Covid-19 pandemic: Govt cuts airline capacity to 50% from June 1

Decision divides industry with experts calling it interference in commercial freedom of airlines

Photo: Shutterstock — The directive comes at a time when airlines suo moto have reduced capacity with some even flying less than 50 per cent capacity

5 min read Last Updated : May 29 2021 | 10:03 AM IST

The government has cut down capacity for airlines to operate from 80 per cent to 50 per cent from 1st June in order to safeguard viability of airlines with weak finances. Simultaneously it has increased the upper cap of airfare to go up by around 14 per cent due to the rise in fuel prices.

“In view of sudden change in the number of Covid-19 cases, and decrease in number of passengers and reduced occupancy, the existing capacity cap of 80 per cent is reduced to 50 per cent,” the Ministry of Civil Aviation said in an order.

The directive comes at a time when airlines suo moto have reduced capacity with some even flying less than 50 per cent capacity. Industry sources said that government’s direct intervention on fare and capacity have severely divided the airlines with SpiceJet, Go Air supporting the move whilst market leader Indigo and Tata Sons-owned Vistara opposing it.

Airlines like SpiceJet and Go Air’s finances are at a precarious stage with both airlines on thin cash balance. Wadia group’s Go Air is planning to raise around Rs 3,600 crore to pay off debts and vendors. Aircraft lessors have sent notices to both Go Air and Spicejet for defaulting on lease payments.

Sources said that in a meeting between secretary Pradeep Singh Kharola and airline executives, Spicejet and Go Air said that with flights being empty and fuel costs increasing it has become unviable to keep operations sustainable and the government should cut capacity.

“With airlines operating only a fraction of their aircraft in the near term, there is a possibility that stronger airlines will outnumber weaker airlines and distort pricing to fill up their aircraft, potentially affecting the financial viability of carriers as well as that of the industry,” said an official. This situation needs to be prevented,” an executive who attended the meeting said.

However, an executive of IndiGo said that such an intervention from the government on the commercial freedom of airlines hampers decision making and raises risk of diminishing the ethos of a free market.

India deregulated the aviation industry in 1994, allowing market forces to determine the fares. However, a clause in the Aircraft Act, 1934, which governs aviation in India, allows the government to frame any rules, including those related to the regulation of tariffs. However, last year when the airlines were allowed to restart operations after a closure of two months, the government had started the practice of controlling capacity and airfare.

“Airlines including IndiGo have already reduced capacity to less than 50 percent. Some have reduced more according to their own commercial wisdom. But an intervention from the ministry on things like fare and capacity is uncalled for and sends a wrong signal,” he said.

According to data reviewed by Business Standard, airlines operated 1,468 flights on Thursday out of which IndiGo operated around 450 flights while Go Air operated barely 20 flights.

IndiGo CEO Ronojoy Dutta had earlier said that regulatory caps on capacity on fare impacts an airline’s decision making.” Our morning fare should be so different from an afternoon fare, one way fare out of Ranchi is very different from an incoming fare into 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 dictate by someone by saying this is what the fare should be,” Dutta had earlier said.

With 250 aircraft and a healthier cash balance compared to its peers, IndiGo has the cushion to operate flights on one way with a lower load but make money on directions where it gets full capacity. The airline has a free cash balance of Rs 7,440 crore as on December 2020 and plans to raise Rs 3,000 crore through QIP which puts its solvency in a relatively comfortable position to tide through the Covid-19 crisis

A network planner of Air India explained that at current fare levels, flights need to be at least 80 per cent full for an airline to have a chance to break even. But IndiGo’s cash balance allows it to operate a flight which has load on one way but virtually empty on return.

“Currently we are almost at 50 per cent occupancy as most of the metro cities are under lockdown but while IndiGo may not be able to recover the full cost of the trip, it can at least recoup the variable cost from one way,” the persons said.

Variable costs go up or down, depending on how much the aircraft have been used. They include fuel, landing charges at airports, and crew allowances.

“With manageable fuel costs, it makes sense for an airline with substantial cash to keep as many planes flying as possible, rather than paying high rentals and keeping them grounded.

Experts called the move regressive and said that airlines will now adjust capacity by cutting flights to smaller cities. “This is an unwanted move and will take away flights from many stations and sectors. If the fear was IndiGo, it was anyway not operating to maximum allowed capacity of 80 percent,” said Ameya Joshi, founder of aviation blog Network Thoughts, and expert in airline network planning.

India’s civil aviation minister Hardeep Singh Puri had earlier said that both passengers and airlines benefited from capacity and price caps set by the government

“Fare caps have benefited both the passengers and the airlines. There was a complete disruption of civil aviation traffic. And if you had not had the cap you would have had some people utilising the resources to produce irrational fares,” he had said.