Base airfare to come down post unbundling of srvcs: KPMG

The base fares of the airline companies are likely to come down post unbundling of services by government, noted Amber Dubey, partner, KPMG. Today, the government allowed airlines to charge passengers for preferred seats , check-in baggage and meals among other things, which will essentially raise the cost of air travel.

However, the government argued that this move would result in a lower base fare. Agreeing to this view, Dubey explained that people will now only pay for services that they are using.

"The base fare will definitely come down. But by how much? It is something which only time will tell because almost 80-85 percent of the cost base of a airline is anyway fixed,” he said.  Most of the airline costs such as fuel, airport charges, wages and salaries, and aircraft leasing are fixed, leaving very little room for companies to reduce base fare.

This move will also allow airlines to cross-subsidise and reduce fares with the use of these extra amenities. Dubey said that apart from reduction in air fare by a few rupees, what is a bigger positive is that government is slowly relaxing its intrusive control on the airline sector.

Below is the verbatim transcript of the interview

Q: The government’s argument is that the base fare will now be lower and then customers can actually add on services as per their choice and they pay for those services. So fares will actually come down, is that true?

A: Yes absolutely, because pretty much now people will pay for what they use and which means that the base fare will definitely come down. How much? It is something which only time will tell because almost 80-85 percent of the cost base of a airline is anyway fixed whether it is the fuel or the airport charges, wages and salaries, aircraft leasing, most of that is fixed. So, there is pretty much very little margin or room for airlines to reduce fare. But definitely this will allow pricing to be fixed as per the services which you actually use. So yes, base fares will come down by a notch.

Q: As you were pointing out that there is very little room for airlines to actually reduce the base fare because 80 percent is actually fixed cost. In that scenario when you start saying alright, you need to pay for your check-in baggage, if you are carrying an instrument you need to pay for the instrument, if you want an aisle seat or a window seat you need to pay for that additionally, food you are anyway on most low-cost carriers paying. Will the incremental cost not increase for the customer?

A: Yes, but only if you are using that. So if there are only three rows, which have extra legroom. So, those people who enjoy the privilege of that extra legroom will pay for it and this also allows in a very competitive market for the same airline to actually cross subsidies and reduce fares for the rest of the seats. So you pay as you go.

Also read: Fees for check-in bags to slightly push airline rev: Expert

Q: What will this actually mean as far as airlines are concerned? Because ancillary revenues at this point in time are very miniscule portion of the total revenue that airlines make, but now that the Directorate General of Civil Aviation (DGCA) and the Civil Aviation Ministry has given the leeway, how much do you actually see airlines benefitting from ancillary revenues in India?

A: Absolutely. This is a very positive measure. In fact the ministry seems to be on a reform-roll, if we can put it that way, and thank god for that. This gives more freedom for airlines to price the tickets as they wish to. This is also good because it is an acknowledgement of the fact that how an airline prices its offerings is a contract between the airlines and its passengers and the government pretty much has no role in the same. I think it is the acknowledgement of this very fact that gradually the ministry is pulling back from having a very intrusive control over airlines is a positive. So that I feel is a bigger positive than the few rupees that we will see as a reduction in the air fares.

Q: The DGCA has said that it will not get involved in pricing, the pricing is left to the airlines, but it will intervene if it sees what is called a violative pricing. It doesn’t say what that means or how they will decide what is violative or not. But in the global experience that you have seen what is the kind of difference that we actually see in rates for check-in baggage and so on and so forth?

A: There are people in that aircraft who are just traveling with probably just an iPad or a laptop. There are also people whom you see taking huge baggage into the cabin and they would have already checked in at least about 20 kgs into the belly of the aircraft. So a person travelling with just a one kg baggage versus someone who is travelling with 27-28 or 30 kgs of check-in plus hand baggage. Surely, at the end of the day every kg has a cost attached to it in terms of higher fuel usage. So, I guess this will allow airlines to price it as per your usage, so I think it is very fair.