Fare hike will prune airline losses but slow down traffic growth: experts

On Friday the govt hiked minimum and maximum fare slabs by 12.5%

The government's move to hike minimum and maximum fare slabs by an average 12.5 per cent will help airlines to narrow their losses, but will delay the recovery of air traffic to pre-Covid levels, aviation experts have said.

On Friday, the civil aviation ministry raised the floor and ceiling prices which airlines can charge in a 30-day cycle. There is no cap on fares sold beyond 30 days and airlines are free to charge their own prices.

Airlines have also been allowed to deploy 72.5 per cent of their capacity–an increase of 7.5 per cent. With the latest order, minimum fare (excluding taxes) on the Mumbai-Delhi route has increased from Rs 4,700 to Rs 5,300. Similarly, the minimum fare on short distance routes such as Mumbai-Goa or Delhi-Chandigarh has risen from Rs 2,600 to Rs 2,900.

“The decision of the civil aviation ministry to increase fare floors and caps by 12.5 per cent is shocking and insensitive to the airlines and more importantly to the passengers. (It) sends a signal that we are not interested in registering traffic volumes,” aviation consultancy CAPA tweeted today.

“The lower fare bands for short duration flights are almost double than fares in pre-Covid times. This will have a negative impact on the flight occupancy. The government could look at removing fare bands for shorter sectors to begin with and judge the market response before deciding the next steps,” said Ameya Joshi, founder of aviation blog Network Thoughts.

Over 269,000 passengers flew on August 1, the highest since the resumption of air traffic in May 2020. In the first seven days of August domestic air traffic rose over 53 per cent over the same period in July as the government delayed in reintroducing fare bands. The growth in traffic has slowed since.

According to an airline executive, 85-90 per cent of tickets are being booked for travel within 30 days of booking. Half of the bookings are for travel within seven

days of purchase compared to 30 per cent in pre-Covid time. Industry wide occupancy too has risen to around 70 per cent in August from 65 per cent in last month.

“While aviation turbine fuel prices have increased by around 57 per cent on a year on year basis, load factors have not increased meaningfully. With the current load factors of 65-70 per cent airlines will continue to post losses,” said an analyst of domestic brokerage.

Domestic airlines are expected to post a combined loss of $ 4.1 billion in FY 20222 similar to FY 2021, CAPA said in June.

“The increase (in fares) will allow airlines to partly offset the impact of increased aviation turbine fuel prices, thereby cushioning some impact on their losses,” said Kinjal Shah, vice president and co-group head corporate sector ratings, Icra.

According to Shah, the price increase may not materially impact passenger traffic demand as in the current scenario, it is limited to necessary travel while both leisure and business travel are curtailed due to various state wide restrictions.