Airlines accept 3-month fare cap, but wish govt didn't fix pricing

The industry is fears that despite the government saying that the cap and floor will be for three months, it may extend it arbitrarily

Airline executives were divided over the government capping air fare for the first time since its deregulation. While the broad opinion was that the fare floor fixed by the government was reasonable considering the current demand, they fear such interventions may become more prominent.

“The lower cap set by the government seems to be reasonable. In July, it’s a dream for any revenue management guy to be able to charge Rs 4,000 in the Delhi-Mumbai route,” said an executive of a 

low-cost airline.

Domestic flights will have a cap on fares with both an upper and lower limit for three months when flights resume on Monday, Civil Aviation Minister Hardeep Singh Puri said on Thursday. While the upper price limit is aimed at preventing any sharp rise in fares due to pent-up demand, the lower limit will help ensure financial viability of airlines does not suffer amid high costs.

“According to our analysis, fares have a lower floor and cap than the one prescribed by the government. Airline fares are at a discount of 0-55 per cent on median fare basis and 32-58 per cent on average fare basis. Thus, we believe that temporarily regulated fares would at least not impact if not boost the current pricing of airlines,” analysts at Motilal Oswal said.

However, the industry fears that despite the government saying that the cap and floor will be for three months, it may extend it arbitrarily. “The aviation sector has suffered a massive financial trauma. Market-based pricing is the best medicine to nurse airlines back to health quickly,” said Anand Stanley, chairperson, civil aviation committee, Ficci.

A second airline executive, however, said: “People are desperate to travel at least in the initial few days. And, they are scared to travel in train. So, I think there will not be any problem with the floor.” However, he said that when demand is muted and minimum fare is higher than what it is, the weakest or least-attractive player suffers the most because they cannot use pricing as a tool to steal market share.

Flights between cities that are under 40 minutes have been classified under section one, while those under 40-60 minutes are under section two. Section three consists of destinations 60-90 minutes apart by flight, section four comprises cities 90-120 minutes apart, and section five consists of cities 120-150 minutes apart. Destinations between 150-180 minutes and 180-210 minutes have been classified under sections 6 and 7, respectively.