How Indian Railways’ flexi fare scheme impacts its revenue

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How Indian Railways’ flexi fare scheme impacts its revenue

New Delhi: Indian Railways needs revenue, no doubt, but can it afford to be selective about its customers?

This debate was sparked off by the flexi-fare scheme introduced by the national carrier in 2016 for the 142 “premium trains” such as Shatabdi, Rajdhani and Duronto. Under this dynamic pricing system, the base fare increases by 10% with every 10% of berths sold, with a limit set at 1.5 times the original price. The scheme was applicable to all classes, except AC first class and executive class. The pricing system is still in force.

How Indian Railways’ flexi fare scheme impacts its revenue

The reasoning behind it was simple. Indian Railways carries around 8.4 billion people every year, according to railway officials. Of this, only 140 million would be impacted and they have the purchasing power to afford it.

Railways minister Piyush Goyal and his predecessor Suresh Prabhu have on several occasions supported flexi-fares stating that it is applicable only to those passengers who have the ability to pay. “Those who cannot pay, for them the trains are different and the fares are same for last few years,” Goyal said. They also argued that as the model of surge pricing has been used successfully by industries such as airlines, taxis and hotels, it only made sense for the railways to also do so.

However, while drawing upon the fundamentals of dynamic pricing, what Indian Railways failed to introduce was the simple principle that flexi-fares work both ways, hikes and declines. The railways model just focused on increasing fares with no provision for a decrease in price when demand is low.

“Railways is divided over flexi-fares. While half of the decision makers in the Railway Board support it, half of them oppose it stating that what the railways requires is an increase in ticket prices across the board,” said a senior railway official on condition of anonymity. Railway fares, he pointed out, are a political issue, with the national carrier having subsidized low fares over the years.

After the introduction of flexi-fares, the railways lost 700,000 passengers in just 11 months while the additional revenue earned as a result of the scheme was ₹552 crore. The Comptroller and Auditor General (CAG) in August said the flexi-fare decision was bad and that Parliament should ask the railways to review it.

The loss of passengers worried the railways and it appointed a six-member committee to review flexi-fares, which came up with several suggestions on how the pricing system could be replaced. The committee recommended that trains with shorter travel times charge higher fare. It also said special premium charges could be levied for overnight trains, discounts could be given for travel on trains arriving at odd hours. It also suggested differential pricing for preferred berths, e-auctions on popular trains and higher fares when demand peaks, such as during the festive seasons.

The recommendations along with the CAG report and a public outcry indicates the decision on flexi-fares may have been wrong.

Ameya Pimpalkhare, associate fellow, and Paresh Rawal, consultant, at the Observer Research Foundation say that, historically, governments have successfully cut subsidies in petroleum and power to generate higher revenues. A similar strategy should be chalked out for the railways’ passenger business too, they argue. To successfully improve its passenger revenue, the railways can reduce the subsidy by increasing base fares by a few paisa per kilometre. As train tickets will still remain cheaper than airfare, the scheme will allow the railways to retain its upper class passengers, who pay more.

Taking a cue from the CAG, passengers representations and the committee report, the railways in October introduced changes to flexi-fares. It decided to cancel flexi-fares for 15 trains and remove them periodically for 32 others during the lean months of February, March and August. It also decided to reduce the cap from 1.5 to 1.4 times the base fare.

However, the move will impact only particular regions. The flexi-fare rationalization will reduce train fares for people travelling in Shatabdi trains in the northern states of Punjab, Haryana, Chandigarh, Himachal Pradesh and Delhi. Those travelling in the Chennai-Madurai Duronto, and Guwahati-Dibrugarh and Howrah-Puri Shatabdi, will also benefit. For the rest, the flexi-fares will remain the same.

With so many flaws, is flexi-fare the right choice for Indian Railways to earn revenue? Or should it go back to the drawing board and come up with a pricing mechanism that enjoys broader support and helps to improve its finances too?

source: livemint