Sensitivity of Traffic Demand to Fare Rationalisation

The Airport Metro Express Line and the implications of rationalisation of the price on its traffic and revenue are examined. The amel was incurring huge operational losses when the Delhi Metro Rail Corporation took over its operations, and was faced with the challenge of reviving it and making it operationally viable. The role played by price rationalisation to enhance capacity utilisation and revenue, which contributed to improving the amel’s “operating ratio,” is analysed. The strategy worked, and by April 2016 the amel was able to break even. This is an example of how a well-thought-out pricing strategy could improve the viability of a public utility.

This case study started as a study project by Dinesh Sharma with the help of DMRC officer Sankalp Devendra. The authors are grateful to him and his team for their support and for the data and insightful comments. They are also thankful to the anonymous referee for detailed comments which the authors have tried to address and incorporate in the paper.

Public utilities, such as mass rapid transit, involve high capital cost, most of which is fixed in nature. This leads to huge economies of scale in these ventures. Metro networks are also characterised by positive externalities and help in reducing pollution, congestion, and accidents, besides being energy efficient. However, they tend to be loss-making by nature, as the prices charged by them are kept low (close to average cost or marginal cost) to encourage more people to use these services. This has been one of the reasons why these are generally financed by the public exchequer or are heavily regulated. The low prices tend to make these industries supply-constrained and face overcrowding. Low prices also erode their financial viability leading to lower investments, which further exacerbates the supply bottlenecks in these industries.

Many of these sectors (such as power, water supply, etc) are universal inputs or are essential services for society. However, to attract private players to these sectors, the government tries to give them many incentives, such as high prices and longer concessions to run the project in order to recover costs and be remunerative. Due to these benefits, in the last three decades, the public utilities in many sectors have attracted many private players who consider these supply-constrained sectors to be a big opportunity. These are also known as public–private partnerships (PPPs). However, the prices charged by these concessionaires, at times, tend to be too high to ensure their financial viability and lead to a “Pareto inferior” outcome in terms of suboptimal efficiency.