Lowest airfares may be curbed by govt

Written by Mihir Mishra | New Delhi | Updated: Feb 12 2013, 17:24pm hrs
AeroplaneThe civil aviation ministry is preparing a formula to limit the lowest airfares offered by airlines. (Reuters)
In a first, the government is working on a plan to step in and partly regulate airfares by limiting the lowest fares offered by airlines. The move, which is being formulated under section 5 of the Aircraft Act 1937, is aimed at ensuring that carriers do not bleed themselves out of business by undercutting each others fare offerings.

The civil aviation ministry is preparing a formula to limit the lowest airfares offered by airlines. The limit, which could change every month, will be decided on the basis of the airlines monthly financial numbers and could also vary according to airline.

The trigger for this regulation is believed to be the recent offering by SpiceJet in the domestic sector. The airline had offered 25 per cent of its inventory for travel across India from February to March on a one-way fare of Rs 2,031. Of the one million tickets on offer, the airline could sell 700,000 tickets during the three-day offer. After the offer, the Directorate General of Civil Aviation (DGCA) had reportedly asked the airlines not to get into any fare war to counter SpiceJets offer.

Private airlines have termed the governments move to regulate fares as an unnecessary intervention. We do not need such regulations to protect us. We are in a commercial business and have the right to do whatever makes business sense. Companies like us are also accountable to our shareholders and there is no need for someone else to make rules to safeguard our interests, said a SpiceJet executive.

A top executive with another low-cost carrier executive, said: Full-service carriers, who have double the costs of any low-cost carrier (LCCs), should not be allowed to sell below their costs to drive out the LCCs.

Analysts said that regulatory intervention does not protect consumer interests. Consumer interest is never protected by any regulatory intervention but by ensuring market forces remain very competitive and dynamic, said Kapil Kaul, CEO-India of Centre for Asia Pacific Aviation, an aviation consultancy firm.

But, justifying the move, a senior civil aviation ministry official said: Airlines offer unrealistically cheap fares to gain market share, but end up closing shop in a number of cases. This is a worrying trend and we are planning to limit fares offered at the lower end of the bracket. We are neither trying to regulate fares nor do we plan to, but we need to have a system in place to ensure than no airline shuts shop due to this reason. Any airline shutting shop takes the sector backwards.

The ministry official said the government does not have the authority to regulate fares but can make rules under section 5 of the Aircraft Act 1937. The Act gives the central government powers for the economic regulation of civil aviation and air transport services, including the approval, disapproval or revision of tariff of operators of air transport services.

This is the first time the ministry is trying to regulate fares at the lower end. After complaints of excessive fares charged by airlines earlier, the DGCA had, in December 2010, asked the airlines to share a route-wise fare sheet on their website that will have the maximum fares for every route, primarily to clip the fares on the higher end of the bracket.