Rise in passenger traffic in August once again triggers debate on removal of fare caps

Though there is some recovery observed in June 2021, there exists continued stress on demand, driven largely by the second wave of the pandemic.

Some domestic airlines are again knocking on the doors of the government, seeking a return of the free market regime in the Indian aviation industry.

The fresh demand to remove fare caps comes after the industry saw 2,065 flights take to the skies on August 2, carrying around 269,713 passengers, on a day when the central government delayed announcing a fare band after the earlier price caps expired on July 31.

Also Read: Indian aviation gets a glimpse of what withdrawal of airline fare caps can do

On one end of the spectrum, airlines, including IndiGo, and many market experts are calling for a free market to return on the back of a faster recovery. On the other side, airlines like SpiceJet and GoFirst want fare caps to remain until passenger traffic returns to pre-COVID levels.

While the ministry of civil aviation has, till now, favoured protectionism after reopening the Indian skies on May 25, 2020, the government may now be forced to rethink its strategy.

The need for removal of fare caps

“The exponential rise in passenger traffic since the start of August shows that a competitive market will lead to a faster recovery of the Indian aviation industry," a senior IndiGo official told Moneycontrol.

August 1 and 2 have been the busiest days at airports since January 2021, and the government should consider allowing a free market to determine prices in order to extradite recovery in the sector.

Ronojoy Dutta, Chief Executive Officer, IndiGo, had earlier said that regulatory caps on capacity and ticket prices hurt an airline’s decision-making capacity.

“Our morning fares should be so different from afternoon fares. One-way fare out of Ranchi is very different from an incoming fare to Ranchi. Let people get creative with it, let people experiment with it and let’s see what the right answer is. But let’s not have it dictated by someone by saying this is what the fare should be,” Dutta had said.

Willie Walsh, the Director-General of the International Air Transport Association (IATA), had, last week, said that the Indian government should remove capacity and price caps as they restrict competition, market access and growth.

Aviation consultancy CAPA India, in its reports, had also said that the government should look to maintain price floors and caps, for the first half of 2021, which came to an end in July.

“While price caps are helping some Indian airlines with weaker financial books, since capacity utilisation is still capped and there isn’t a lot of demand across the country, higher floor prices are further causing a hesitancy to travel," Lokesh Sharma, a senior aviation and defence consultant, said.

Furthermore, removal of fare caps matters especially on shorter sectors, where the government-prescribed fare is much higher than pre-pandemic fares.

For instance, a ticket between Delhi and Agartala, which used to be Rs 4,500, on an average, has risen to Rs 6,600. Similarly, shorter routes like Bengaluru-Chennai, which used to see fares starting at Rs 1,412, are now seeing fares of around Rs 2,995.

Not everyone favours removal of fare caps

The government's move to enforce fare caps was intended to benefit airlines that are not operating near the 80-percent capacity mark and airlines operating on fewer routes in order to prevent monopolisation by market leader IndiGo.

These issues remain even now. Most smaller players still have lower capacity, compared to IndiGo, and may struggle to match the fares offered by IndiGo, if caps are removed.

IndiGo has a war chest of more than Rs 15,000 crore and has already ordered a new set of aircraft, which will further help in increasing operational efficiencies.

Market experts do not expect losses to widen for IndiGo as it is offering tickets at prices its competition cannot match without making more losses. IndiGo can continue to increase its dominance on the routes across the country.

In June, all airlines together flew 790 unique routes in India, shows data shared by Caladrius Aero Consulting LLP, a boutique aerospace and defence consulting firm.

Of this, IndiGo, the country’s largest carrier by fleet and domestic market share, operated on 531 routes. This was followed by Air India, which had operations on 265 routes. SpiceJet came a close third, operating flights on 262 routes.

On 194 of the 531 routes that IndiGo operate, the airline had an absolute monopoly. SpiceJet had monopoly operations on 26.7 percent of its routes while Air India had monopoly operations on only 21 percent of its routes.

While SpiceJet did not respond to questions by Moneycontrol on the need for a floor price, an executive at GoFirst said that, at the moment, passenger traffic at routes connecting Tier-I to Tier-II cities and routes connecting Tier-II cities were still much lower than the pre-COVID levels. Therefore, the demand on these routes would not take a hit at government-set fares.

He added that the phenomenon seen on August 1 and August 2 was a product of sales campaigned pulled off by airlines, including GoFirst, as customers are still looking at some form of cheap, revenge tourism.

Unless a substantial number of these passengers continues to travel despite the sales promotions, the fares set by the government are required, he said.

Similarly, market experts said that removal of fare caps will result in even more stress on Indian airlines.