Airliner’s Dilemma

It is no secret that sustained profitability remains a dream for most, if not all Indian carriers. Barring a few sporadic quarters or profit, airlines have mostly suffered losses over the past few years.  The well publicized Kingfisher lock-down and Air India bailout highlighted the consequences of accumulating sustained losses.  The Indian aviation market is in such a tough state that airlines are more focused on surviving let alone return to profits.

So, where does the problem lie? Surely, it cannot be empty seats since passengers traffic continues to increase. In fact Kingfisher was among the top in terms of passenger traffic, when it locked down its operations. Can it be oil prices? But then airlines can increase ticket prices to accommodate the effects of oil prices.

The problem lies in the very approach of trying to survive and not build profits. A classic case of the popular Prisoners Dilemma problem.

Let me quickly brief you about it. PD explains why two people/competitors might not co-operate, even if it appears that it is in their best interests to do so. Let’s say 2 murderers are caught by the police but without sufficient evidence to charge them and are questioned separately. They are promised that they would receive a lighter sentence(1 year) if they co-operate(admit guilt) and a harsher one(3 years) if they don’t. But if one cooperates and the other refuses to accept guilt then the co operative person will face the maximum term(15 years) while the other is let free.

Ideally, both would like to co-operate and get the minimum sentence of one year. But this very thinking would give a greater leverage for one of the persons to deny their murder so that he could go free while the other co-operative guy languishes in prison. Hence, both should rationally refuse to co-operate as this ensures that each doesn’t receive the maximum punishment.

In the current market heavily dominated by low-cost carriers and middle class passengers, ticket prices play an important role in luring people. So, if one airline cuts their ticket prices, naturally other airlines will follow suit lest they would lose their customers. Clearly, this would lead to an ideal solution in terms of passenger traffic for all the airlines since they are similarly priced.

For a better understanding consider the following example.

Airline/ its ticket price A/same A /cut
B/same 50-50 70-30
B/cut 30-70 50-50

(The numbers a-b represent the market share of A and B respectively)

Ideally, the best solution for both A and B would be to maintain their airfares for optimum market share and sufficient revenues. However, the prisoner’s dilemma advises not to increase their airfares though it is in their best interests to do so. This is because; if any one airline increases its fares and the other doesn’t then the passengers would flock to the one offering the better price.

This is what has happened in India all these years. With the presence of low-cost carriers there is immense competition to cut prices even if it is below profitable level. Airlines are looking at every minor opportunity to squeeze their costs to stay in the price race in fear of losing out on passenger traffic.  Add to this the fluctuating oil prices and airport taxes where every minor change can significantly their balance sheets, it becomes clear why the airlines are on turbulent weather. With FDI being introduced, fares are likely to drop further and perhaps it would be the airline with the deepest pockets which shall survive this race to the bottom.

Academics and the Principle of Marginality

When we sit back to analyze our academic results we often list out a variety of reasons for our performance. These typically include: motivation or the lack of it, focus or the lack of it, the teaching standards and the difficulty of a subject.

But I believe it all comes down to arguably the most important theorem in economics: The Principle of Marginality. It states a particular activity should be chosen such that it yields the highest utility(profit) upon each additional unit of effort(cost) as compared to other activities.  This fundamental principle lies at the heart of many government policies and multi million dollar deals.

To illustrate this principle, consider the following example taken from the book Why Markets Fail? by John Cassidy. A Robinson Crusoe figure is stranded on an island and wonders how he should devote his time and energy to maximize his well being.  Should he spend more time on hunting or fishing, on building a shelter or making clothes? The answer is that he should spend his time in such a way that the additional benefit yielded by another hour devoted to any one of them is the same. If it is easier to catch a fish than hunt for a deer, he should head for the shore. If the roof is leaking in rain, he should repair the roof.

But how is all this related to academics you might think.

We all know that the academic grades are directly linked with the time you spend studying. However the study time needed to obtain a particular mark need not be the same of all since some may be able to study faster than others. But fast learners are no different than slow learners as far as the end results are concerned.  So for a particular student, the more number of hours spent studying results in higher grades and the point at which he stops studying decides his grades.

So when does he stop studying? He stops studying when he finds another activity which would give him a higher utility( read pleasure or satisfaction) for an additional unit of time spent on it. Toppers find no such activity and for them, academics would always yield the highest return and thats the reason for their  straight A’s. While some might be content with a few B’s  and instead of trying to convert them into A’s they would spend the extra time to relax as it would give them a higher utility.

