How Will The Railways’ Rs 1,000 Crore Flexi-Fare Gamble Work?

If surge pricing can work for cab aggregators, then why not for the Indian railways?

That’s essentially the question that Minister for Railways Suresh Prabhu is trying to answer through a flexi-fare strategy announced on September 7. Prabhu, tasked with improving the Railways’ finances, is willing to try new ways to make the network more profitable and this is one such experiment.

The announcement, however, has drawn criticism from many who say that this will hit the “common man”, even though the flexi-fare strategy is restricted to premium trains. Opposition parties have also hit out at the government calling the move “anti-people”.

While the government has stuck to its plan so far, it was quick to clarify that the flexi-fare policy is experimental.

“People misjudged the press release (Introduction of Flexi Fare system for Rajdhani/Duronto and Shatabdi trains dated September 07,2016). It was announced immediately that the policy is experimental,” said Anil Kumar Saxena, an official spokesperson for Ministry of Railways.

The policy will be tested for 3-4 months and, just like other policies, it will be reviewed from time to time as well, Saxena added.

Understanding Flexi-Fare

The ‘Flexi-Fare’ system aims to introduce a new pricing system for three types of trains -- Rajdhani, Shatabdi, and Duronto trains. It means the base fares on these trains would increase by 10 percent with every 10 percent of berths sold, the press release says. In other words, following a very basic rule of supply and demand, as supply of seats reduces, the price of each available seat will move up.

There will be a limit to this. The railways say that the flexi-fare will be subject to a ceiling of 1.4-1.5 times the base price depending on the class of tickets.

For those who resort to last minute bookings under the ‘Tatkal’ quota, there will be no change in the number of seats available under this quota but prices will be higher. The Tatkal tickets will be booked at 1.5 times the base fare for all classes except AC First Class and Executive Chair Car.

Only 1.1 percent of total trains will be subjected to this new fare system. Of the nearly 12,500 trains that the Railways runs, about 142 will cover under the new scheme. About 0.65 percent of all passengers will be impacted, said an official from the Railway Ministry.

The Railways estimates that it can earn about Rs 1,000 crore annually if the scheme works. According to a statement made to the Lok Sabha in April, the Railways incurred a loss of Rs 33,490.95 crore on its passenger services in 2014-15, said an official cited above.

Is The Railways Following The Strategy Of Cab Aggregators?

Surge pricing occurs when the company raises the price of its product or service in times of high demand -- a strategy currently used by cab aggregators. Many have criticised this policy saying it takes undue advantage of consumers. Economic theory, however, tells us this is a market clearing strategy which can help make services available when they are needed most.

Still, given the debate around surge pricing, the Railways is trying to steer clear. It is more like a predetermined price, an official from the Railways told BloombergQuint while requesting anonymity.

The Railways is also trying to counter fears that higher prices may push fringe customers towards low fare airlines.

On September 8, the official twitter handle of the Press Information Bureau put out a factsheet comparing the revised railway fares and air fares, hoping to convince people that a rail ticket will still cost less than an air ticket.