Railways needs a revenue manager, not a tariff regulator; here's why

The Indian Railways (IR) is expecting a 94 percent Operating Ratio, (they had targeted an operating ratio of  92 percent) despite wage hikes, and falling revenue. What is more a matter of concern than managing the operating ratio is the falling passenger and freight revenue of the Indian Railways.

The dip in gross earnings in the first five months of FY’16-17 is about 13 percent lower than targets and five percent lower than the same period a year ago. On the freight side, the Indian Railways increased its tariff in late August by up to 19 percent to compensate for loss in traffic volumes. Whether that has really helped IT recover freight revenues is a matter of debate.

Representational image. AFP

Representational image. AFP

On the passenger revenue side, in September, Indian Railways came up with surge pricing in select trains. They were expecting to mop up close to a 1000 crore through the surge pricing scheme. In this financial, however, in a small window of 1-10 October, their revenues fell by 232 crore, including passenger revenues from surge pricing.

One of the responses has been to finally acquiesce to having a fare regulator, to decide upon fares regularly.

While this is being hailed as a revolutionary decision, the real challenge is what would be the content of decision-making of the regulator. Will it understand the dynamics of market forces or follow the same beaten path of surge pricing which will further make passenger services non remunerative for Indian Railways? That is the real question of the moment.

Following surge pricing, a number of trains like Mumbai Rajdhani, August Kranti Rajdhani, Sealdah Rajdhani and Trivandrum Rajdhani have a large number of vacant seats during mid-December. Often there used to be a scramble to even obtain tickets in these trains in the tatkal quota. What the Railways failed to understand is that they were in the business of transportation, and not in the business of just running a public undertaking with pay commission obligations, that incidentally had a railway line also to take care.

So while the IR increased its fares dynamically, airlines undercut the market by offering tickets at Rs 3,000 to popular destinations like Goa and Kochi, often cheaper than the Rajdhani and Shatabdi fares.

While there is a long-term vision of offering value-added  services and creating a new class of greater service offerings to passengers such as UDAY, Humsafar, DeenDayalu etc., the fundamental premise of each one of them is to seek better cost recovery.

The question that nobody is asking is, whether that cost in itself is competitive in the market or not. Else, how could the airlines and even bus services beat the Railways at costs over a huge spectrum of routes and time periods. The question of the fare regulator is therefore in a way a little secondary, and also not the right solution to a problem whose symptoms are at least seen rightly.

On long-haul sectors such as Mumbai-Delhi and Delhi-Sealdah, the Rajdhanis were beaten by airlines, while on sectors such as Chennai-Bangalore, the Shatabdis were beaten by private bus operators.

So what can the fare regulator do, replicate a policy that has already failed ?

Rather than a fare regulator, which will only tinkle with fares keeping the Railways cost structure in mind, what is needed is a professionally-run revenue management stream for railways. Much like most airlines also have a revenue management function.

The revenue management function needs to optionally discount fares, or increase them with a single goal of increasing occupancy and thus the amount of marginal revenue. The operating costs of a train do not decline or increase with the occupancy. However, if you can increase marginal revenue over the same operating cost you make more money. That needs to be the fundamental premise. In fact, discount prices should kick-in far in advance just like airlines do, not waiting for the last day to kick in a 10 percent discount like Railways have ideated, and that too on the last surge pricing fare, which just does not work.

In fact, the huge investments in road infrastructure and reducing airline fuel costs are facts that railways needs to live with. They will, therefore, have to work more on discounting fares rather than passing the so-called cost burden through the portal of a regulator to the consumer, and increasing fares. That would be more suicidal than the surge pricing scheme itself.

So there we go: Are there any CVs of Revenue Managers available? Fare Regulator should be considered passé .

(The author is CEO of M76 Analytics which is a SINE, IIT Bombay company)

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Published Date: Jan 11, 2017 08:49 pm | Updated Date: Jan 15, 2017 09:06 pm

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