The Competition Commission of Pakistan (CCP) has found that the increase in airfares by two private airlines was not exorbitant, as airfares were increased merely due to an increase in demand and the normal operations whereby last minute bookings are charged a higher rate. In this regard, the CCP here on Monday completed its enquiry into the alleged exorbitant increase in airfares by private airlines.
According to the inquiry report of the CCP, it is proposed that the Commission should continue to keep a close eye on the behaviour of all market players in the domestic airline industry, in particular, any exorbitant and unreasonable price increase and collusive behaviours, among other things. The CCP found that neither of the undertakings, ie, Airblue and Shaheen were dominant in the relevant market for domestic passenger air travel in Pakistan for the period October 1-6, 2015 and February 2-4 2016.
The report concluded that from the analysis of the data that on the routes examined the increase in airfares was nominal and the Enquiry Committee could not find any exorbitant three-fold increase as alleged in the media neither did it receive any evidence from consumers to substantiate this allegation. It may also be noted that the above scenario was temporary in nature and the normal market conditions were restored once the strikes were called off. The Enquiry Committee did not receive any evidence from consumers to substantiate a three-fold increase. The commission has completed its enquiry into the alleged exorbitant increase in airfares by Airblue and Shaheen. The Commission had taken notice of concerns expressed over the media and other forums relating to the conduct of the two private carriers during the suspension of PIA flight operations from October 1-7 2015 and February 2-9, 2016. It was alleged that fares had been hiked by as much as 300 percent.
A five-member Enquiry Committee was appointed to determine whether the private operators had exploited consumers during the time period under review by charging exorbitantly high airfares. The said airlines were asked to submit detailed information on airfares charged for each passenger on domestic routes for the period under investigation as well as the preceding months. The Commission also issued a press release asking consumers to come forward and provide evidence of tickets purchased at high rates.
It was observed that as per standard industry practice world-wide these two airlines employ a Revenue Management System allowing them to set different parameters for determining the basic fare some of which are demand and supply, size of the aircraft, the route, time of booking ticket, passenger load on other airlines etc. The lowest fares are invoked when the booking is made well in advance, as the time of the flight approaches near the higher fare classes are invoked depending on the availability of seats.
The Enquiry Committee analysed airfares on the major domestic routes of Karachi-Islamabad, Islamabad-Karachi, Karachi-Lahore and Lahore-Karachi. The airfares charged when PIA flight operations were suspended were compared with airfares charged under normal market conditions, ie, the months immediately preceding each strike. The results show that for Airblue on average the change in fares when compared with immediately preceding month ranged from Rs 159 to a maximum of Rs 2,766. The maximum increase of Rs 2,766 can be attributed to the operation of two special flights between Karachi and Islamabad in the period of 2-4 February. Fares on this flight were higher due to special arrangements made (arrangement of aircraft, crew, fuel etc) and last minute bookings to facilitate customers of PIA. For Shaheen the change in average airfares when compared with immediately preceding month ranged from a fall of PKR 320 to a maximum increase of Rs 1,933, it said.
While comparing fares charged during annual peak season, in the month of July when demand is at its highest, with the maximum fares charged during the period under review, the Enquiry Committee observed that the fares during the period under investigation were lower than those charged during the peak season. The Enquiry Committee also observed that the average fares of PIA are generally higher than the two private airlines.
Through the revenue management system airlines "allocate inventory with a focus on dynamically balancing supply and demand in the market. By effectively managing variations in demand over time, airlines ultimately maximise revenue". By managing the availability of booking classes according to demand, an airline can smoothen demand variations throughout the year and achieve an optimal customer (or fare) mix. Submissions made by Airblue state that "to effectively manage demand, airlines must effectively respond to seasonal changes. During the high season (eg the summer), discount-booking classes might be closed to reduce demand and maximise revenue potential. This strategy is intended to optimise demand and supply by selling a greater proportion of seats in the higher booking classes". It further states that: "a prime goal of revenue management in the airline industry is determining optimal seat allocations by booking class to maximise revenue". The use of Revenue Management system is a standard practice throughout the airline industry including PIA and Shaheen.
With respect to "fare determination mechanism", the airline stated that the fare or price at its most basic consists of all costs plus our profit margin (the "yield"). Some of the direct costs for flight included fuel costs: in-between 62% to 74% of the total cost per flight; taxes - GST, FED, Income (WHT); customs duties for imported parts and aircraft; CAA has various charges including landing, parking, rental, airport fees, security charges etc; pilots, crew and other staff salaries; aircraft lease rental charges - approximating US $200,000 per month per aircraft and insurance charges; ground handling charges; boarding costs for crew and pilots etc and catering - currently only airline on domestic routes providing hot meals.
While finalising its conclusions the Enquiry Committee took into consideration the fact that normal market conditions were restored once the strikes were called off. As per international practices competition agencies refrain from interventions if the market has the ability to auto-correct as has happened in the instant case. Therefore, after a thorough analysis of facts and data before it the Enquiry Committee concluded that no prima facie violation of Section 3 (Abuse of dominant position) of the Competition Act, 2010 was made out. After reviewing the Enquiry Report the Commission has decided to conduct a comprehensive competition assessment study on the aviation sector. The study will analyse entry barriers, regulatory measures and the possible policy level competition issues in pricing of airfares.
It is important to highlight that the Commission can undertake sector studies under Section 37 of the Competition Act, 2010 with a focus to remedy potential competition concerns to allow for maximum competition in the industry leading to better choices and prices for consumers and a level playing field for businesses, the report added.
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