Treading with caution on passenger fares

Indian Railways has little space to manoeuvre in terms of fare increases unless it provides a competitive advantage to its passengers

Treading with caution on passenger fares
Western Railway and green toilets: In order to achieve zero discharge of human waste on the tracks, Western Railway (WR) today said it has provided bio-toilets in 468 coaches so far and plans to install more of these in a phased manner.

The finances of Indian Railways are in a bad shape. As against an ideal operating ratio of 75-80%, the Railways is targeting an operating ratio of 92% for 2016-17, while hoping to end 2015-16 at 90%. The organisation, being the largest transporter in the country, needs huge amounts of money to put its house in order. One of the easiest ways is to increase passenger fares—which are currently cross-subsidising high freight fares—in order to make them more realistic and also enable the Railways raise resources. But increasing them may not be that easy.

Over the past few years, Indian Railways has been losing passengers. In 2012-13, the number of passengers who travelled on its network were 8,421 million, which got reduced to 8,397 million in 2013-14. This number further came down to 8,224 million in 2014-15, a decline of 2.06%. Examining the different classes of passenger travel and the pricing strategies therein provides us with insights to the problem.

The highly-subsidised unreserved, sleeper and suburban classes cater to the lowest strata of the society and any increase in these fares could have social and electoral implications. The third AC sleeper (3A) class, according to the Railways, is the most profitable among all classes. This class is 30-40% cheaper than fares charged by low-cost carrier (LCC) airlines. But any further increase in 3A fares would dent that advantage—if the price is marginally lower than that charged by LCCs, the middle-class passenger may decide to fly instead. The fare for second AC sleeper (2A) is marginally lower than LCCs and such passengers are steadily shifting to LCCs. The fare for first AC (1A) is equal to or in some cases higher than that charged by LCCs. This class has already lost a lot of passengers to the airline sector. In other words, the Railways risks losing a lot more of their most profitable passengers to air travel if AC class fares are increased. The dip in global oil prices has further made LCCs more competitive.

In addition, the Railways has resorted to indirect fare hikes. One of the biggest passenger-unfriendly moves was increasing the period of reservation to four months, and follow the same with an increase in cancellation charges. In today’s uncertain world, people are hardly able to plan their journeys in advance. A four-month period only means an increase in cancellations, leading to more income for the Railways. To take care of passengers who travel last-minute, the Railways introduced Tatkal scheme a few years ago, at a higher fare, and progressively increased the number of berths under this quota as compared to the general booking quota. As recently as in December 2015, the Railways increased Tatkal charges. It also brought in a new concept called Suvidha Trains on popular routes, with dynamic fare pricing aligned as a multiple of Tatkal fares that would increase on subsequent bookings. This could lead to a strange situation in some cases, wherein AC class fares could become higher than airfares for last-minute bookings. As a strategy, the Railways has been launching most new trains as superfast and converting existing trains to superfast; ironically, superfast is defined by a low average speed of 55kph, enabling the Railways to collect a superfast surcharge.

Indian Railways has to contend with high completion from both roads and air. The government has an ambitious programme to build expressways and highways, connecting important cities. This has led to an increase in average speeds of private vehicles, reducing journey times. Additionally, the high-speed Volvo buses on popular intercity routes—these are available at a maximum of one week’s booking—are becoming popular. Given that Indian Railways lacks really high-speed trains, on some sectors these Volvo buses complete the journey in lesser time than trains.

Certain sectors historically seem to be neglected by the Railways, compelling its profitable passengers to migrate to air. For example, on the Mumbai-Chennai sector, there is no Duronto, no Garib Rath or even an AC superfast train; the fastest train between these two major metros takes a long time of 23 hours.

Clearly, if it doesn’t focus on speed, Indian Railways would not be able to offer a value proposition to the target market segment, and passengers would increasingly try to look at alternatives in road and air travel; more so if train fares are further raised.

Indian Railways has little space to manoeuvre in terms of fare increases unless it provides a competitive advantage to its passengers. The road and air sectors poised on the cusp of a rapid expansion are a real threat to its growth. The Railways, therefore, should look at developing alternative sources of generating income instead of relying mainly on periodic fare revisions.

Written By: V V Ravi Kumar. The author is associate professor, Symbiosis Institute of Business Management, Pune.
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