Flying on clipped wings

Capping airline fares is unnecessary

With the nationwide lockdown being lifted in phases, administrative intervention in the economy appears to have surged. This appears to be implicit in the “calibrated” resumption of airline services on May 25, a decision that caught the airline industry by surprise (an earlier announcement had pointed to a June deadline). The advanced deadline will be good news for airlines, which were suffering the ill effects of a pre-Covid-19 economic slowdown that the national lockdown compounded. The reopening, which the civil aviation minister has said will start with one-third of operations, is conditional upon strict safety guidelines to be followed at airports and on aircraft. The civil aviation ministry’s note on standard operating procedure sets out the protocol for passengers and the airport staff to follow. Face masks, gloves, social distancing during check-in and in security queues, mandatory temperature checks, the downloading of the tracking app Aarogya Setu, a limit on hand luggage, and no meals on board are all obvious and sensible elements of the safety standards. This much is expected and warranted.

Less understood is the minister’s announcement on capping airfares for three months. The cap has been decided in seven categories starting with flights with less than 40 minutes’ travel time and in six other categories of 30 minutes of incremental travel time. As if this isn’t enough, the government has put in a second rider — 40 per cent of the seats have to be sold at a fare lower than the midpoint of the maximum fare. A price cap, however temporary, may be warranted in situations of limited competition, when the propensity to cartelise remains high. The airline industry does not fit this paradigm at all. For instance, more than seven airlines operate multiple direct flights on the Delhi-Mumbai route, so the risk of predatory pricing is also relatively low. It is possible, of course, that airlines may be tempted to indulge in some degree of premium pricing to cash in on the pent-up demand after over 50 days of lockdown. But the rise of dynamic pricing offered by competing online ticketing services tends to preclude cartelisation — or, at any rate, make it extremely complicated to accomplish across multiple agents in the supply chain. If airlines did choose to price tickets exorbitantly, the laws of demand and supply would act as an automatic stabiliser with customers exercising the free will not to fly. Capping pricing at both ends will create more complications. 

Finally, given the deep uncertainties over economic revival, an extension of the three-month cap remains a permanent risk. The government would do well to recall the early days of liberalisation, when the frequent boom-bust cycle among private airlines was partly a result of a government restriction on pricing norms, which prevented private competitors from charging fares below the minimum fare charged by the national carrier. It’s the government’s prerogative not to listen to the requests made by the airline industry for lower landing charges, reduction in taxes, etc, amid the Covid-19 crisis. But the fare cap decision is the latest example of the government’s failure to properly implement the “reduction in interference” that the prime minister has promised industry many times. It’s clear that the government will need to fundamentally alter course.