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Price caps in air travel uncalled for

By DM Deshpande

The decision to open up skies for domestic air travel must be welcomed. It is a sign that the long drawn lockdowns have now started yielding to the imperative need of opening up the economy.

Over two months, civil aviation has been one of the hardest hit sectors along with others such as malls, metros, spa and saloons and others which depend upon touch and close proximity. The Aviation industry is highly cyclical in nature and one of the most capital intensive types. The industry in India is stuck with heavy debts and zero revenues for the past two months.

Of the major economies, India and Saudi Arabia are the only two that have imposed total ban on air travel during the lockdown period. The rest of the world has allowed at least partial operations in unaffected regions.

In order to prevent overcrowding a gradual opening up of air travel is envisaged. At present, only a third of the total scheduled flights of around 7,800 are being allowed to operate. It is a double whammy for the domestic airlines. They have to not only operate much below capacity, but are also bound by tariff regulations of the government. As many as eight price bands are imposed depending on the duration of flight travel, the first time such exercise is being undertaken since deregulation of prices in 1994.

The minimum fare for a 40 minutes flight is capped at Rs 2,000 and maximum ceiling for a 180-200 minutes at Rs18,600. For a Mumbai-Delhi flight, price band fixed is Rs 3,500 to 10,000. In addition, airlines have to ensure that they sell 40 per cent of the tickets at a mid-point of the slab, viz. Rs 3,700. Even in normal times, these regulations are difficult to follow. Now with uncertainties galore airlines have a new headache, one that could have been best avoided.

This may appear to be pro-consumer move but actually end up benefiting neither- consumer nor the airlines. Safety protocols have increased the servicing cost. Debts may force weaker companies to go out of business.

In the current situation, most businesses would avoid as much as possible, physical contact and air travel. Over the last eight weeks, several vital decisions have been taken via video conferencing and by use of digital platforms, webinars etc. There are clear indications that they have gained in confidence and therefore not likely to take to air travel just because it has been opened up for domestic travel. Non-discretionary travel is simply out of question given the rate at which the pandemic is spreading in the country.

Yet, one cannot rule out the pent up demand that can bring in more travellers for some time. Hence, there is a likelihood of air prices going up as feared by the aviation minister. It is the job of Competition Commission of India (CCI) to investigate and prevent any collusive pricing norms of airlines.

To reign in prices it is imperative that the government does all that it can, short of fixing arbitrary price caps for airlines. Price caps are reminiscent of our old license permit raj. Airlines are still not sure how the demand pans out and what should be their pricing strategy. The new normal is still in the realm of uncertainty; airlines will be able to find out only by experimentation what works and what does not. Hence it should not be curbed by a government diktat. Before the pandemic air fares in the country in most parts of travel were highly competitive.   In fact, often cheaper than or comparable with second A/C train fares.

On its part, the government should be concerned with safety and health aspects and not try to micromanage economic matters of airline business. Airlines, battered badly as they are, need a supportive and predictable government policy. Right now price controls are slated for three months period, quite long and worse, no one knows what happens next. It should ensure adequate flights operate on daily/weekly basis in every sector. Even the restriction of allowing only a third of total flights seems unnecessary. As long as social distancing, wearing masks and testing/certifying norms are in place at airports, no useful purpose is served by artificially restricting numbers of flights. In fact, more the flights better it is from the view point of preventing overcrowding.

Possible sharp spike in air fares is given as justification for imposing price caps. But Air India, public carrier has already done a commendable job in evacuating Indians stuck abroad. Can not the government use it’s own carrier to be on the forefront of charging
fair prices?

There is a definite case to reduce tax on aviation turbine fuel. Right now, aviation fuel is cheap but with lifting of lock downs in different parts of the world, demand may pick up. Being highly volatile, oil price fluctuates widely and quickly to changes in global markets. Hence, reduction in tax on aviation fuel will help the beleaguered industry more than anything that the government may do to help the aviation sector.

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University,

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