The point is that whatever grades you obtain; the condition of marginality is satisfied as always.

Why this kolaveri?

We all have faced kolaveri moments in our lives due to certain people. Moments when we feel a rage building inside ourselves. Moments which leave us scrambling to hide our faces. Moments when we feel there is no use trying to explain things to them. Moments when we just pity them.

Well, this blog aims to share some of  my kolaveri moments. Though these kolaveri moments were experienced with different people, for simplicity’s sake, I am describing these moments keeping in mind a fictional Auntyji, her husband Uncleji and their three children: Bade Bhaiyya, Chinku and Little Tina. While most of these kolaveri moments are true, some are cooked up for the sake of continuity of these conversations.

Me: Auntyji, please take these sweets. I am happy to inform that I have got admission into NIT Trichy where I will be pursuing engineering.

Auntyji: Thats nice Beta. But why are you going to Tiroochi?  I hear only about students coming to Chennai to study engineering from all over India.

Me: *head slam* But Auntyji, NIT is among the top institutes……(stops me)

Auntyji: Its ok beta, you should study what you want. Besides, whatever happens is for one’s good. So, dont get disheartened if u didnt get admission here. Oh, did I tell you about Chinku? He is in his final year at the prestigious Champulal college. Nearby only. Comes home daily. Studies well, only 3 arrears but now all clear.

Me: *bang**bang**bang* Oh, thats nice aunty.

Auntyji: Yes, we are very lucky. He can come home daily and enjoy. I feel sorry for you dear, you have to go to Tiroochi. Very hot climate. And hostel life would be tough, adjusting with local tamilians and all. But anyway you will come out tougher.

Me: (Oh for goddamn sake,atleast pronounce it correctly. Its Trichy not Tiroochi) Thank you aunty.

Little Tina comes running in.

LT: V bhaiya, you are going to live separately and study? How come? Bade Bhaiya and Chinku all studied in home only at Champulal college. Why dont you join there V Bhaiya?

Auntyji interrupts

Auntyji(whispering): Ssshh Tina, don’t be so rude. Now wish him all the best.

LT: Sorry V Bhaiya. All the best. Hey, what will you be studying in Tiroochi Bhaiya? Hey firstly where is Tiroochi Bhaiya?
Brings out a globe and asks me to locate it.

Me: *blank* Engineering. TRICHY is close from here.

LT: Yaaaay, engineering.Is it computers? My brothers who always do geeky stuff with computers. Will u teach me computer after engineering bhaiya?

Me: No no Tina. I will be studying Instrumentation engineering.

LT: Oh wow. It about making musical instruments isnt it? I love music bhaiya. I am also going to become instrument engineer like you. And I am not very intelligent like my brothers to work on computers.

Auntyji: See Tina, now you can ask bhaiya to make violin for your music class. You wanted new violin no?

Me: (Why did I even come here?)

Part 2:

Auntyji: Hello, V beta. So thin and dark you have become. You must be suffering there. Here have some peda. Whats that beta?

Me: Its my android phone aunty.

Auntyji: Nice…but I don’t understand beta, this android and iphone and all. What is the difference between them and Nokia- DoubleX DoubleY. Both are used to call and send message and even my phone has camera also and snake game too.

Me: *bang* These phones are different in sense that they have different operating systems blah, apps blah, customizability blah…

Auntyji: I don’t understand these engineering terms beta….Anyway leave it.

A few days later when I am trying to unravel a tight shoe lace knot when uncleji stops by and removes the knot in a jiffy.

Uncleji: What is this V? U are engineering student and u don’t know how to tie shoe laces.

Next time, when I fumble in trying to screw a loose nut of my table fan, uncleji stops by and does it in a jiffy.

Uncleji: You and all an engineering student.

Me: (Yeah right, I study Digital Signal Processing and Control systems. How in the world is studying engineering related to these situations)* smiles like a dork* Thank u uncleji.

The End

P.S- Kindly pardon the pathetic use of the English Language in some places. It has been done to represent the situation realistically.

Why fuel prices must rise

As another fuel price hike looms large, it is expected that it would elicit a backlash from many; for every hike in the past has been met with public protests and scornful remarks about the governments that had implemented the hike. In some cases, the government has rolled back the fuel prices immediately after a hike to avoid its collapse.

