Economics of Advance Ticket Bookings

Starting December, the airlines ticket prices started shooting up. It was understandable considering that holiday season is the best chance to make some profits and demand outstrips the supply. What was surprising that the price of tickets for non-holiday season also displayed increasing fares. Bangalore-Delhi round trip which used to cost 9k-11k with 15-30 days advance booking, was costing 15k for month of February. Now suddenly we see 30-day advance booking fares reduced to as low as Rs 8000 for round trip Bangalore-Delhi. It seems to be a great deal which ideally should not be missed and that is why everyone is gung-ho about this scheme. But what is the benefit in this for airlines and on the surface it does seem that airlines will be making a loss with such schemes when they are already bleeding(?).

First of all, such schemes are being launched close to the financial year-end. This scheme brings huge cash to the airlines and also make their cash flow statements a bit healthy. The revenue is still considered unrecognized and shown as liability in Balance Sheet till the time customer take a flight, but if it is cancelled with such revenue recognized the previous year and only balance is shown as unrecognized (same scheme was launched last year). Minimum of 40% of this revenue will stay with the company as that is the cancellation fees for tickets, if all customers decide to cancel their tickets. It can be assumed that now started, these schemes will come every year as otherwise operating cash flow will take a hit.

Economics of it: Lets consider the Delhi-Bangalore sector. Regular advance fare on this sector are Rs 4500-Rs 4900. During this scheme, the tickets are priced at Rs 3900. If the cost of capital for airlines is 16%, averaging for a half year to keep it simple @8%, airlines would have paid Rs 312 as interest to get this revenue. Since no one is sure of plans 6 months in advance, lets say 15% of tickets are cancelled and 15% are schedule changes. It brings in additional Rs 474 (Rs 1580 as cancellation/change charges). Airlines do consider these cancellation/schedule changes and overbook factor @20% brings in additional Rs 780. In total, a seat which is being sold as Rs 3900 is actually bringing in Rs 5446 as revenue to airlines companies. This is much better than the regular advance fares which used to be sold at Rs 4500-Rs4800 and actually works to Airlines advantage more than the traveler.

So does this mean are we being cheated? Not exactly, because it is working more like insurance, as you do get cheap fare if you actually take the flight. For travelers, cost of capital is not more than 8%, which averages to Rs 156 for 6 months. So your total cost for flight is only Rs 4050. The only catch is premium for this insurance is very high. It would be a good entrepreneur opportunity for someone to start such exciting insurance schemes. However, airlines have resorted to gimmicks to make this scheme attractive. Like artificially inflating advance fares by 20-30% a month earlier. There has been no recent developments to justify this rise.

But is that reason to complain. I do not think so, as it still works in benefit of customer. In addition, this adds to load factor of airlines and brings in some new customers. Not to ignore huge sum of cash as revenue and not borrowings, that makes their life easier. To me, it is more like a win-win combination and those gimmicks can be termed nothing but Corporate Strategy!!!

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