Cap on airfares unlikely to impact carriers' pricing regime: Report

The government's decision to temporarily regulate airfares to pre-empt any attempt by the airlines to jack up ticket prices in view of the reduced capacity is unlikely to impact if not boost the current pricing regime of the carriers, a report said.

After remaining under suspension for two months in the wake of the coronavirus lockdown, domestic commercial flight operations would resume on May 25. Initially, airlines would operate with one-third of the capacity.

Justifying the capping of airfares, which would be in force for three months, Minister State for Civil Aviation Hardeep Singh Puri had on Thursday said, "If the prices were not fixed, then it was entirely conceivable, but I am not saying that it would have happened, that fares would have skyrocketed and remained very high."

The Ministry of Civil Aviation (MoCA) has categorised all domestic routes into sector (bands A to G) based on flight duration (at an interval of 30 mins), which will remain applicable till August 24.

 

"According to our analysis, airline fares year to date (YTD) have a lower floor and cap than the one prescribed by MoCA. Airline fares are at a discount of 0-55 per cent on median fare basis and 32-58 per cent on average fare basis.

"Therefore, we believe that (temporarily) regulated fares would at least not impact (if not boost) the current pricing of airlines," brokerage Motilal Oswal said in a report.

Citing the example of a Mumbai-Delhi flight, which comes under band D (90-120 minutes)that has a fare band of Rs 3,500-10,000, it said, "Our airfare tracker suggests that normal band rates for the same route stands at Rs 2,200-9,300."

Ministry guidelines also stipulate that at least 40 per cent of the seats have to be sold at below mid-point of the band.

Taking into account the fare band of Mumbai-Delhi, which is Rs 3,500-10,000, 40 per cent of the seats will be booked at around Rs 6,700 (the average of the upper and lower band), it said.

"Our airfare tracker indicates that normal average rates on the Mumbai-Delhi route is Rs 4,100 (for 30-day ticketing window) and Rs 4,400 (for 15-day ticketing window)," the report said.

Based on interactions with industry experts and companies, the report said there might be various challenges in terms of enough seats being booked.

"However, we believe that reduced capacity would balance out the skewed economics of supply versus demand in the current environment (as the guideline provides an airline more options to strategise their routes) and aid airline companies in achieving better utilisation rates (PLFs) on respective routes," the report stated.

The decision not to leave the middle seat vacant or zero social distancing on board would allow airlines to fly in an economic manner (versus the earlier feared cap of about 66 per cent on aircraft utilisation), it said.

Also, flight economies would be further aided by improving airfares as April-May saw improvement of 27-47 per cent with YTD airfares down 2-11 per cent now and lower current jet fuel prices, which are currently ataround 21,000/kl versus pre-lockdown price of around Rs 57,000/kl, the report stated.