Towards efficient regulation

Bring airlines into line with minimal action

The government's move to regulate the way commercial airlines charge a passenger for cancelling her ticket and carrying excess baggage, or compensate her for shutting out access to a scheduled flight has predictably raised the hackles of the industry, which has issued dark threats of such regulation eventually leading to higher fares. There can be little dispute over some basic propositions under free-market conditions. A player should have pricing freedom and the job of the regulator is not just to mitigate market imperfections but also to act as a protector of consumer rights. The latter is important as in a face-off with an airline a consumer finds herself in an unequal combat. Above all, it is important that the regulator be seen to be fair and not prone to excessive regulation.

There can be little doubt that the cancellation charge should not exceed the basic fare, the amount that the airline was to get in the first place. In collecting user development fee or service tax, the airline is acting as an agent obliged to pass on the revenues to the principals. Passenger service fee also is not for the airline but for security and passenger services at the airport. An airline can argue that a last-minute cancellation caused it to be landed with a loss, an empty seat. The reality is in fact the opposite. Fares tend to go up as a flight's departure approaches and a last minute cancellation often allows an airline to sell a costly ticket, resulting in a windfall gain. As for a passenger being denied a seat either due to over booking or flight cancellation, that is an altogether more serious matter. It is a breach of promise for a scheduled carrier to deny a seat to a passenger with a valid reservation. The airline on its part can be hit by events beyond its control like bad weather or a wildcat strike by some workers. It is difficult to scientifically put a value on such cancellations and the amounts in question should be fixed through negotiations between the airline and the regulator.

Excess baggage charges, on the other hand, can and should be determined scientifically. It should not be a flat rate but be driven by cost per kilogram and the distance covered. The cost of carrying a kilogram of baggage over one kilometre is as easy to determine as the cost per seat kilometre, a standard ratio airlines use for pricing purposes. Airlines should offer a ready reckoner at every check-in counter terminal to determine the excess baggage amount chargeable for a particular flight. After all, the cost to an airline for carrying a kilogram of extra baggage over 500 kilometres cannot be the same as over 1,500 kilometres. The regulator should examine the underlying arithmetic for the ready reckoner periodically to ensure that it is realistic on the basis of current costs.

Both regulator and carrier should be mindful of their images. The regulator should not be seen to be having itching fingers ready to meddle at every available opportunity. Airlines should not be seen to be overcharging. The figure of 10 per cent of overall revenue being mentioned in this connection seems to be on the higher side. It would be far better to subsume, to the extent feasible, all these into the basic fare and compete on that basis.