MC Explains | Airfare cap removal: What it means for the aviation industry

The government lifted caps on domestic airfares with effect from August 31 after more than two years, allowing airlines to set ticket prices freely. The limits were imposed in May 2020, when the carriers were allowed to resume services following the nationwide lockdowns.

With airfare caps removed, the market is still divided on what it would mean for the airline industry. Here is how the market is reading the fare cap removal:

What were the airfare caps?

The government set minimum and maximum prices for domestic flights, depending on their duration in May 2020.

Airlines could not charge a passenger less than Rs 2,900 (excluding GST) and more than Rs 8,800 for domestic flights with a total duration of 40 minutes or less.

Why were these limits introduced?

The fare caps were put in place to prevent a spike in ticket prices due to pent-up demand after the easing of air travel restrictions in 2020.

These limits would protect economically weaker carriers and prevent passengers from being overcharged.

Why have the airfare caps been lifted now?

The Indian government lifted the caps on domestic airfares after reviewing factors such as demand for air travel and prices of aviation turbine fuel. The removal of fare restrictions will help airlines meet challenges such as fuel costs, which is one of the primary determinants of airfares.

What does the cap removal mean for airlines?

Airlines will now have the freedom to set fares, increasing them when demand is high and offering discounts when seats are going empty. Analysts said the removal of limits has been a positive so far.

According to an analyst, IndiGo, the country's largest carrier, reportedly said the removal of airfare caps will help the airlines increase passenger load factors by offering discounted fares. This suggests that IndiGo is focused on expanding its market share and other airlines will follow suit, the analyst said.

What is passenger load factor?

Passenger load factor is a measure of the passengers that an airline has carried. It is the percentage of available seats sold on a flight. It helps determine demand and sales for an airline.

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What does demand for air travel look like?

Air travel demand will improve on the back of lower ticket prices and the festive season, analysts said.

Vistara recently indicated that the surge in demand was driven mainly by family visits and leisure travel. It added there was a gradual uptick in corporate travel.

Indigo has reportedly witnessed a strong recovery this summer holiday season and expects the trend to continue through the festive season.

However, JM Financial Institutional Securities said airlines might be adversely impacted during the July-September, which is a seasonally weak quarter.

Would removal of airfares mean an increase in competitiveness?

Competitive intensity in the sector was expected to intensify with the addition of Akasa Air and Jet Airways. But analysts said the cap removal specifically might not spur competitive intensity as much.