The Irrational Airfares

There is only one thing that is more volatile than Sensex i.e. Airfares. In fact it’s unfair to compare both. Sensex has some logic and sense and one could calculate the risk to a very reasonable extent. But that’s not the case with Airfares. One could never apply any logic and it has become a pure gamble to buy your air tickets in advance.

cartoonThis Friday I checked the fare of Mumbai-Delhi return flight around mid-April and it stood around Rs. 5200, which is quite reasonable. But maybe not reasonable if I compare it with what I paid in the month of February i.e. Rs. 3850 (lowest ever I have paid). But there was a good logic attached to the reason behind the cheapest fare ever.  I’ll discuss that soon.

I remember if you booked your air tickets around 30 days in advance in 2007-08, it would be quite pocket friendly. The average Mumbai-Delhi return ticket would cost around Rs. 4500-5000 during the year 2007 and the first half of 2008. Flight ticket prices are directly affected by the fluctuation in crude oil prices since ATF (Aviation Turbine Fuel) charges amount to almost 45% of the total cost of operations incurred by the airlines in India. For most part of the year 2007 crude oil prices fluctuated between the ranges of $50-$65 per barrel. This was one of the factors that enabled the low cost airlines to slash their ticket prices. The crude oil price started moving north from the month of October in 2007 when it averaged around $77 per barrel and touching the high of $86 in the month of November 2007.

As the crude oil prices showed resistance at the $84 levels in the beginning of the year 2008, the airlines were naturally forced to increase the airfares. The continuous north bound trend in the crude oil prices that was all times high in the months of June and July in 2008 (average of $126 per barrel) resulted in the sharp increase in the airfares. That was the time when Mum-Del return ticket would not cost you less than Rs. 8500. People stopped travelling by air and Indian Railways welcomed their passengers back.

This was the time when business experts wondered if crude oil prices could breach the $200 per barrel mark. The sudden economic slowdown, led by Lehman Brothers bankruptcy, prevented the crude oil from breaching the sky high mark of $200 per barrel. The slash in the crude oil prices was sharper than its rise with the crude oil price touching as low as $33 in the month of December 2008. It was the price that was last seen in the month of June 2004. Government of India also abolished the 5% custom duty in November 2008 to keep the domestic airline industry alive.

The current air fares defy all the logics that have been followed so far. With the Crude oil prices hovering around $45 (marginally below the 2007 levels) and the benefit that abolished 5% custom duty provides along with the reduced salaries of the staff, the airfares should be way below the current market price. The current market price of the Mum-Del return flight nears Rs. 8500 (if booked 20-30 days in advance). The logical price of the Mum-Del return flight should not be more than Rs. 5000. The current air fares are illogical and such a high price in this time of recession is nothing but utter nonsense. If the air fare was half the price of the current prices just a month ago, I wonder what the hell on earth has happened in past one month to increase the prices two fold. 

The airlines are taking advantage of the declaration of upcoming elections. The airlines are in the mood to make the moolah till the time government doesn’t take any action.

~ by pankajsingla9 on March 16, 2009.

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