Sunday, June 17, 2007

Air fisher or king deccan!

New regulatory & infrastructural challenges in aviation

After reporting the ongoing crisis in Rajasthan (a perverse outcome of the reservation imbroglio led by the Gujjars), one of the national news channels announced that the cost of the flight from Jaipur to Delhi has shot up from Rs. 1750 to Rs. 17,500 per ticket. Furthermore, even with a ten fold increase, tickets were unavailable for most of the passengers. This was due to the fact that the passengers did not have any transportation alternative, as the roads and trains from Jaipur to other parts of India were blocked by the agitators. This made me wonder about the economics of such a peculiar price rise. Obviously, owing to the absence of substitute and near-substitute forms of transportation, the price of air travel was bound to go up. On the other hand, if we had an adequate number of flights from Jaipur, then probably the prices would still have gone up, but not to this extent. Even if the reasons for the price hike might be unpleasant, one has a lot to learn from Jaipur episode.

Fortunately (and also exceptionally), Jaipur has a wonderful road and rail network, connecting one with at least Delhi, but the same is not true for other parts of India. In the given scenario, liberalisation in the aviation sector and the consequential entry of low cost airlines was a big boon for the middle class. Another advantage accrued was the wide array of airlines that the passengers were exposed to, along with the pricing advantage. In order to woo the first-time passenger, the airline companies promoted the much-feted pricing schemes and indulged in under-pricing. An article in the Business Line quotes that the airline industry loses an estimated Rs. 2,000 Cr. annually. Overall, the aviation story has been such a huge success, that the existing airport infrastructure fell way short of the passenger load. Airports resemble regular inter-state bus terminals.

In the on going consolidation in the airline industry, the ones who suffer the most are the passengers travelling by low-cost airlines. Three months back, the passengers had a choice of eight airlines, which has reduced to six. As further consolidation takes place, the options available are going to implode (more so due to the likely merger of Air India and Indian). The more the passengers lose their discretionary power, the existing pricing advantage (having been primary driver of demand of the industry) constricts further. The reason: as the intensity of competition reduces and the industry becomes a greater oligopoly, companies would then tend to charge a premium and even collude to manipulate price, if there was a oversight by the regulatory authority. The remnant of the bit players wield virtually no power, lack the ingenuity to move the market and woo that additional passenger. Invariably, the whole of India would be no different from the blockaded NH-8.

To protect the interests of passengers, there are only two options before the government. Either ensure a sound rail & road infrastructure or observe this consolidation as a mere spectator. In case of the former, passengers have multiple options and can exercise their discretion, a function of urgency and price elasticity. As this would take up a lot of time, it can at least ensure a robust regulatory regime and ramp up amenities for passengers at all airports.


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