector airline and market leader was the price setter. It is not clear now who is the market leader, especially with LCCs (in the present case some LCCs charged higher than regular airlines). With travel websites providing ticket prices online, it is the consumer who has a perfect knowledge in an imperfect market. The sudden blips in prices or anticipated increase during known season are based on statistical modelling. <br /><br />Limited powers<br /><br />The DGCA has limited powers. However the Aircraft Rules of 1937 framed under the Aircraft Act of 1934 has a provision which meets the requirement. Under rule 135 dealing with tariff, subsection 4 and 5 state:<br /><br />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.<br /><br />Subsection 5 - Every direction issued under sub-rule (4) shall be complied with by such air transport undertaking.<br /><br />The DGCA has correctly used this rule to consider the sudden high increase in tariff currently as ‘excessive’ as otherwise airlines are free to set their own fares and Ministry cannot interfere. Furthermore, Ministry cannot presume collusion. <br /><br /><em>(The writer is Chairman of International Foundation for Aviation, Aerospace and Development (India Chapter) and former Joint Secretary, Civil Aviation Ministry.) <br /><br /></em><a href="../content/118104/autonomous-regulator-must-passengers-body.html">Autonomous regulator a must: Passengers’ body</a><br /><br /><a href="../content/118106/pricing-mechanism.html">The pricing mechanism</a></p>.<p><a href="../content/118111/airborne-fares-may-hit-air.html">Airborne fares may hit air pocket</a> </p>
