Lockdown 4.0: Will airfare caps benefit airlines and protect consumers?

Will the cap on minimum as well as the maximum air fare really benefit airlines as well as protect consumers? Many airlines as well as aviation analysts say that it won’t and the government might have to relook at these restrictions much before the stipulated three-month period.
 

Those who defend the caps say controlling fares is important because weaker airlines with hardly any cash reserves might be forced to close down. A large airline could sell fares at below cost or at marginal cost and kill an airline that does not have the cash reserves to do the same.  After all, a dominant player like IndiGo controls over 50 per cent share of the market with around Rs 9,000 crore of cash reserves.
 

But Kapil Kaul, chief executive of CAPA for Indian sub-continent and the Middle East, said: “I don’t see how these airlines can be saved by having a minimum threshold fare for a three-month window. They can only survive if they recapitalise and that would require $1 billion (without IndiGo and Air India) as they hardly have any cash reserves. Otherwise, they have no chance for survival.”

The reason for that is simple: With a monthly revenue of around Rs 7,500 crore, as much as 25 per cent of it goes on fixed costs, which include lease rentals. But for nearly two months, airlines have had near zero revenues.
 

Moreover, even after the sector has opened up, demand will suffer a steep fall for the whole financial year. CAPA estimates that 55-70 million domestic passengers will fly in financial year 2020-21 (FY21), as compared to 140 million in the last financial year.
 

Based on this assumption, only half of the current capacity is needed to fly the limited number of flyers. Consequently, airlines have to shrink their fleet considerably. In any case, to begin with, the government has permitted only a third of flights to operate.
 

One of the airlines said the bucket pricing system gave them leeway to push the passenger load factor, at an average a robust airline would sell 40 per cent of tickets at the lower buckets (which are much below what the government has stipulated now for routes such as Delhi to Mumbai). Yet they were able to push overall yields by selling about 7-10 seats at the highest bucket (which is far higher than what they can charge now as capped by the government).
 

Now that this flexibility has been taken away, a lot of passengers who used to fly because the fares were only marginally higher than rail fares, will not fly. The result could be that average yields per passenger could come down due to a low passenger load factor, without really benefitting the customer.
 

The government has added another rider, namely, that 40 per cent of seats have to be sold at the mid-price between the lower and higher cap. The airlines say the number should have been determined by the demand and supply scenario of a flight rather than mandated. A senior executive of a low-cost carrier said the reason to have these caps is primarily to address criticism (as some airlines will fold up) that they had made attempts to protect them but that was not enough.