Low cost airlines to eat into rail earnings

Expansion in the airlines sector will hit rail finances hard.

With airlines hiking their carrying capacity to 32.5 million by the end of this fiscal, and simultaneously following aggressive pricing strategies, there is a real threat that the Railways will lose their only profit earning segment "" AC passengers "" to air travel.

Passengers travelling by air-conditioned coaches, which accounts for 0.73 per cent of passenger traffic for the Railways, contribute 27 per cent of the revenues. The Railways earns a profit of Rs 680 crore on AC traffic, as against a loss of Rs 5,555 crore on non-AC traffic.

The threat to rail finances is therefore very real.

"Airlines have a capacity of 26 million, and are expected to add another 6.5 million seats by the end of this fiscal, taking the total to 32.5 million seats. In contrast, the demand for airline seats is only about 15 million" said transport analysts, explaining the reason for reduced fares being offered by airlines.

Airlines are increasingly going in for aggressive pricing strategies in order to fill seats.

Utilisation of seats in airlines is only at about 58 per cent, while they need at least 65 per cent occupancy in order to make money, they said.

"Since the marginal cost for an additional passenger on the plane is probably, only the cost of the food that is served to them, airlines will be able to offer passengers tickets at lower  prices," they added.

Compare the number of seats available on airlines with the fact that the entire AC traffic in Railways in 2002-03, the latest year for which figures are available, was 36.73 million. It is the AC-I and AC-II tier passengers who are being targeted by airlines.

The AC-I passengers on Railways travel for reasons like comfort and extra luggage capacity and are not likely to shift to airlines.

Given the expansion in the airlines sector, airlines will have to lower costs to survive. "The advent of low cost airlines has led to lower income thresholds for air travel. So, the old argument that the AC-II and AC-III segment is price sensitive and unlikely to shift to airlines no longer holds," analysts add.

And since it is these two segments, which earn the most for the Railways, prospects for railway finances are bad.