Hairbrained idea: Capping air fares will be counterproductive

The government should focus on improving infrastructure , making it easy for new supply to be created, and laying down parameters for minimum safety standards, instead of fixing prices

A parliamentary standing committee has sought the capping of air fares on the grounds that airlines are charging more than 10 times the advance booking fare. In a recent report, the committee on transport, tourism and culture also noted that the deregulated environment did not mean “unlimited freedom of exploitation”, and urged the civil aviation ministry to intervene as some airlines were charging more than 10 times the advance booking fare around festivals and for ticket purchases made closer to the date of travel. The committee is of the view that dynamic pricing, or the so-called bucket method that is generally followed across the world, is not suitable for India and leads to airlines fixing arbitrary and exorbitant prices. To buttress its argument, the panel has also pointed out that even after a 50 per cent reduction in the price of aviation turbine fuel (ATF), airlines have not passed on the benefit to consumers. Beyond fixing a cap on ticket prices, the panel also wants a cap on the cancellation charges that are levied by airlines. It claims that there is no uniformity or minimum standards to impose charges for rescheduling, cancellation and no-show, and private airlines lure consumers by attractive offers only to charge high cancellation fees.

Thankfully, the government has so far not shown any interest in following up on the recommendations. There are three problems with the panel’s demand. One, it betrays a lack of understanding on the exact way bucket pricing takes place. The government has already pointed out that only 1.7 per cent of the tickets are sold at the highest fare basket—the ones being characterised as exorbitant. Capping all fares will be counterproductive because it will result in pushing up airline ticket prices for 98-99 per cent of the passengers. And it is also legally untenable as in a deregulated sector it is not possible to interfere in a strategic decision such as air fare pricing. With the repeal of the Air Corporation Act in March 1994, the provision of air fare approval was dispensed with by the government. Two, basing the argument on changes in ATF prices is faulty as it ignores the cyclical nature of the industry. Once put in place, a price cap would be politically difficult to remove even if ATF prices soar in the next cycle.

In fact, the only reason why airlines can get away without passing on the benefits is that there is not enough competition in the industry. In other words, there is not enough supply to meet demand on many routes. For the government to come out with a price schedule for each route—an exercise which will be far more arbitrary than anything existing right now—will be the worst advertisement for potential entrants into civil aviation. That is not to mention the fact that Indian air fares are far lower than global standards. The government should focus on improving infrastructure (perennially clogged airports, for example), making it easy for new supply to be created, and laying down parameters for minimum safety standards, instead of fixing prices. Forcing existing airlines to charge less will likely result in their reducing expenditure on safety and overall quality of services.