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Monday, October 31, 2011

Dynamic Pricing of Tickets in Railways

Indian Railways is broke. A large number of their plans, particularly those relating to increase in capacity, are not moving forward because of lack of funds. Their operating ratio is over 90. That is, for each 100 rupees that they earn, more than 90 rupees are spent on the operating expenses alone. Obviously, no money is left for development work.

If you do not increase the passenger fares for 8 long years, and you have limited flexibility on the freight side of business, you are bound to land in the situation that Railways is in today.

With some increase in infrastructure, improvement in technology, higher efficiency, some more new trains can be introduced every year, but to really solve the problem of demand and supply, they would have to build infrastructure at a very fast pace. But for which they have no money.

In the last one month, the Minister and the officials have been talking about a middle-of-the-year increase in fares, which is good. The Minister has reportedly said that they don't want to get into the situation that Air India is in. They have already increase the freight rates, but given that they have a strong competition from trucks, they can't cover all their passenger traffic losses from freight. But I am sure no politician would want to increase the fares substantially in one go. And there is no doubt that the situation is so bad that a small tinkering with fares would not be of much help.

This is where dynamic pricing could help. And the good news is that the Minister is talking about it. (Read an article in Economic Times.) The Minister only needs to announce an increase in the normal fare, a fare that would be paid by only some of the passengers. Others pay the fare determined to a large extent by demand and supply. Just to give an example, if in the first 10 minutes of the reservation opening 90 days in advance, 10 percent of the train capacity is booked, the pricing engine would increase the fares. On the other hand 10 percent of the train capacity is not booked even 10 days after the reservation opens, the fare remains the same till an upsurge in booking is seen closer to the travel date.

The last minute tickets could be priced substantially higher than the minimum fare for the same on peak rush days.

Dynamic pricing has been completely accepted by public at large as applied by airline industry, except when the fares have become ultra-high, as it happened during Diwali time in 2010. Even in trains, the Tatkal rules of Laloo's times, when one had to pay the fare of end-to-end journey, and a premium on top of that with no cancellation refund, was accepted by public without much protest, though it would often be more than 2-3 times the normal fare, if one had to undertake the journey for only a part of the train route.

Dynamic pricing has lots of advantages, both for railways as well as passengers. Railways is able to get more funds, which can now be used for expanding the services. Passengers don't have to resort to bribing, finding loopholes, standing for several hours from early morning, 90 days in advance, so that they can get reservation on the day of opening, and so on. The VIP quota business can be thrown out, as with the new system, it would be possible to have some tickets available till the last day. Railways lose a lot of revenue, particularly in AC-1st and AC-2T because many people traveling on business do not want to book waiting list tickets. So for these classes waiting list is not long enough to take care of additional seats available when these VIP quotas are released for general public.

A system which allows some tickets at a relatively low fare on first come first served basis, and other tickets to be sold on the basis of market conditions, is also a fair and practical system. Selling all tickets at low fares 90 days in advance does not seem fair to those who cannot plan so much in advance. Selling all tickets through a lottery a few days before the date of journey is not fair to people who want to plan their vacations much in advance. Auctioning all tickets discriminate against economically weaker sections. But dynamic pricing takes care of all these concerns.

If one still has "fear of the unknown," it may be first introduced in upper classes, see the experience, and then take a decision to introduce it in non-AC classes.

Indian Railways could also introduce differential pricing for different seats in the same class. The pricing of lower inside berths could be higher than side upper berths.

Another pricing differentiation could be that the price of a short journey on a long distance train could be higher than the price of the same journey on a short-distance train. For example, Delhi-Kanpur ticket would be cheapest on Delhi-Kanpur trains, slightly costlier on Delhi-Allahabad trains, more costly on Delhi-Howrah trains, etc. Basically, encourage more long distance passengers on a long-distance trains, and you will find out that the long distance trains do not have many passengers from small stations, and therefore, those halts can be removed, and trains can be speeded up.

Another advantage of dynamic pricing (and the resultant availability of tickets closer to the day of journey) is that one can provide better service on super-fast trains. It may be worthwhile to recall that about a couple of decades ago, there were no unreserved compartments in many of the prestigious super-fast trains. They were added later on to enable those passengers to travel by these trains who have to reach their destination urgently because of some emergency, and they could not get reservation done in time. But now, if reservations are available closer to the date of journey, we could remove all unreserved coaches, replace them by reserved coaches, and make journey more comfortable for more people.

There are other ways in which Railways can get more revenue without having to increase the base fares by much. Currently, Indian Railways has a mechanism to book a ticket from a station different from the station where the passenger will board. This is, however, discouraged by Railways. If I want to go from Station 'B' to Station 'C', and if I try to book the ticket from Station 'A' to Station 'C', with boarding at Station 'B', the reservation engine will book me only against the quota of Station 'B', and therefore, it would be foolish to pay from Station 'A'. But if Railways allowed passengers to use quota of Station 'A', it is essentially increasing the fare of those passengers, while keeping the option to sell those seats between Station 'A' and Station 'B' and make additional money.

We need Railways for the economic growth of the country, and not just a defunct railways, but a vibrant railways, which is expanding to meet the growing needs of the nation. It has to be financially strong to invest in the future.

