Flexi Fare on Indian Railways

I love dynamic fares and I wrote about their need on Indian Railways long time ago (2011) in this blog article. I had talked about several ways in which fares could be made flexible.

I was excited when the Railways introduced dynamic fares in a Rajdhani like train between Delhi and Mumbai, and I wrote this blog article in December, 2013.

When they introduced dynamic fares on a system-wide scale in the name of "Premium Tatkal" I wrote another blog article praising the move, even though I said that this was a poor implementation of dynamic fares.

My hope was that Railways will learn about market, about demand and supply, and will learn to price their product better through this experiment.

They have taken the next step and introduced something called "Flexi Fares" on Rajdhanis, Shatabdis, and Durontos, the premium trains of the Indian Railways. The fares will increase with bookings, 10% after 10% seats are filled, upto a maximum of 50%.

And this time, I am beginning to believe that Railways is not really thinking about the market, about demand and supply. They are only thinking of higher revenues. Thinking of higher revenues is a legitimate business strategy. However, when you think of higher revenues without thinking of what the market can bear, it may not lead to desired goals.

I understand that Dynamic fares or Flexi fares are the only politically correct way to raise fares, and with a background of no fare hike for almost a decade, several large fare hikes in quick succession are needed to bring railways back to some kind of financial health and Mr. Prabhu is doing that. What has happened is that the fares on these trains have just gone up by 50% with a few tickets being sold at less than that.

My problem with the hike is just that. That it is not introduction of dynamic fare. The fares are completely fixed and do not depend on demand. Yes, there are a few price points. Ideally, Railways should do what airlines do - keep following their own bookings for every flight, keep looking at the competition, and decide fares based on their estimate of the demand and supply around that particular flight. If the 10% seats get filled up the day reservations open 120 days in advance, that is a very different demand than if the 10% seats get filled up over the next 60 days. Second, they also need to look at their competition - status of other trains close to Rajdhanis/Shatabdis/Durontos - are people booking them instead, or are they too not having heavy bookings, as well as status of flights and at least good quality bus services.

A truly dynamic fare will be more acceptable to public than what IR has done. It would really hurt to see a half empty coach when I have paid the "surge" pricing. Dynamic fares would have meant that in the lean season, the increase is smaller but in the holiday season coming up, the fare would go up higher.

In terms of fare increase, I think this was needed, and this was overdue. These are premium trains, and no poor person travels by these trains. There is no reason for subsidizing higher classes in premium trains.

A lot of comments on social media say that these trains would become unviable. They wouldn't be able to find enough AC-2T passengers on Delhi-Mumbai or Delhi-Bangalore Rajdhanis. Yes, there won't be many end-to-end passengers on most Rajdhanis on most days. Already, at least in the current lean season, air fares are cheaper than AC-2T fares on Rajdhanis. But this is where the planning by Railways become crucial. My favorite example for these discussions is Lucknow-New Delhi Shatabdi. The Lucknow-Delhi air fare is cheaper than Executive class fare, and the fare on Chair Car after 50% hike would be right there too. So in the lean season, I would expect the passengers to take flights. But come busy season, people will be back to Shatabdis since the air fares will be much higher. However, if Railways can earmark more quota from the intermediate stations, like Kanpur, from where there are no flights, they can really double the fare and still find passengers. But will Railways give more seats to Kanpur and other intermediate stations. Similarly, I would expect much fewer passengers on Delhi-Howrah Rajdhani traveling end-to-end. But I would expect more passengers to board from Kanpur, Allahabad, etc. if the quota from these places go up.

At least till the regional air connectivity scheme takes off, giving more seats to inter-mediate stations would give a lot of dividend to the Railways.

My fear is that increasing the upper class fares substantially without linking them to demand and supply and without a plan to fill those seats through quotas of intermediate stations, would cause the AC coaches to remain vacant, and then someone is going to say, there is not enough patronage of such trains, and let us stop this train, or remove upper class of service. So we could have reduced capacity not because there was reduced demand, but because that demand was not managed properly.

By the way, if the Railways finances were more transparent, and someone could show that the cost of transporting an individual in AC-2T over long distance like Delhi-Bangalore is inherently more than a flight seat over the same distance, I would have no problems if long distance upper class seats are reduced substantially. If economics of transport options is such that for a certain route trains can't compete with flights, we shouldn't mourn the death of passenger trains in those sectors. May be we can have more freight trains instead on those sectors. However, my fear is that in the absence of any transparent way of apportioning costs, such decisions could be arbitrary.

One of the criticisms that I consider valid is that Mr. Prabhu is trying to avoid taking tough decisions. Is he willing to increase fares or pass costs in Mumbai suburban. Why not increase fares of 2S and unreserved tickets, which are heavily subsidized. The fare hike in Rajdhani/Shatabdi/Duronto is just testing the waters. If there is enough noise, after a certain period, we will see partial roll back. If there is not enough noise, the experiment would be extended to other express trains as well. However, from all what I am hearing, even if this experiment is extended, it will be only for AC classes in mail/express/superfast trains, or at best SL class in a few trains. Without tackling the biggest sources of subsidy, you aren't going to take Railways out of that proverbial ICU.

We don't need flexi fares or premium tatkal fares. We need market linked fares. And we need market linked fares not just for AC classes, but also for SL class. And, of course, we need to recover a greater part of the cost of suburban and passenger trains as well.