Commentry on Rising Fuel Prices Essay

Air travel is fast getting out of reach for relatively small town Indians. According to Airport Authority of India’s (AAI) latest figures, April 2008 saw lesser number of people flying from places like Goa, Patna, Thiruvananthapuram, Guwahati, Calicut, Srinagar and even tourist hotspots like Udaipur, Jammu and Jodhpur over same period last year. On a national basis, the growth rate of domestic passengers this year has fallen to single digit, down from the heady 30% to 40% figures recorded in past three years. While this growth was largely due to airlines offering attractive fares, the drop in passenger flow was as high as 35% in Jodhpur or 24.5% in Jammu. These figures have the alarm bells ringing as the steep hike in jet fuel prices – which have led to sharp increase in airfares – started only in April and the fall in flyers could get much worse for later months. Till April, fuel surcharge on each ticket was Rs 1,650. Now the same surcharge is between Rs 2,250 and Rs 2,900 and base fares are also much higher, making flying a fancy for many. â€Å"We are slowly reaching a situation where only flights between metros or ones originating or ending there may remain viable for airlines at these operating cost levels. State governments must come forward and offer low sales tax on jet fuel to airlines in return for an assurance that the latter would neither cut flights, nor hike fares to those places,† said a senior AAI official. In fact, the huge 30% to 40% growth recorded in past four years (after the advent of budget carriers) was substantially due to airlines rushing in with flights to places where bus and rail users could be shifted to air by the lure of low fares. But now with airfares on the rise, this connectivity is under severe threat. Airlines have already started pulling out of unprofitable centres. SpiceJet executive chairman Siddhanta Sharma gave the airlines’ perspective. â€Å"Basically flights from most small cities are short haul. On such sectors, high airfares now compete with other cheaper fares of other modes of transport and air travel becomes unviable. Only a reduction sales tax on jet fuel may help keeping such places connected as we would be able to offer competitive fares,† he said. But as state government still dilly dally on this issue, their connectivity is suffering. Cities like Lucknow, Varanasi, Trichy, Patna and Rajkot witnessed much lesser domestic flights in April 2008 than last April. While fares of international flights haven’t risen as sharply, international passengers have also declined. Times of India Introduction: The Indian Aviation sector has grown by leaps and bounds over the last financial year but this seemingly booming sector is now slowing down. The above article talks about the decline in the number of air travellers from cities other than the metropolitans. The growth in the number of passengers came about because of one major reason, the introduction of low budget airlines which fly at a much lower cost. Even this effect is being negated by the rising cost of civil aviation. I will use the concepts of Choice, Necessity and Price Elasticity of Demand. The alongside diagram shows the increase in Jet fuel or aviation fuel over the last few months. It also comparatively shows how expensive travelling by car is becoming, due to the rising fuel coats. Figure 1 Concepts Involved: There are mainly three basic concepts involved in this article- ‘Choice’,’ Necessity’ and ‘Price Elasticity of Demand’. 1. Choice: In today’s day and age of cut throat competition, if we need to travel from New Delhi to Mumbai we have several options regarding as to what mode of travel that can be taken. Flying is obviously the fastest and least time consuming and according to popular belief was also very expensive. Since the introduction of low budget carriers, the cost of flying drastically reduced, as these airlines worked on a â€Å"NO FRILLS† policy meaning that they offered no service whatsoever. As a result travel by aeroplane became as expensive as travelling by a second or third class Air Conditioned compartment by the most popular mode of transport in India namely the Railways. As a Result the people travelling by rail reduced in the respective ticket brackets and the passengers aboard aeroplanes increased. People from smaller towns thus for better and quicker travel increased their journey a little bit out of choice and took a plane from the nearest airport of their departure to the airport nearest to their destination. Footnotes: 1. Financial Year- the time period between the 1st of April to the 31st of May. It is called a financial year as the government of India asks for the finances of a company between this period. 2. Low Budget Airlines- They are those airline services that operate on a lower cost due to certain in-flight service policies that they follow. As the price of aviation fuel rises so does the cost if the ticket required to sit on a plane and as a result people from smaller towns are not finding air travel to be a viable means of transportation as they found to be having a lesser income than travellers in bigger cities are resorting to the next best option for their travelling needs. 2. Necessity: A necessity in economics means a compulsion to consume a certain good or service. This applies to a lot of people who travel from larger cities by air. Maximum usage of domestic air travel is done due to some business activity. Businessmen are in vast numbers in big cities such as Calcutta or Bangalore and as a result they not only have a want to travel but this want of theirs is a need. They travel by air as it is the best and the most convenient way to get to a destination in which business has to be transacted. As a result he businessman would not care what the price of air travel is as; they gain more business in exchange for paying a higher price. 3. Price Elasticity of Demand: Elasticity of demand is the responsiveness of the demand of a commodity to a given change in the price of a commodity. We can generalise the kind of people who travel by air in two categories, one who have a highly elastic price elasticity of demand for a commodity and the other who have a relatively inelastic price elasticity of demand for air travel. People from smaller towns will be generally classified in to the first category as they use air travel as an alternative to other modes of transport and seeing a rise in the price they will happily revert back to their earlier means of travel. Travellers from large cities on the other hand will be classified into the second category. They travel by air out of necessity or because they have enough means to account for a rise in the price of air travel. As a result a change in the price will induce small town travellers to cut down on air travel while not so much affecting others from larger cities. Conclusion: Travelling by air for people in smaller towns was a better alternative and not a necessary change. As a result when price went against them, they simply chose not to fly by air. Footnotes: 1. Highly Elastic Price Elasticity of Demand – A change in demand which is related to the price of and article. It is called highly elastic as the change in demand is large due to a change in price. 2. Highly Inelastic Price Elasticity of Demand – A change in demand which is related to the price of and article. It is called highly inelastic as the change in demand is not very large due to a change in price. 3. Aviation fuel- The fuel consumed by aeroplanes. 4. Domestic air travel- Travel which is within the country. 5. Want- It is a desire to consume a good or service backed by the ability and willingness to pay for it. 6. Business- A venture taken on by an individual with the purpose of gaining a profit out of it. Bibliography: * The article was taken from the Indian newspaper â€Å"The Times of India†. Dated 2nd July it is written by a journalist by the name of Saurabh Sinha. The link to the article is: http://timesofindia.indiatimes.com/Steep_fares_lead_to_drop_in_small-town_flyers/articleshow/3186374.cms * The footnotes and other definitions were written with the help of the book: â€Å"Economics Course Companion† written by Ian Dorton and Jocelyn Blink. * Footnotes and definitions that are not found in the book were written out of memory and previous reading from various unrelated and previously read newspapers and articles. * http://content.edgar-online.com/edgar_conv_img/2007/12/21/0001362310-07-003512_C71797C7179706.GIF