Covid-19 crisis: Govt considers regulating air-ticket prices after lockdown

The govt's move has divided the industry with executives of airlines and experts suggesting that government's intervention in pricing will be counterproductive

The government is considering temporarily setting caps and floors on airfares once air transport resumes after the lockdown, in a bid to “protect both consumers and airlines”, officials aware of the matter said. The civil aviation ministry, which has started discussions on the process, feels that it is important to ensure tickets don’t become very expensive, and to prevent predatory pricing from hurting the financial viability of airlines.
 

The move if implemented, will be a temporary measure to protect both consumers and airlines, said officials aware of the matter.

A section of airline executives and experts, however, warned that any intervention in pricing would be counterproductive.
 

“This is not feasible. It changes the rules of competition and is also detrimental to consumer interest,” said Kapil Kaul, CEO (South Asia) of aviation consultancy firm CAPA.

India deregulated the industry in 1994, allowing market forces to determine the fares. However, a clause in the Aircraft Act, 1934, which governs aviation in India, allows the government to frame any rules, including those related to the regulation of tariffs.
 

“With airlines operating only a fraction of their aircraft in the near term, there is a possibility that ticket prices may go excessively high, having an adverse impact on consumers and connectivity. There is also a possibility that airlines may start pricing excessively low to fill up their aircraft, potentially affecting the financial viability of carriers as well as that of the industry,” said an official.
 

“Both (situations) need to be prevented,” he added.

The government banned air transport since March 23 in order to prevent the spread of coronavirus, but the step is now threatening to push airlines with weak financials into bankruptcy as they grapple with high fixed costs and zero passenger revenue.

A second official said the demand to regulate prices had come from a few airlines, which felt that the market would drastically change as the virus threatened the viability of weaker airlines. He said the airlines suggested an appropriate profit margin could be added to determine the break-even price per kilometre, accounting for the cost of fuel, crew, and airport charges.
 

“A few airline executives have asked for regulating pricing as they fear that market leader IndiGo, with close to a 50 per cent market share, may become monopolistic and control pricing in a post-pandemic market,” the official said.
 

The promoter of low-cost airline SpiceJet, Ajay Singh, has been vocal about pricing indiscipline in the industry, saying that a super low fare regime would lead to airlines going bankrupt. Singh’s airline is facing a threat to its survival after the government refused any bailout package for the sector. SpiceJet practically had little cash before the lockdown and its net worth was negative (Rs 850 crore in end-September 2019), owing to past losses. A two-month freeze on revenue has made things even worse.
 

In contrast, IndiGo had a cash pile of Rs 9,412 crore at the end of December 2019.
 

The government has on previous occasions mulled a price cap and floor, but didn’t implement it finally. Nasim Zaidi, former secretary of civil aviation said that the government is well within its rights to frame a rule to protect consumer interest and airlines, but he warned that there shouldn’t be a uniform price cap for all airlines. He suggested that the price cap and floor if implemented should be related to the cost structure of an airline.

“Deregulation doesn’t mean complete lack of regulation. There is a strong reason for a price cap. However, a one size fits for all approach will not work. The optimum price an airline is charging should depend on the cost structure of an airline. Cost structure of a full service airline and a low cost airline will not be the same," said Zaidi who in 2012 had commissioned a study to find factors which inhibits competition in Indian aviation.