Domestic airfares: To intervene or let Mr Market decide?

September 09, 2021 6:15 AM

The government has instituted a fare floor and a fare cap, and it is the fare floor that is of greater concern

What the price floor helps with is to ensure that weaker airlines are not bled dry by stronger airlines by discounting air tickets to a point where airlines with cash challenges are unable to sustain themselves. And there are at least a couple of such airlines in India.What the price floor helps with is to ensure that weaker airlines are not bled dry by stronger airlines by discounting air tickets to a point where airlines with cash challenges are unable to sustain themselves. And there are at least a couple of such airlines in India.

By Satyendra Pandey

As the pandemic continues, Indian aviation is facing a curious course of action. Namely, fare caps—the mandate by the government on minimum and maximum ticket prices airlines can charge from passengers. Effectively, the government is intervening in commercial decisions of airlines. Yet letting the market decide may mean that some airlines may face failure. The question remains: Whether to continue with intervention or let market forces take over?

To start with, the term ‘fare caps’ is a misnomer. The government has instituted a fare floor and a fare cap, and it is the fare floor that is of greater concern. The fare cap, for the most part, is irrelevant because with airlines putting in an increasing number of flights and occupancy levels not quite where they need to be, prices inevitably adjust downwards. But with fare floor, which is a fairly high fare floor, it effectively prices out a large segment of the market while interfering in commercial decisions of airlines—in contravention of stated policy goals of inclusive access.

As of now, fare floor or minimum fares that are charged are within a 30-day period, i.e. for bookings that happen within 30 days of travel, passengers are forced to pay higher prices. For bookings beyond 30 days, discounts are available. While the intent is presumably to aid cash-flow for airlines, but the impact is that airlines are losing out on their ability to discount and thereby fill a portion of seats. Consumers lose out as behaviourally India has been a late-booking market, i.e. people tend to book tickets 15-odd days from departure and this trend is being witnessed over the last few years. To force a change in behaviour via policy is simply not working.

What the price floor helps with is to ensure that weaker airlines are not bled dry by stronger airlines by discounting air tickets to a point where airlines with cash challenges are unable to sustain themselves. And there are at least a couple of such airlines in India.

In July, when the government was late to issue a circular extending fare caps, airlines went ahead with massive discounting and the result was a surge in bookings. For August 2, passenger numbers crossed the 2-lakh mark and reached the highest levels since the start of the pandemic. But then fare caps were reinstituted.

Presumably, policymakers are wary of an outcome where a removal of these price caps may result in one or more airlines crash-landing and resulting in loss of jobs in an industry already battered by the pandemic. Along with job losses, there is also the credit risk impact with loans going bad, which will further impact the cost of capital and the appetite to lend to the sector.

India’s airlines differ in their views towards this policy. Compare balance sheets, credit profiles and cash balances and one has clear indications on the stance of various airlines. Not all have been very vocal about this policy.

Yet for a price-sensitive market like India the current minimum fare levels mean that a portion of the traveller base is just not taking to the skies. That too in an environment where rail and road capacity remains muted. Arguably, this has helped keep travel at bay and thereby mitigate the spread of infection, but that, in itself, is a matter of much debate.

For now, fare caps remain. Concurrently, it poses a challenging situation for the policymakers: To intervene or to let Mr Market decide.

The author is Managing partner at aviation services firm AT-TV

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