While the hike can put a stress on the pockets of many, we must understand why fuel price hikes are necessary and how it can be helpful in the long run.

Fuels being the basic energy sources have to be made available to everyone for the nation to develop and the majority of our requirements are met from expensive imported oil. The government of India subsidizes these fuel prices i.e it pays a certain amount of the real price on our behalf so that the millions of poor people can afford to buy fuel for their energy needs. So, the amount spent on fuel subsidies depend on the global oil prices, the exchange rate and the energy demands of the people.  An increase in fuel prices means a reduction in the subsidies offered by the Government.

But why cut the subsidies?

India now suffers a budget deficit of $40 billion which is around 6% of the GDP (for the last year). It means that the net revenue of the Government collected through taxes and government enterprises is lower than the net amount spent by it by $40 billion. To finance this debt, the Government borrows from other countries or sells government bonds to investors, with an interest. To counter this widening budget deficit, the government can either reduce spending or cut subsidies or increase taxes. Reducing spending on areas like infrastructure and healthcare would be disastrous since a growing nation needs better facilities to develop and satisfy its requirements.  Taxes have been marginally increased in the previous budget but its not enough to close the burgeoning deficit. Therefore the only way to enforce budget discipline is to reduce the subsidies on fuel in line with the global crude prices.

Is the budget deficit really important to the economy?

One might wonder how countries continue to prosper in spite of having a budget deficit. For example, India had continued to develop at around 8% in the last few years in spite of having a budget deficit, albeit a smaller one compared to this year and the US which has always been in deficit zone for many is the strongest economy still.  Well, small budget deficits are acceptable due to necessary spending on developmental areas like infrastructure, education, welfare schemes and healthcare. The government can take care of interest repayments so long as the economy is in a healthy state. However, large budget deficits like the current one can affect the economy. To finance large debts, the government has to borrow more and hence repay with more interests.  So, the future budgets of the government would concentrate on repaying the creditors and less on public spending. As public spending falls, invariably development will slow down.

But how did the budget deficit increase?

The budget deficit can increase either due to increased government spending or reduced revenue. In India’s case, the rising crude oil prices, the weakening rupee and the growing energy demand ensures that India has to spend more on fuel subsidies to make fuel available at the same rate to the public.  So, the budget gap widens.  Another significant reason is the weakening industrial sector due to reduced demand from foreign countries thanks to the global economic crisis.

While we may feel the pinch of higher fuel prices, we must realize that this is a sacrifice we have to make to ensure healthy budget deficits and the savings earned from cutting subsidies can be converted to higher public spending in the future. Investing more in developmental areas is always beneficial in the long run than subsiding services because public spending can bring more employment and ensure a steady income for the millions of poor people while subsidizing fuel doesn’t guarantee employment for the poor. This brings an analogous situation to my mind wherein if a teacher would lower his evaluation standards so everyone can get good grades without actually learning the subject much or set high standards which may lead to reduced overall performance but which can make sure that students are more knowledgeable about the subject and improved performance over a period.

On a concluding note, I would like to say that these decisions are being taken by the most educated Indian PM, a Harvard graduated FM, a LSE alumnus who is the economic advisor to the PM and an IIT/IIM/MIT educated advisor to the FM. (I am not taking any political sides but I believe that highly educated people with loads of experience get it right more often than not).

The IPL myths

Nowadays, it is nearly impossible to find any Indian who doesn’t have anything to say about the IPL. Ask any Indian about it and chances are that you will get a vociferous response explaining his avid support or utter contempt for the IPL. While a lot of opinions are aired, there are a couple of widely held beliefs which need some revision.

One of the common debate doing the rounds is the effect of IPL on Indian cricket. Some say that it has had a positive effect on Indian cricket by providing a platform for budding cricketers to gain valuable experience by competing with International stars while others blame the IPL due to the fatigue factor it brings in and the huge amounts of money showered on young players which leads to the club over country mentality.

So the natural step would be to have a quick glance at the performances of the Indian cricket team after the IPL was conceptualized in 2008. Lets start with the debacles against England and Australia. The critics say that player fatigue due to IPL and the debilitating effects it has had on youngsters led to the dismal overseas performances. But an in-depth analysis of the fixtures shows that key members of the team like Dravid, Laxman , Tendulkar and Zaheer Khan had ample rest before they took the flights to England and Australia. It must also be remembered that the players from the IPL generation like Kohli, Ashwin and Gambhir  performed well in these tours.

