Rethink aviation policy

Govt price caps are counter-productive

The government’s approach to the aviation sector in India has grown messy, confusing, and possibly counter-productive. Recently the director-general of the International Air Transport Association (IATA) pointed out that government regulation was slowing the recovery in the sector from the second wave — both through capacity and pricing restrictions. In May 2021, according to the data from the IATA, domestic air travel in India was 71 per cent lower than in the equivalent month of 2019, before the pandemic hit. This was even worse than the 42 per cent decline registered in April 2021 over the equivalent month in 2019. For context, global domestic passenger traffic was 23.9 per cent less in May 2021 than it had been in May 2019. The IATA has argued that it will take three years to return to the pre-pandemic load in the airline sector from the moment of reopening. Its director-general is right to call for “data-driven” decisions on such matters because otherwise restrictions are speedily put in place and removed at a relatively slow pace.

There is no doubt that the pandemic has scarred the aviation sector in India, perhaps more so even than its global peers. Fleets have been downsized and older aircraft retired, making the restoration of capacity to pre-pandemic levels a non-trivial task. Government regulations on capacity utilisation have recently been slightly relaxed. Before the second wave hit, domestic flights were permitted to operate at 80 per cent capacity. Subsequently, that was revised downwards to 50 per cent and has now been raised slightly to 65 per cent, although some airlines, including market leader IndiGo, were in favour of going all the way back to 100 per cent capacity. Last week, IndiGo itself reported a larger than expected net loss in the first quarter of 2021-22 of Rs 3,174 crore. Part of that may be due to the increase in fuel prices that airlines have had to deal with.
 

Government policy on capacity utilisation should be driven by scientific advice rather than through numbers picked at random. It should also swiftly respond to the broader data available about variants, transmission, and positivity rates in various areas. But what is certainly inexplicable are the price caps that have also been a feature of policy during the pandemic. These price caps are based on the duration of flights and range at present from Rs 2,600 for 40-minute flights to Rs 8,700 for flights of over three hours. This has forced many airlines to shutter routes — for example, Vistara had announced with great fanfare a flight to Dehradun, which it has quietly had to stop.

Civil Aviation Minister Jyotiraditya Scindia, introducing an amendment to the Airports Economic Regulatory Authority Act in the Lok Sabha last week, claimed that the government wanted to energise flights to smaller airports. The government seems unaware that its actions are having the exact opposite effect. The worst possible outcome will be if, rather than ending price controls, the government decides to subsidise airlines instead. This will in effect be an unjustified transfer to well-off Indians. Nor does the sector need it. The fundamentals of India’s aviation business, driven by world-beating passenger growth over the past decade, are sound, but the government’s policy on fare restrictions can seriously undermine them.