Govt, airlines start discussions to remove cap on passenger fares

IndiGo, Vistara against limits; SpiceJet, Go First not on board

The government has started discussions with airlines about the removal of price bands for passenger fares. The talks have started after some airlines renewed their demand to remove the pricing caps, claiming the regulation is a hurdle to the full-fledged recovery in domestic air traffic.

According to government sources, there will be a meeting between the government and airline CEOs next week. “A final decision in the matter will be taken by Minister of Civil Aviation Jyotiraditya Scindia,” said a senior government official.

People aware of the development noted that the industry is not unanimous in its demand. It is understood that market leader IndiGo and Vistara are pushing for the removal of fare caps and floor, but SpiceJet and Go First have asked for continuous government intervention in ticket prices.

India deregulated the aviation industry in 1994, allowing market forces to determine airfares. Since air transport resumed on May 25, 2020, following the lockdown, the Ministry of Civil Aviation (MCA), using a clause from the Aircraft Act, 1934, started the practice of fixing capacity and price bands.

Though the ministry lifted the restrictions on domestic capacity in October last year, it continued to cap ticket prices within 15 days from the date of travel. The government said the price and capacity caps have been brought in to prevent the bankruptcy of airlines with weaker financials, such as SpiceJet and Go First.

“Air traffic is increasing as almost all curbs that were put in place against Covid have been removed. With fewer restrictions, people are travelling more. But the number of flyers in a day is stuck within the range of 300,000-350,000. This is primarily because the cap on fares beyond 15 days is hurting airlines’ ability to provide dynamic fares which help stimulate the market and build up forward loads,” said an executive of an airline. 

Before Covid, airlines were carrying around 400,000 passengers per day.

While airlines have been forced to increase ticket prices because of a spike in jet fuel prices, executives say air ticket pricing is very dynamic. According to them, they need to provide cheaper tickets to build future loads.

“Airlines price tickets depending on pricing history, which determines how much the customer and the market will bear. Pricing also differs depending on which group the passenger belongs to -- leisure or business. The way each group is priced is very different. The limit placed by the government is hurting that ability,” said another airline executive.

He added that opening up of international routes should also lead to an increase in domestic passenger traffic.

The state oil marketing companies’ decision to increase the price of aviation turbine fuel by 18 per cent to record Rs 1.10 lakh a kilolitre. Fuel accounts for over 40 per cent of an airline’s expenses and the latest jet fuel price hike will increase overall expenses by 7-8 per cent.

The latest increase in jet fuel prices comes against the backdrop of the Russia-Ukraine war. Russia is the second-largest exporter of crude oil, with a global share of 11-12 per cent. However, the country is now facing sanctions from multiple governments, making trade deals difficult.