Indian Railways' surge pricing: Why strategy for premium trains is myopic and bad move

The surge pricing as a business strategy is myopic. In the short run, passengers may be willing to pay and Indian Railways may also make some money. But in the long run, it will turn them away

Jai Mrug September 08, 2016 12:44:04 IST
Indian Railways' surge pricing: Why strategy for premium trains is myopic and bad move

Sometime in November 2014, I hailed a cab back from the airport to my house. The cab driver, as numerous of them in Mumbai are, was from Uttar Pradesh. An avid fan of the Indian Railways that I am, I asked him about the punctuality of trains from his home state (which, most railway fans will acknowledge, have a notorious reputation for being late). I was accosted by a conversation which I feel must be a primer for most politicians in India.

He said punctuality was fine, it did not pinch him much. But what about kaala dhan? For a minute I failed to countenance why he referred to kaala dhan. It struck me without much delay that he was referring to the BJP's pre-election promise to bring back the black money stashed abroad. But what did it have to do with my poser?

He then said that when he went to drop of some of his relatives to the train station, he offered money for two platform tickets at the counter. The ticketing clerk asked him to shell twice the money he used to pay. As the acche din has dawned on the country, the platform ticket prices had then just been doubled by the NDA government.

Indian Railways surge pricing Why strategy for premium trains is myopic and bad move

Rajdhani Express. AFP file

The cabbie was of the view that had the government brought back the kaala dhan as promised, there would have been no need to raise the platform ticket prices.

The unreason behind his kaala dhan story aside, there is a fundamental truth in the entire plot which most politicians miss. You cannot pass on what you assume is user charges, unless you make your system proportionately efficient. In other words, a charge which does not provide any value addition will only create disenchantment among the consumers.

That is the simple reason why there is so much of resentment against the Indian Railways' plan to introduce surge pricing in the premium trains such as Rajdhani, Jan Shatabdi and Duranto. According to the plan, to be implemented from Friday, travellers booking tickets on these trains will have to pay 10-50 percent more under the dynamic surge pricing system. As per the PTI report, 10 percent of the seats will be sold in the normal fare in the beginning and then on the fares will increase by 10 percent with every 10 percent of berths sold with a ceiling of 50 percent on the fare rise.

The plan has turned out to be a political hot potato with opposition parties terming it 'anti-people'.

It has to be remembered the surge pricing system has been introduced at a time when the commuter is already under the impression that the railways has short changed him. After the price rise of tatkal tickets and earmarking of tatkal quota at 30 percent, the middle class was just waiting for one more chance to start yelling again. What has made matters worse is the fact that surge pricing as a business strategy is seen in the grey area of business ethics.

To put things in perspective, one has to analyse at the latest strategy along with some of the steps taken by the railways in the past two years that are aimed at extracting money from the common man, leaving several questions unanswered.

One such case was the abolition of the half ticket in April. The current surge pricing as planned by Indian Railways has to be seen in this back drop.

Now let's get into the details. One could look at the surge pricing plan both from political perspective and as a business strategy.

The railways currently starts booking four months in advance and has 30 percent of the seats for tatkal. After taking into account the VIP and other forms of quota which take away another 10 percent, roughly about 60 percent of the seats are available for the general public for booking four months in advance.

The new policy states that 10 percent of the tickets would be sold at the current base rate. Assume these are exhausted in the first ten to 15 days. Your price now goes up by another 10 percent. So effectively approximately 50 percent of the seats are left for you after the first surge pricing has taken place. As these get consumed at each progressive step of 10 percent increase in occupancy there is a rise of 10 percent in the base fare. So the last 10 percent which is available to the public will be at a full surge price of 50 percent.

So in a decent season approximately 50-60 days before the date of travel you are likely to hit the peak surge fare. After that it’s party time for the railways. It is going to charge 50 percent hike on the normal ticket, or force you to buy a tatkal ticket, which will be priced even higher with a tatkal charge.

Let us work out a few scenarios for the Mumbai-Delhi Rajdhani.

The surge price ticket for 2AC is likely to be Rs 4,054 about 50 days in advance. Now assume I am getting a waitlisted ticket, as the approximate 60 percent general quota is exhausted. Then will I risk myself with an unconfirmed travel or buy a flight ticket? A flight ticket about two months in advance is most likely to be reasonably priced around Rs 5,000. So what is railway minister Suresh Prabhu effectively doing? He is ensuring that you junk the railways and migrate faster to the airlines.

Let us take the scenario still later in time, say 20 days in advance before the travel. You now have a wait-listed ticket, which looks like having a hopeless chance of getting confirmed. The railways then provides you a still more riskier option. It says wait until the day before the scheduled travel, and then you may get a tatkal ticket which has the tatkal premium as well added to the latest fare (this we are yet to get clarity about). The truth is your travel is until the the last 24 hours.

A simple math shows you that is the Railways levies a tatkal premium on top of my surge price, the ticket charge approximately is Rs 4,500. Isn't it better to trade off the uncertainty well in advance with a small premium? So you pay Rs 6,000 to an airline, which will give you a confirmed ticket and, of course, peace of mind. It’s actually a double-whammy for the railways.

Above all this, as a government that promised acche din, should the NDA be trading in the grey area of business ethics? The methods the government uses to arrive at the pricing of its services should be reasonable. The common man will indeed understand that - but only that.

Remember in 1998 he tolerated onions even at Rs 40 a kg? But when onion prices touched an unreasonable Rs 70 per kg, the government fell. The common man may not understand the mathematics of the Rail Bhavan but much like the invisible hand in the market he has an idea of what is reasonable pricing. It's about getting the numbers by honest means. Mandarins at the Rail Bhavan don’t have to face the electorate. Those who govern don’t have a choice.

The surge pricing as a business strategy is myopic. It might get frustrated passengers to pay more in the short run, and the railways might earn a few pennies now. But in the long run, it will turn the passengers away. The government will get anti-incumbency as an added bonus. The railways should shun such silly ideas.

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