Government to start discussions this week on removing airfare price caps

The central government is expected to take a decision on continuing price bands for domestic airfares by the end of the month, after holding discussions with industry representatives, multiple government officials told Moneycontrol.

“Some airlines have requested for the removal of the lower and upper limits on domestic airfares and if there is no opposition from other airlines, a decision on the removal of the fare caps will be taken by the end of the month,” a senior government official said. He added that government officials will meet with airline representatives this week for further discussions.

Another official said that if airlines continue to oppose the removal of the price bands, then the government will look to increase the lower and upper limits of the permitted price bands.

“If all airlines agree to the removal of price bands, then the government will consider it,” the second official added.

He added that not only would the government have to protect monopolization in the aviation industry, but it would also have to look to prevent an exorbitant rise in domestic airfares.

Insulating passengers from exorbitant fares

Last month, aviation minister Jyotiraditya Scindia said fare capping was necessary to protect passengers from being charged exorbitant fares.

"I have an environment where ATF prices are still very high, I want to protect the passengers and also the airlines... I have to ensure that the environment is stable and I need multiple airlines to proliferate in my country and then I need to create that arena where multiple airlines can operate,” Scindia had said.

Discussions on removing the price bands for domestic airfares have resurfaced after many airlines renewed their demand to remove the pricing caps, saying that over-regulation is a hurdle to the full-fledged recovery of domestic air traffic. Airlines in India are also hoping that ATF will be brought under the ambit of the goods and services tax regime, to lower their burden.

Differing views within the industry

In the past, representatives from IndiGo and Vistara had been very vocal against these regulations and have requested the government to consider removing the limitations altogether.

However, SpiceJet and Go First have opposed the idea of doing away with fare caps.

This time around, SpiceJet’s chairman and managing director Ajay Singh has also called for a 10-15 percent increase in domestic airfares in India due to the sharp increase in jet fuel prices and depreciation of the rupee.

Similarly, IndiGo’s chief executive officer Ronojoy Dutta had on June 1 said that rising fuel prices have become a real problem for the Indian aviation industry and that the government should once again consider increasing the upper limits on domestic airfares. Vinod Kannan, chief executive officer at Vistara, also said that the best solution for airlines to deal with rising fuel costs would be to have absolute freedom in pricing.

ATF prices have risen more than threefold, from Rs 40,783 per kilolitre in January 2021 to Rs 1,41,232.87 per kl in Delhi on June 16, 2022, data from the websites of oil marketing companies shows.

Why the fare caps were imposed

Fare caps are currently applicable on a rolling basis for a 15-day cycle, which means airlines are free to set prices of tickets beyond a 15-day period from the date of booking.

Experts said it has become difficult for airlines to maintain operating efficiencies under the current fare caps, given that ATF accounts for 30-35 percent of operational costs.

The Aviation Ministry had imposed lower and upper limits on domestic airfares based on flight duration when services resumed on May 25, 2020, after a two-month lockdown due to the pandemic.

The lower end of the fare band was put in place to help airlines that had been struggling financially due to travel restrictions. The upper limit was imposed so that passengers are not charged huge amounts when demand for seats is high.

Due to the rise in ATF prices, senior officials from domestic airlines in India say that prices of domestic tickets are likely to rise 2-4 percent every month.

Regional routes like to see fare hikes first

Market experts expect the rise in ATF prices to be seen first in the prices of tickets on regional routes.

They anticipate that airlines will hike fares on popular tier-I routes by around 5-10 percent in the next two months if fuel prices don’t fall, but expect a 20-25 percent hike in ticket prices on regional routes by the end of August.

At the moment domestic ticket prices are already nearly double the price on some routes compared to pre-COVID levels.

“If you look at the Delhi-Mumbai route, a ticket on average costs around Rs 4,700 to Rs 5,500 at the moment, which is much higher than the prices seen before the pandemic and even last year,” another senior official from a domestic airline said, seeking anonymity.

The average price of a one-way ticket between Delhi and Mumbai came for Rs 2,300-2,500 in June 2019. In June 2021, the average price of a one-way ticket between the two cities had risen to Rs 3,500- 3,800, historical data from airlines and online travel agents shows.