A K Bhattacharya: Regulatory turbulence for airlines

Creating more regulatory bodies will only create more confusion and widen the governance deficit

It was a pleasant surprise that there were no loud protests when airfares on many domestic sectors almost doubled during the Holi weekend. There was added relief, too, as there was no government intervention either to discipline the airlines. The Delhi-Mumbai economy class one-way fare for an evening flight last Friday shot up to Rs 14,800-16,400, compared to the normal weekend fare of Rs 5,500-6,000. What happened? Why didn’t the aam-aadmi government of the United Progressive Alliance (UPA) issue a warning or two to the airlines for what it should have seen as a ploy by them to pocket super-profits?

Remember that the UPA government did just that last Diwali in November 2010, when the airlines decided to raise fares by almost 300 per cent taking advantage of the holiday rush. The civil aviation ministry had issued a stern warning to the airlines asking them to limit the fare increase on such occasions within a pre-determined slab. The airlines’ argument that fares tended to go up automatically just before major festival holidays, particularly for those purchasing tickets at the last minute, failed to impress the government. Nor was there any taker of the argument that the airlines’ business model was such that they had different buckets of fares and once the low-fare buckets were fully booked, travellers had no choice other than buying tickets from high-fare buckets.

To be sure, the increase in fares during the Holi weekend remained within the government-stipulated cap. Here then was a government that seemed to be tying itself in knots over its own mindless game. Having first tinkered with market-determined prices and imposed a fare cap that too for a service that a tiny percentage of well-heeled Indians consume, it had no reason to intervene again since the airlines raised fares within the permissible range, never mind that the increase was more than 100 per cent.

There was another governance failure that stood out in stark contrast. The airlines experienced a surge in the Holi weekend booking rush also because the ongoing Jat agitation had paralysed train services in large parts of northern and western India leading to the cancellation of many trains. The absence of government intervention in defusing the Jat agitation also contributed to the airline fare spike. The irony is too obvious for anyone to miss. The government could do precious little with the spike in air fares because the increase was within the limits set by it. At the same time, there was no effort by the government to prevent the cancellation of a large number of trains, which had inconvenienced most ordinary Indians planning to travel home during the festival.

There is, of course, a larger problem in the way the government has been dealing with airline fares. The belief that airline fares should be subject to government directives has no rational justification. Yes, airline fares too need to be regulated, so that airlines do not make super-profits by taking advantage of sudden shortages in airline seats availability, but that regulation should be done by a regulator, and not by the government. Unfortunately, airline fares continue to come under the regulatory domain of the directorate general of civil aviation, which many believe is an extension of the civil aviation ministry.

Those who had heaved a sigh of relief at the formation of the Airports Economic Regulatory Authority of India (AERA), in the belief that over time this body would expand its role and bring under its ambit the regulation of airfares as well are in for a major disappointment. The government proposes to create a separate regulatory authority to oversee airfares, while AERA would continue to deal with only airports regulation. Indeed, the government’s thinking is that there should be a new apex level regulatory body supervising the functions of the two regulators — one for airports and the other for airlines. Why the government has made such elaborate plans to create multiple regulatory authorities within the same sector defies all logic and common sense.

Consider the following. The power sector has three distinct operations with different functions. There are companies that generate power. Then there are some companies, which are in the business of transmitting that power after evacuating it from the producing plants. Finally, there are companies, which are engaged in the plain business of distributing power.

Now imagine a situation where instead of the Central Electricity Regulatory Commission as at present, there would be three different regulators — each one of them looking after the three segments of the power sector. What would be the advantage of such a system? None, except that more jobs would be created and more retiring bureaucrats (primarily those belonging to the Indian Administrative Services) will feel more secure about landing themselves with decent jobs with the perquisites and pay that are not lower than the last pay drawn by them prior to their retirement, thanks to the Sixth Pay Commission recommendations.

If only the government began seeing beyond the myopic interests of its bureaucrats, the civil aviation sector would benefit from better governance with a proper regulator overseeing the airports and the airlines. There is no need to create more regulatory bodies, which can only create more confusion and widen the governance deficit.