The high price of low cost airlines

Published in The Hindu - Sunday Magazine on Sep 28, 2008

Low cost airlines seem intent on squeezing the frugal traveler- not only financially but also physically.

The nearly 70% increase in the loaded fare on low cost airlines (since 2003) is fairly visible when you pay for the ticket, but the increase in number of seats per airline has managed to remain stealthy.

Seating reality

As I sat in my flight from Mumbai to Chennai on a LCC (low cost carrier), I could not but wonder at the transformation that service has undergone in the race to minimize cost (of airline operation). Although I am just 5ft-7”, it took me multiple attempts before I could successfully manage to squeeze my legs into the 7-inch gap between my seat and the seat in front of me. I searched for the recliner button so that I could atleast make up for the discomfort on my knees by easing my back, but all I could see was a sticker in small print: “Non Reclining Seat”. A further examination of the seating revealed a recent refurbishment - looked like the Big Boss felt: “what’s the fun in merely changing the seat covers, lets add a few extra rows while we are at it!”. May be the next step is to get rid of the seat belts and hence save a few ounces of fuel - now that the passengers are pretty much naturally locked-in at their respective seats. For a moment I was overcome with claustrophobia and pressed the help button overhead for water. The pleasant stewardess promptly returned with a half litre bottle, but before I could express my gratitude she held out for Rs 25 (FYI that is 250% over market price for a bottle of water – which needs to be offered free in the first place)

It was sometime after take off and time to encounter the next surprise: the restrooms – instead of the usual two restrooms for the A320, there was just one now and an additional row of seating magically took the place of the other. As I went back to my seat, I noticed that the usual ‘extra row space’ in front of the emergency exit no longer existed. Two seats with the same narrow legroom instead occupied it. In simplistic terms - your survival opportunity in the case of an emergency has been marginalized simply because you paid less for your ticket.

Food disaster

Being a night flight and all, I decided to get something as close as possible to dinner – and the best choice I could find was a burger for Rs 120. But, within the first bite I got a feeling that hunger might have been a better option. This was possibly the meanest burger I had in my life – it was so cold and dry that the bun had become brittle. I couldn’t resist thinking of the steamy roadside vada pav, which would be a better quality replacement at a fraction of the price.

What the future holds

Desparate to distract myself from the burger disaster, I opened the in-flight magazine. On the first page was a welcome letter from the founder of the airline. Here is what he had written: “We are proud to say that despite the rise in oil price and other costs, LCC’s have only marginally increased their loaded fare from Rs 3500 (in 2003) to Rs 5800 (today) for the Mumbai- Chennai route. This is significantly lower than what full-fare airlines offer. We are on track in terms of our plans to make up for our current loss of Rs1000 on average per seat by reducing bad costs and introducing more variable fee based services.”

Can you imagine the implications of this! Despite the current ‘broiler chicken’ approach to transport passengers, LCC’s need to cut frills further or start charging extra in order to merely break-even. Of course only charities can be proud of break-even, these guys need to go beyond that and squeeze in a profit.

Following is a dream I had during the rest of my flight – about how a LCC would achieve break-even and what it could mean for the cost conscious traveler such as myself:

The year is 2012. Being the frugal traveler that I am, I go back to my favourite LCC, which amazingly has become the first LCC to break-even.

Check-in counter: Sir, would you be carrying any luggage?
Me: carry-on or check-in?
Check-in counter: due to space constraints, we do not allow in-flight baggage sir–so only check-in please.
Me: fine, one check-in bag

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Check-in counter: We need to measure your bag’s dimensions and also weight it.
Me: Why? It is just a small bag
Check-in counter: no sir, baggage charges are not included in your ticket. You have to pay a separate fee as computed based on the volume of the bag and the weight.
Me: okay here is the bag

