Effective June 1, 2021, the capacity in Indian skies will be capped at the 50 percent level again. Last May, domestic aviation in India had restarted with a cap of 33 percent capacity. In stages, it was upped from 33 to 45 percent, 60, 70 and 80 percent until last week when it was cut sharply to 50 percent.
Along with the constraints on capacity, the government has also increased the floor price on fare caps. While this is the third revision in fare caps, this is the first cut in the capacity cap -- having increased it all along the past.
With the cap on capacity at 50 percent, there won't be any immediate cut in capacity and that is why the decision raises more eyebrows. With flights already at one-fourth pre-COVID levels, what was the need to cap capacity?
What does this mean?
February 2020 was the last full month of operations before lockdown. Airlines in India flew an average of 425,179 daily passengers on 3,135 domestic flights. On May 30, airlines flew 70,941 passengers across 870 flights – 16.68 percent and 27.75 percent, respectively, of pre-COVID numbers.
Citing an increase in input costs, primarily Aviation Turbine Fuel (ATF), the government increased the floor price on fare cap without changing the upper limit. Starting June 1, the base fare will increase across the country. The argument for it is that there are very few passengers across the country and there is no need to increase the ceiling price since flights aren’t full. Also, since discretionary travel is not around, the increase in fare won’t impact demand directly.
What is the reality?
The reality could be a tad bit different, though. For April, the data declared by the regulator, the Directorate General of Civil Aviation (DGCA), shows that Kolkata - Delhi, Kolkata - Chennai, Kolkata - Port Blair, Delhi - Leh, Delhi - Patna, and the Delhi - Dehradun routes, among others, saw some seats being sold in the highest fare bracket.
While the percentage of seats is few and far between, a proportional increase in the highest fare would have helped the airlines, and not impacted a lot of passengers at the same time.
On the other hand, short-haul flying has become expensive. Seats on sectors like Bengaluru - Kochi or Bengaluru - Chennai are now selling at over Rs 2,900. These sectors were available for Rs 1,200 not so long ago, pre-COVID. Indeed, these rates were to stimulate the market and attract more traffic--a strategy that won't work in current times.
The increased airfare could see a lot of passengers look for alternative modes, especially shared vehicles where co-passengers are known. The benefit of road travel over air travel in a few cases has been the states enforcing negative RT-PCR results for air travel but the same not being implemented for road travel.
Is IndiGo the real threat?
Most airlines in India have a cash crunch. When the lockdown started, IndiGo was best placed with a Rs 20,000-crore cash surplus. This has subsequently depleted and the airline has passed a board resolution to raise Rs 3,000 crore via QIPs.
Vistara and AirAsia India are banking on the legacy of the TATA group to continue sustenance while GoAir plans to float an IPO. It is unclear how SpiceJet tends to tie up for funds while the auditor continues to raise flags on its ability to continue being a going concern.
It wouldn't be a wise strategy for IndiGo to burn out all the cash just to ground its competition. But even if it would have done so and tried grabbing market share, past data shows that it is not how the market has worked. In July last year, IndiGo had a market share of 60 percent. Subsequently, it has hovered around the 54 percent mark in 2021 - a tad higher than what it was during the pre-COVID days. IndiGo has been inching higher with every passing month over the last couple of years.
Tail Note
While the best case is to do away with capacity caps, the least that can be done is to have rules earmarked to ensure that the cap can be moved on either side, based on the actual numbers.
Immediately after it was announced that the industry would be without caps if traffic crosses 3.5 lakh per day thrice a month, air traffic dropped drastically. Likewise, after an announcement about revising the capacity cap downwards to 50 percent, air traffic has started moving up. For a market poised to become one of the largest in the world, such short-sightedness doesn't bode well.
Gone are the days of measuring CASK, RASK and other parameters. Those were good times! In the current times, all that airlines would look for is the total revenue that comes in and will it be lesser passengers with higher average fares or more passengers at lower fares?
The point that is being missed here is that airports will be hit harder than airlines since they will lose service on many sectors and many airports would be without service for a significant duration until the capacity is revised again.
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