Our Procrustean policy on airfares is pointless
PremiumThe Centre had imposed price controls and capacity caps on air travel for covid safety, but they bear the ills of a command market. They cramp efficiency and are much too arbitrary
The aviation business has always been one of India’s most heavily regulated. But the covid pandemic, which pinned flyers to the ground and clipped airlines’ wings, has left it even more so. After being grounded for two months of an all-India lockdown, regular flights resumed in late-May 2020 with a jumble of rules on flying capacity, fares and certifications that would merit a Kafka novel. The Centre dusted off a couple of pre-1991 tools for our ‘open sky’: quantitative restrictions and price controls. In command-economy theory, these could be combined perfectly to meet the government’s goals. As air traffic had to be kept minimal for covid safety, carriers could operate only a third of their flight capacity; and as this seat crunch could cause fare spikes beyond levels most Indian flyers could afford, price caps had to be imposed; and, as weak demand could crush the finances of airlines so soon after a couple had folded up, ticket floors were placed as price props. In practice, it was chaotic. As the pandemic appeared to ease after last year’s peak, that capacity limit was raised to 80%, step by step, before our ministry of civil aviation took note of the second wave and knocked it down to 50% from 1 June, some three weeks after infections peaked. This overnight reduction in seat supply, though, was accompanied by a hike in fare caps. Last week, the Centre revised our rules again. Airlines can now fly at 72.5% of their strength and sell seats within price bands hiked in one go by 11-13%, about twice our annual rate of inflation.
At the stroke of a pen, the revenue potential of our air-carriers has gone up. The ministry’s 12 August diktat raised the minimum charge for a seat on a flight up to 40 minutes to ₹2,900 and the top rate to ₹8,800. Flights of 180-210 minutes may now be priced in a band of ₹9,800 to ₹27,200. This may seem like enough space to let prices vary by demand and supply. Barring the odd exception, our private carriers have not complained, perhaps content with this central plan. But it is time to resist such intervention. It is nobody’s case that aviation can be an ideal free market. The use of common facilities like airports and public resources like airspace makes regulation necessary. It also limits how many carriers we can have. Even so, with the exit of Kingfisher and Jet, rivalrous intensity has slid sharply over the past decade. While a new airline called Akasa might take off next year and Jet’s new owners seem keen to get it airborne again, we are left with too few carriers for competitive prices to prevail. Still, these conditions do not justify price distortions that cause inefficiency. If a conflict of buyer-vs-seller interest warps the basic logic of policy, as seen in the June tweaks, then arbitrary price bands also expose policymakers to charges of favouring some carriers over others.
Airlines are in the business of perishables, as unsold seats can’t be sold once a flight is flagged off. While supply has a time-ticker, demand is variably elastic. We have a mix of emergency flyers and bargain hunters whose grab-that-seat points of preference would exceed our price bands on either side. For optimal flight realization, must-fly passengers should pay premium fares to subsidize others, while saleable seats must not perish, even if they go ultra-cheap. Cost structures vary too. As every carrier has its own math, a one-size-fits-all scale can’t be fair to all players. Fairness calls for pricing freedom. So why persist with a Procrustean policy that cramps market efficiency? It needs a rethink.
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