IR has been doing its homework on the flexi-fare system for more than 15 years now. The Tatkal system, which all of us are accustomed to for about 15 years now, is itself a flexi-fare system: passengers pay a tatkal charge to book PRS tickets a few days before travel for almost all the mail and express trains. Between 13 and 25 per cent of the total tickets are bought by passengers by paying tatkal charges for various classes and trains. Sensing willingness and affordability on the part of passengers to pay a premium for train travel, IR went several steps ahead by introducing "premium" trains, with a dynamic fare system in 2013 and expanded this in 2014. However, "premium" trains recorded an average occupancy of 60 to 70 per cent only, as the algorithm used for fixing the dynamic pricing on these trains lacked transparency and the fares for the last few tens of seats went up to the level of airfares, in some cases even exceeding the latter, thereby creating an anomaly.
The rule of thumb that could be inferred from the patronage for "premium" trains was that passengers were ready to pay up to twice the base fare even for higher classes, but above that was beyond their affordability and willingness. To overcome the anomaly in the fare structure of "premium" trains and to bring more transparency into the flexi-fare system, IR replaced such trains with "Suvidha" trains in 2015. For "Suvidha" trains, the first 20 per cent of tickets were charged at base fare plus tatkal. For every subsequent 20 per cent of tickets, the fare went up to 1.5, 2, 2.5 and three times the base fare plus tatkal, respectively. The patronage trend of "Suvidha" trains followed the pattern of "premium" trains, with an average occupancy of about 65 to 75 per cent. However, "Suvidha" trains have reached break-even with 50 to 60 per cent occupancy.
In my article, "Special trains, special fares" (July 17, 2015) in The Pioneer on the eve of the introduction of "Suvidha" trains, I put forth my point that IR had not learnt the rule of thumb passengers employed in choosing to travel on "premium" trains and that the maximum fare in any flexi-pricing system should not exceed twice the base fare to ensure more than 95 per cent occupancy. Any common carrier transporter has to balance the dual objectives of policy success and financial viability. Policy success lies in plying common carrier transport facility closer to maximum occupancy. With no lessons learnt from the experiment of "premium" trains, "Suvidha" trains failed to achieve policy success even as they were financial viable. With the experiences of "premium" trains and "Suvidha" trains since 2013, IR calibrated the flexi-fare system well before introducing it on September 9, 2016, for "elite" trains. It is bound to succeed in terms of policy success and financial viability.
The related question is whether such an arbitrary fare hike would push passengers to opt for air travel and how confident IR is about mopping up an additional Rs 500 crore, as envisaged, with this hike. Even after implementing flexi-fare, 3AC, CC, sleeper and seating classes remain competitive in both road and air travel. Thus, IR would not lose patronage on these classes because of flexi-fare. Only in the case of 2AC, there might be a dent in the patronage. However, once low-fare seats on planes are exhausted, the charges would be much higher than the 2AC flexi-fare; hence passengers would have to come back to book 2A tickets. Moreover, train seats are always in short supply across India. Against this backdrop, the patronage for "elite" trains would remain undisturbed even with flexi-fare and IR may be able to run them with few vacant seats.
The next question is whether IR can charge different fares from different passengers, who travel on the same train with the same comfort. Essentially, it is a queue: those who line up early get tickets at a lower rate than latecomers. It is not uncommon for those who book early to get lower berths that are more comfortable while latecomers get the upper berths. This is what has been happening even in the tatkal system in IR and in other transport modes around the world.
One more question: Why are the fares of 1AC and executive class on "elite" trains untouched? Current fares of these classes are steep and almost on a par with airfare and hired taxi charges; the flexi-fare system for these classes means coaches of these classes would likely go empty. The 1AC and executive class form a minuscule minority in the larger scheme of IR and it may not add revenue to its exchequer by introducing flexi-fare in these classes.
An important question posed on flexi-fares is whether IR can increase fares arbitrarily. IR essentially survives on revenues from freight transport; it loses heavily on passenger transport. For every Rs 100 in operating expenses for freight transport, the IR earns Rs 161; for every Rs 100 in operating expenses for passenger transport, it earns Rs 58. Consequently, IR loses about Rs 30,000 crore plying passenger services. The profit that has been accruing from freight transport has been used to cross-subsidise passenger transport. Contrary to what many people believe, revenues from passenger fares do not break even with operating expenses for all passenger classes, except 3AC in mail/express and ordinary passenger trains.
The AC classes have limited subsidy, while sleeper, seating and unreserved classes are offered huge subsidy on mail/express and ordinary passenger trains. As 3AC breaks even at 80 per cent occupancy rate, IR has a soft corner for this class. Hence, it decided to fix the maximum fare for 3AC at 1.4 times the base fare for 60 per cent of the tickets sold, unlike in other classes where the maximum fare is 1.5 times the base fare for 50 per cent of the tickets in the flexi-fare of "elite" trains. For 100 per cent occupancy, these "elite" trains generate a profit for IR. But given the precedence these trains get in accessing railway tracks over other passenger and freight trains, it is apt on the part of IR to charge more for these "elite" trains. Even after flexi-fare for "elite" trains, the total operating loss per year to IR due to passenger operations would be about Rs 29,500 crore in 2016-17.
But for the profit from freight operations, IR would have gone bankrupt long ago or would have accumulated huge losses like Air India has.
The author is a doctorate in public systems from IIM Ahmedabad and currently teaches at TAPMI, Manipal. The views are personal