Lift capacity, fare caps: Operators of India's largest airports to govt

Operators of India’s largest airports — Delhi, Mumbai, and Bengaluru — have urged the central government to remove caps on capacity and price. They say this is impeding the return of passengers and hurting the financials of India’s top airports, most of which are privately owned.

They have also urged the government to resume international air travel without limiting capacity.

While GMR Group owns Delhi and Hyderabad airports, Adani Group owns Mumbai and six other regional airports, including Lucknow and Ahmedabad. Bengaluru airport is owned by billionaire investor Prem Watsa’s Fairfax Group.

Sources aware of the developments said the suggestions were made when chief executive officers (CEOs) of these airports met Civil Aviation Minister Jyotiraditya Scindia last week.

“The artificial constraints created by the government’s rules hinder airlines from deploying maximum capacity, which prevents the return of traffic. More problematic are the price caps, which have made multiple routes unviable,” said an executive of a private airport operator.

An airport’s revenue is directly connected to passenger footfall. More passengers and more flights translate into more landing and parking fees for airports. Similarly, passengers spending time at airport lounges shopping or dining generate non-aero revenue for airports, which comprises up to 30 per cent of an Indian airport’s revenue.

According to an estimate by aviation consultancy firm CAPA-Centre for Aviation, Indian airport operators are estimated to have posted a consolidated loss before tax of Rs 7,000 crore ($942 million) in 2020-21, compared with a profit of Rs 5,160 crore ($694 million) in 2019-20.

India deregulated the aviation industry in 1994, allowing market forces to determine airfares. Since air transport resumed on May 25 last year, the Ministry of Civil Aviation (MCA), using a clause from the Aircraft Act, 1934, has started the practice of fixing capacity and price cap bands. The MCA has said the price and capacity caps have been brought in to prevent bankruptcy of airlines with weaker financials, such as SpiceJet and Go Air.

Currently, the government has allowed airlines to deploy 65 per cent of their pre-Covid capacity. Airports have said that a cap on capacity limits the options for airlines to bring stability into the network.

“For instance, if there are seven city pairs connecting an airport, it is possible that three of them are not getting traffic, while in four others demand is outstripping supply. With the government capping network-wide capacity, airlines have limited options to restructure their network. In many cases, we have seen airlines halt one city pair to add to routes doing well,” said a second executive of a private airport operator.

They pointed out that the government’s practice of fixing a floor for airfares has increased fares across routes, preventing many passengers from taking flights.

Fixing the price floor wreaks havoc with airline pricing strategies. Demand is impacted — the lowest price buckets are no longer offered. Certain price-sensitive passengers, like first-time flyers, rely on low-cost fares to make the transition from train to airplane.

“The floor price of tickets fixed by the government is higher than what the market thinks and has made multiple routes unviable. Fares between Delhi-Coimbatore have increased up to Rs 9,000 under the fare band. For a family of four, such pricing is unsustainable. Passenger traffic could decline. The impact on tourism and the local economies will inevitably be negative,” said a CEO of a private airport.

Executives illustrated the example of footfall for the first three days in August, when air traffic had recovered to almost 70 per cent of pre-Covid levels. Airlines took advantage of a delay in the government reintroducing the price caps to sell tickets at prices that were at least 30-40 per cent lower than mandated by the government.

Industry sources said the practice of government intervention in fare and capacity has severely divided the airlines, with SpiceJet and Go Air supporting the move, and market leader IndiGo and Tata Sons-owned Vistara opposing it.

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

 

But executives of airports in their discussion with Scindia have pointed out that in the process of protecting structurally weak airlines, the practice of price and capacity cap will impair the entire aviation ecosystem.

“While it is the government’s responsibility to prevent bankruptcy, there are airlines which are suffering due to mismanagement and poor planning. Such structural weakness cannot be rectified with artificial protectionism which, in turn, hurts the finances of the entire system,” said an executive quoted earlier.