What the fare cap and capacity limit extension mean for airlines, explained

While the floor price has seen an increase of 10-12 percent, the ceiling price has seen an increase up to 30 percent. In an environment where occupancy levels are far from their all-time highs, airlines have little manoeuvring ability to charge the ceiling price, which would be applicable to a handful of sectors, and very few days between now and the end of March until when the pricing is in place.

Traditionally, Q1 of the calendar year is weak for travel and also one without many long weekends or festivals - times when there is a spike in travel and demand. The extension until the end of March makes it out of sync with global scheduling time tables.

Airlines the world over follow two schedules, summer schedule and winter schedule. The Summer 2021 schedule comes into effect on March 28, 2021 this year. (Last Sunday of March). Airlines will have to plan for a capacity adjustment for four days of the schedule, assuming that the capacity caps would not be extended further. This is one of the quarters that have seen regular sales in the past as airlines have tried to stimulate demand and look for cash flow.

The move is likely to benefit airlines which are not operating near the 80 percent capacity mark. Airlines operating on fewer routes that what they would like will have less to worry about the price dynamics or competition.

That means a fare restriction would be a disadvantage to IndiGo, which operates on far greater routes than competition. India’s largest airline though has the kind of cash reserves it takes to sustain further hits on the revenue side in lieu of expansion of services across the country.

Linked to fuel price?

Including Aviation Turbine Fuel (ATF) under GST has been a pipe dream for long and this budget too did not make mention of the same. But ATF comprises between 40 to 45 percent of total operational cost for the airlines, and while floor and ceiling prices were finalised for the airlines, the ATF was priced at Rs 22,000 per KL in Delhi - the largest airport in the country.

Since then, the fuel price has seen a steady increase reaching Rs 53,795.41 per KL on February 01. While fuel prices have doubled, the fares haven't moved a bit, with the only change being the government restricting only 20 percent of seats to be sold in the median or lower fares band as against the earlier requirement of 40 percent.

Tail Note

The ideal situation demands that market forces would decide pricing. The government doesn't seem to have meddled in any other sector to decide the pricing post COVID, but then there hardly is any other sector which is as fragile and complicated as aviation!

The silver lining has been the increasing passenger numbers, decreasing COVID cases and increasing recoveries, which has not only opened up travel for MSMEs and independent professionals, but also given a boost to leisure travel.

We have left far behind the initial logic of a cap on capacity - to maintain distancing at the airports! The logic now is to ensure that airlines do not go in for a kill.

While the aviation sector has largely been loss-making, the last thing the government would want is to see another airline fall - at a time when Jet Airways is struggling to make a comeback. The high optics in aviation give far more negative publicity than it probably warrants and the fare floor price and ceiling price is a way of ensuring that airlines can sustain a little longer - if not forever!