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Check-in counter: Sir can you please step on the weighing scale?
Me: Me?
Check-in counter: yes sir, the ticket allows body mass of up to 50 kilos. Anything more and you have to pay extra charges per kilo.
Me: Oh common! Can’t you waive this fee?
Check-in counter: no sir, I am afraid not. But I can give you a tip, accessories such as suits, shoes, belts, purse etc… contribute significantly to the weight – you can choose to leave them behind so that you don’t have to pay extra.
Me: no thanks, I would rather pay the charge and keep my purse

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Check-in counter: sir, would you be sitting, standing or sleeping during your travel?
Me: what?
Check-in counter: the ticket offers freestanding travel on the aisle; for sitting- there is an extra fee. Sleeping- is a premium service
Me: so the “sleeper” is a separate section?
Check-in counter: no sir, sleeper is on top of the sitting section on either side. We have 6X3 bunker beds that have been fit into the headroom on top of every seat. You will have just enough space to lie flat throughout the journey.
Me: Wow! Now I know how you achieved breakeven! Are there any more fees?

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Check-in counter: nothing more for now sir. Once you board the airline we offer the usual in-flight ‘pay and use’ services such as food, water, toilet and landing.
Me: %^*&! Landing is a pay and use service!!
Check-in counter: yes sir our costing department has recently discovered that ‘in-flight landing’ can be classified as a special service. Passengers who want to use ‘in-flight landing’ have the option to pay for it else they can avail of the free parachutes!

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All that glitters is not gold…but is the glitter of gold worth it?

Published in The Hindu - Sunday Magazine on Sep 14, 2008

India is among the largest consumers of gold in the world. The majority of retail gold consumption is in the form of jewels. Although Indian women don’t need a reason to go gold shopping, the core logic used by men to justify all that yellow metal consumption is the notion that gold is a “solid asset” with appreciation potential.

The recent bull run in gold, as with the other commodities, stirred up much interest among the junta — what with banks and financial institutions touting that the best returns are waiting to made. The drop in the Sensex further fuelled the speculation in gold thanks to the reorientation of friendly neighbourhood brokerage houses who quickly came up with “buy” signals for the bullion market. While banks and finance companies started selling gold coins, mutual funds played one-upmanship by launching “Gold funds” that would invest in gold mining companies! What an idea!

Logic of returns

When all this was happening, I was defending criticism from the missus for not believing in gold as an “investment avenue”! The logic was simple — convert all my stock holding to gold (ornaments, biscuits or coins) and we would become richer than ever as gold appreciates in value!

Now that the metal has fallen quite sharply (as is the case when so much tension and hype builds up around anything), I thought it was time for me to settle the score about the real potential of gold as a long-term investment option.

I set up a simple experiment to calculate the returns from gold over the last twenty years and compared the same with the returns from BSE Sensex (Proprietary Stock Index of the Bombay Stock Exchange, computed based on the share price of underlying 30 stocks).

Over the last 20 years “gold” as an asset class has generated significantly lower returns compared to equities, notwithstanding the stock market crash. As measured by the Sensex, equities have given investors a return of 17.1 per cent p.a. in comparison to gold’s return of 9.3 per cent p.a.! This means that over the last 20 years, Rs. 100 invested in the Sensex would have grown to Rs. 2,350 while in the case of gold it would have become merely Rs. 592.

Not a good investment

If one includes the dividend payout and tax benefits of equities — gold would further lag behind as an alternative investment vehicle. In addition to the opportunity cost of not investing in a better performing asset class such as equities, those who invest significant amount of capital to buy gold in the form of ornaments would face depletion of 10-15 per cent in terms of total value due to making charges, wastage etc., as a result turning gold into more of an expense than a strong investment.

The verdict is clear. Gold is for fashion…if you want to build wealth look elsewhere. As to the credentials of mutual funds that invest in gold mining companies — I have no comments as yet. For the curiously minded, the gold price and Sensex data culled from various sources is presented in the enclosed table. Of course, the cynic may still doubt my judgement for its basis on historical data, which may not replicate itself in the future, but I would bet my money on 20 years of data rather than the glittering prospect of gold in the future.