The industry needs an independent regulator to fix the demand-supply mismatch that raises fares, but airline pricing should balance passenger expectations with carriers’ aspirations.
Sudhakara Reddy D
National President, Air Passengers Association of India
Given the challenges arising from a rapidly growing civil aviation, the government should set up an independent Aviation Regulatory Authority overseeing the entire sector
As Indian aviation prepares for rapid growth over the next decade, a new policy framework is needed to create a safe and competitive industry that supports economic development.
The number of passengers handled at Indian airports increased from 39 million in 1999-2000 to 123 million in 2009-10. The industry had to develop the capability to cope with an additional 84 million passengers. By 2020, the annual passenger throughput is expected to reach 420 to 450 million, an increment of 300 million or more. The scale of growth in absolute terms will dwarf recent history, and it is a challenge that cannot be underestimated.
If Indians flew as much as Americans, there would be a market of over 4 billion passengers. With the spending power of Indians set to triple over the next two years, the potential for growth is incredible. The government has made remarkable progress in aviation since 2004, particularly during the initial three or four years of its first term. Key achievements included the deregulation of the domestic market, liberalisation of international services and the launch of the airport upgrade and modernisation programme. However, a major shortcoming has been the absence of a long-term strategic plan with an appropriately aligned policy and regulatory framework.
Today, the civil aviation sector is growing at a healthy pace and thanks to GDP growth and the overall economic growth in our country, civil aviation is bound to become one of the most active and vibrant sectors in India.
International flight frequencies to India have tripled to nearly 2,300 every week. India is more connected than ever to our globalised world, bringing enormous economic benefits. This has challenged all those involved in the Indian aviation industry to improve competitiveness. In recent years, there have been some great improvements. But there is still much more to be done. It’s time for a comprehensive approach with a common vision by everyone involved.
For lack of a structured framework, the industry has progressed in an ad hoc manner without clarity or stability on key issues such as bilateral rights, airline licences, airport regulation, ground-handling policy, foreign airline investment and international access for domestic carriers. The lack of certainty about the future makes strategic planning extremely challenging for a capital-intensive industry. This is a major concern and does not help plan investments.
If if a regulator were in place and corrective measures were taken from time to time, the industry would have been healthy and competitive. Today, we find ourselves in a situation where fares have gone up by at least 50 to 100 per cent in different sectors even when compared to those that prevailed in the first quarter of this financial year.
It is unfortunate that the airlines have not added fresh capacity owing to the global economic downturn in 2008 and 2009, in addition to substantial losses that some of them incurred. This and the fact that three of the domestic airlines have been permitted to fly overseas have contributed to a mismatch in supply and demand.
It is also unfortunate that Indians do not plan their travel well in advance, a practice that offers the opportunity to fly at reasonable fares. It is, however, difficult for a corporate executive or an individual to plan the trip sometimes so they end up paying huge amounts towards last-minute travel.
Over the past five years, the absence of a clear policy was manageable because the sector was relatively small. But given the pace of growth (the industry will likely be more than 10 times as large in 2020 as it was in 2004), the challenges are becoming much greater.
It is very important that the government sets up an Aviation Regulatory Authority of India, on the lines of the insurance and telecom regulators, as an independent body overseeing the entire civil aviation sector, whether it is airlines, airports, navigation or safety schedules.
Beyond 2012-13, while traffic growth will continue, our ability to support it may be below expectations and we are far behind in creating the required infrastructure both on the land and in the air.
Kapil Arora
Partner-Infrastructure Practice, Ernst & Young
Allowing the government to fix pricing goes against the open market principles and will create barriers, limiting the long-term growth of the Indian airline industry
Is domestic airline pricing artificially high? Is there a cartel at work? Should the government fix the maximum pricing?
The debate has gained momentum in the last few days with the civil aviation ministry and the Directorate General of Civil Aviation (DGCA) threatening “corrective action” and the airlines responding with publishing somewhat complicated (and confusing) price bands based on the distance between two cities.
Let’s evaluate the current situation and the related questions. For starters, airline pricing is fairly complex and is impacted by several variables such as seat demand versus available supply, competition on routes, global volatility in aviation turbine fuel (ATF) prices, government taxes levies and duties and so on. Further, there are different pricing considerations for busy city pairs (for example, Mumbai-Delhi), corporate versus leisure or holiday travellers as well as seasonal factors that drive the pricing strategies adopted by individual carriers to gain market share.
In this dynamic environment, does the civil aviation ministry or the DGCA have the resources, infrastructure and technology enablers to prescribe normative pricing and proactively monitor abnormal deviations from the benchmarks?
Secondly, the enforceability of any formal government directives could potentially be legally challenged by the airlines since the DGCA is not empowered to enforce a reduction in air fares and its present role is limited to issuing a stern guidance seeking greater transparency in pricing from the carriers.
Thirdly, learnings from the mature markets of North America and Europe show that domestic airline price regulation has been progressively disbanded over the last three decades and left to competitive market forces. The United States (the world’s largest air travel market) is arguably the most competitive, and domestic airline deregulation in the US began in the late 1970s. Similarly, the European Union airspace was deregulated in the early 1990s has since spawned the “budget” carriers who have grown significantly, particularly in the short-haul segment. Airlines in these markets have the full liberty to change fares at will and, notwithstanding the bankruptcies, consolidation and allegations of cartelisation, governments have not taken active control of air fare pricing.
Although there is merit in some regulation and oversight to safeguard the interests of passengers in India, allowing the government to actively fix pricing is not enforceable in the short term and neither practical nor desirable in the long term as it goes against the “open market” principles and will create barriers that may ultimately limit the growth of the Indian airline industry over the long term.
There are also valuable learnings from the pricing deregulation in the Indian telecom sector where economic policy liberalisation and competition over the last two decades have driven market penetration to the hinterland as a result of rock-bottom tariffs. A similar market model could be adopted for the Indian airline sector, which would enable more access to accessible and affordable air travel across the country (not just the six major metros). Instead of a tighter, intrusive and arguably ad-hoc government control over pricing, there is certainly a meaningful role for an active, independent regulatory oversight body with a clear mandate and transparent functioning to address the emerging issues.
To address any collusion, predatory or anti-competitive pricing practices, the Competition Commission of India (CCI) can also be activated to investigate and take appropriate action. Ultimately, airline pricing needs to balance passenger expectations with carriers’ aspirations — that is, between passengers who want affordable prices and airlines that want to maximise revenues and yields.
For the airlines, the answer lies in transparency and self- regulation — on publishing and filing the fares with the government, the fares should be available to passengers directly from the airline as well as from all appointed agents, travel agencies and online “consolidators”. For passengers, a pricing mechanism that is easy to understand, transparent and enables informed choices is the need of the hour.
The views expressed are personal