PS: On an unrelated note, I found this news item on Economic Times very interesting. It talks about a problem similar to Y2K problem in the context of railway reservation system.

9 comments:

Roopesh said...

Hello Sir,
Very good analysis on how IR can squeeze in more revenue from passenger operations. I think rather than all this jugglery they should simply increase the fares. 8 years are too long a time to not increase the fares when everything else is increasing. The world has changed since the last increase. Now people rue petrol/LPG/bus/auto fare hikes and would take in stride the train fare increase. As a middle path, they should at least increase reservation fee, increase higher class fares or at least vary them based on rush like weekends, holidays etc. when air fares too are high. If they could manage additional rolling stock, special trains should be run (more than the current) during major festival season and charge more. For this they should even re-schedule the non-essential freight to accomodate these additional trains. Buses which are far uncomfy still attract higher fares than railways.

Dheeraj Sanghi said...

Roopesh, dynamic pricing is not just politically easier, but in my opinion, also fairer. As I said in my blog, low price for all tickets is unfair to those who can't plan journey 90 days in advance, and high price for all tickets is not good for economically weaker strata of society. Dynamic pricing takes care of both groups.

poweredbybmw said...

Excellent ideas!

sonu said...

Respected Sir,

Dynamic pricing is a very good idea. Because cost we pay must depend upon the demand at any particular instance. But before that I want to have my railway to have 3 reforms-

1. Ticket cancellation charge must increase. People book 4-5 ticket if they have slightest idea that they are to travel say in a particular month. The effect is that the person who really needs the ticket does not get.

2. One more bogie for general people.

3. The interference by agent messes up the system. I met a guy (agent)in Pune who told me he has got some software which automatically starts booking ticket as soon as the clock ticks 8:00 am. He pays 20,000 per month to use the software. I must confess that in situation of need, i have him book my tickets also.

Peter W Ainscough said...

Hi, Does anybody out there know of a sofware package that contains and manages ticket pricing rules and allows dynamic pricing of rail tickets, please?
Please email me at peter.ainscough@ie.fujitsu.com
Thanks
Peter

Shantanu said...

@Sir ... I believe the problem is that Railway ticket prices have not gone up like other commodities in the past 10-15 years. This has invariably resulted in railways making huge losses year on year (not to say railways department in other countries also makes losses). Though public transport should be accessible by many, still there must be some sort of an optimization here.
Also I am not sure whether dynamic pricing is actually necessary. Not to say it is a very good idea on a similar lines to the way airlines tickets are priced but majority of the problem of non availability of tickets is because of agents. I have seen berths going empty in trains where waiting list was more than 80. Railways can solve this problem by charging 50-60% of the ticket amount for a cancelled ticket than say just 20-30 rs. I am sure half of the problems concerning non availability of tickets would be sorted out. Not to say Railway needs better infrastructure in the country. For the past 60 years we haven't improves much from where Britishers left. Any enhancements on the tracks have been made more or less on the same old tracks that were left by the British. No wonder Kanpur (which no longer plays such a major role in GDP of our country) is still a busy station but cities like Bangalore and Pune (which are far more important in the present context) are not as well connected via railways as they should be.

Dheeraj Sanghi said...

@Shantanu, those empty berths that you see have multiple reasons. Some are genuine last minute cancellations. Some could be due to a group/family, where some members got reservation, and some didn't and they decided not to travel. Some could be due to people having passes. I know several Railway employees who would get reservation done on their free pass, and would not bother about cancelling the reservation, since for them there is no cancellation fee - they can simply reuse their passes. Some are due to people reserving for a longer distance but travelling only on a part of it. For example, if I want to go from Kanpur to Howrah, the quota is very small. I may get the reservation from New Delhi to Howrah, and then change the boarding station. While Railway reserves the right to give that berth to someone from New Delhi to Kanpur, they normally don't.

The agents booking a berth months in advance in the hope of selling that berth closer to the journey date at a much higher price is actually quite rare. I have also talked to some agents in Kanpur, and their modus operandi is quite different.

Sabari said...

The Revenue Management concept will also take care of the Overbooking. It will forecast, how many seats will cancel and how many will show-up, based on this it will automatically increase the seats and allows the customers to book more. Finally, it end up with the optimal seat usage with no/less empty seats.

Aryan Garg said...

1. Dynamic pricing is a failure. Today a 2AC ticket from bangalore to new delhi is costing 8000/ on a dynamic pricing premium train. whereas a flight to delhi can be as low as 4500/.

2. Indian railways is the least researched, slowest in adoption of new cheap technology, most outdated system, largely dependent on ridiculous management, poorly engineered systems and infested with corruption at every level.

3. If i take a bullock cart to Bangalore from delhi i think it will cost me at least 20000/. why? because bullock cart is a 5000 year old technology. if we use vacuum tubes to build a laptop processor today it would cost me at least 100000$. IT products are a success because they grow at such a rapid pace. In 10 years we have touch screen mobiles from blue back lit nokia phones. But railway coaches look the same as they were 40 years ago only achievement is they have replaced red oxide paint with blue enamel. plus some trivial mechanical additions in suspension etc.

4. Railways will not grow because they don't face competition. Look at BSNL. They have improved because they had to face tough competition from private companies. It is the basic nature of most humans. They act only at the fear of the stick/danda or when their survival is compromised with.