Proponents of the IPL on the other hand praise the IPL for India’s achievements primarily the World Cup victory. However, the players who played the major roles in winning the cup; Sachin, Sehwag, Yuvraj, Harbhajan, Dhoni, Zaheer had established themselves well before the IPL came into existence and had lots of experience. So it cannot be said that the IPL was the reason for India becoming world champions.

So, the correct and logical step would be to analyse the contributions of the IPL generation players for the Indian team.  This provides interesting results. On one hand we have Kohli, Ashwin and Raina who continue to impress with their sterling performances match after match and on the other hand we have players like Rohit Sharma, Jadeja and Yusuf Pathan who play exceedingly well for their franchisees but have somehow failed to live up to their expectations while playing for India.

A clearer picture on the effect of IPL would emerge later, say in 3-5 years of time when the Indian team would consist of players only from the IPL gen. Whether the IPL has affected youngsters playing for India would be seen from the performances of the Indian team at that time and not now.

To be continued

The perils of reading online

While more people in the western world now prefer to use the internet for their daily dose of news over the traditional newspaper, newspaper readership in India is not faltering. At least till now. However with the burgeoning usage of internet by urban Indians, the numbers could drop. With 24 x 7 access to  the latest news updated by the minute online on any internet enabled device, it is easy to understand why the paper is no longer preferred by many.

While rationalists may argue that information, whether on the screen or on paper is the same, I digress. Reading on the internet offers a different experience from reading the paper. With tons of images and links to various other pages, it becomes difficult to concentrate on a particular article. We may find another link interesting and quickly click on it leaving the present item half read and continue clicking on further links which may appear on the next page.

It is also highly unlikely that we open the web browser for the sole purpose of  reading. Our emails and social media pages would be open always and constant notifications would simply drag our attention to check them out immediately foregoing the current article being read.

All these attention crippling effects mentioned ensures that we hardly read and analyze something thoroughly before moving on. This leads to difficulties in retaining what we have read and a reduced attention span while reading.

However, it is unfair to blame the internet for these effects; for it is we who can choose to use it wisely or not.

Blackberry’s fall from grace

Blackberrys which were extremely popular just a few years back are now struggling to survive in the smart phone market. They now occupy a meagre portion of the smart phone market as compared to an overwhelming majority few years back. Much of its share has been gobbled up by of course the iOs and Android phones. Research in Motion (RIM), the makers of Blackberry are now facing rising losses and its sad to see them go down in a market which they virtually invented.

The Blackberry’s rise was due to its association with Corporate life. It became a must have device for every corporate professional. This was due to the convenience and uniqueness it offered for email and messaging services. They were infamously referred to as  ‘Crackberrys’ due to their excessive usage by its owners and in a reference to crack cocaine addiction. But its ironical that this was the reason for its fall too. Though it was ideal for the corporates, it was ideal only for the corporates. It was ideal only for its email and messaging services and nothing else. Other phones like the Apple’s iPhone and Android phones could do much more as well as being equally convenient for messaging and emails.  They were more, lets say, well-rounded than the uni-dimensional Blackberrys. So people started to shift their loyalties to these phones.

The question then arises about how exactly did the Blackberry go down?

Unlike The iPhones and the androids, the Blackberrys did not offer the option of  using third-party apps, until recently.  Apps are a major reason for the successes of iPhones and the androids due to the vast customization options they offer. There are a huge number of apps available in the apple and android markets which offer a ton of features. Users of Blackberry had to be content with the pre-installed features on the phone which included just the basic stuff. By the time, RIM opened up its system third-party apps, the damage had already been done. The iPhones and the Androids had swept the market. Besides, their app-store offers only a fraction of the apps available in the Apples or the Android stores. It is also believed that developers are finding it tougher to develop apps for the Blackberry as compared to the Androids or the iPhone.

Another reason is the omnipresent QWERTY keypads in the Blackberry phones. Though they offer easy typing, they severely inhibit navigation and entertainment options. Touch screen phones are far more easier to navigate through and they offer a rich entertainment experience due to a larger screen area.

In the highly competitive technology domain, it is imperative to continuously innovate and stay one step ahead of the competitors, else the product dies. Blackberry found out the hard way by sticking to its ‘business user’ image.

Could it change its fortunes with the release of the new Blackberry 10 mobile operating system? Lets wait and watch.