Cap on airline capacity extended till 31 Mar, but fares may rise up to 30%

The government has increased the upper and lower cap on airfare by up to 30 per cent in a move that’s expected to push up tariffs and improve the financials of airlines hit hard by the pandemic. However, the cap on airline capacity, currently at 80 per cent of the pre-Covid level, has been extended till March 31.

Flights with 90 to 120 minutes of duration will have a lower fare cap of Rs 3,900, up from Rs 3,500 earlier, for instance. The cap on maximum chargeable fare has been raised to Rs 13,000 from Rs 10,000.

Except for market leader IndiGo, no other airline has been able to deploy even 70 per cent capacity of the year-ago operation. After being shut for almost two months due to the lockdown, domestic flights resumed on May 25.

The extension of cap on capacity will help airlines with weaker balance sheet like SpiceJet and GoAir, which can’t increase their fleet size immediately. “A few airlines said that allowing full capacity will create pressure on them and may even lead to bankruptcy. That’s why we are treading cautiously,” said a government official.

Airlines, other than IndiGo, wanted the government to defer any decision on increasing capacity to March as forward booking for the next three months is poor.

IndiGo, currently with 265 aircraft in their fleet, is eager to expand and has repeatedly lobbied the government to remove any regulations on fare and capacity. With a ban on normal international travel, the airline needs to expand domestically or risk idling its planes and increasing fixed cost. In December, the airline deployed around 78 per cent of what it operated before Covid.

“Fares are lower than they should be at this point and again it is because we are not getting enough of our booking period,’’ Ronojoy Dutta, CEO of IndiGo, said during the recent post results call with analysts, adding that it was difficult for airlines to make money when occupancy is around 70 per cent. Since the bookings are happening close to the date of travel, it’s too short a period to have good load factors and good yield management, according to Dutta.

Civil aviation minister Hardeep Singh Puri had recently said that floor and ceiling price on airfares was an extraordinary measure to prevent a tariff war, which could trigger bankruptcies.

"It is not our intention--it also cannot be in an open, deregulated market situation--to have the fare bands as a permanent feature. So, it is our expectation that when flights open up to pre-Covid levels in this summer schedule, we would not have the need for a price band," he said.

Analysts tracking the sector said the biggest worry was the absence of business travelers who buy costly tickets making it possible for airlines to offer cheaper fares to vacationers.

“We believe domestic passenger growth would be slower going forward (than seen over the last seven months) – particularly from business travel and foreigners travelling on domestic routes. This is attributable to long lasting changes in demand demographics from Covid,” Swarnendu Bhushan of Motital Oswal wrote in a recent note to clients.