Let discounts happen

Perils of regulatory overreach in the aviation sector

The Directorate General of Civil Aviation, or DGCA, has set a worrisome precedent by asking SpiceJet to withdraw a discount scheme hours after the budget carrier launched it on Tuesday. SpiceJet had announced a three-day sale with fares starting from Rs 1 for travel from July 1 onwards. July is when the lean season starts, and airlines worldwide routinely come up with such promotions to fill up their seats. The DGCA's reasoning was the offer did not make any financial sense and could distort the market; also, the seats on offer were negligible, and hence this amounted to misleading the customers. This is not the first time the DGCA has expressed concern over such promotions. In January 2013, SpiceJet offered a million discounted tickets. The DGCA then advised others not to slash fares in response, but refrained from issuing a formal notice. The SpiceJet offer, it had said, would only benefit the existing fliers and would not expand the market. This time, the DGCA has gone a step further and made SpiceJet withdraw the offer.

Although it is true that the sector is mired in losses (the Centre for Asia-Pacific Aviation reckons the industry will report a combined loss of $1.2 billion in 2013-14), this is a purely commercial decision - ultimately, it is for the company's shareholders to decide whether it is unwise or not. True, SpiceJet's profit of Rs 51 crore in the first quarter of 2013-14 turned into losses of Rs 559 crore in the second quarter and Rs 173 crore in the third quarter, but no regulator can take away from a company its right to take business risks. And if other carriers felt this was predatory pricing, the matter could have always been investigated by the Competition Commission of India. SpiceJet has also maintained that with a 20 per cent share of the market, it is not in a position to be predatory.

The DGCA's case would have been strong if the offer lacked transparency, and there was the likelihood of buyers getting duped. The DGCA, while justifying its action, said SpiceJet had earmarked just two per cent of its seat inventory for the offer but had created a (disproportionate) hype in the market. This, the DGCA felt, amounted to misleading the customers. However, the press release put out by the airline clearly mentioned that only limited seats were put on offer. It also mentioned that the discounted fares did not include statutory taxes and fees and were dependent on the route and date of travel. Moreover, if it was a small offer, it would be unreasonable to say that it would distort the market and bleed the entire industry.

Such promotional schemes are a regular feature of low-cost aviation all over the world. Through discounted fares, airlines are able to get passengers for seats that would have otherwise gone empty. While the DGCA's recent moves to make private aircraft more accountable and stepping up checks and inspections are welcome, the organisation needs to ensure that it doesn't fall into the trap of regulatory overreach.