Regulate Domestic Fares

Fares charged by Indian carriers are labile and often appear to be designed to exploit the air passenger especially in the holiday season during which demand outstrips supply

Issue: 2 / 2016By Air Marshal B.K. Pandey (Retd)Illustration(s): By Anoop Kamath

In the Draft National Civil Aviation Policy, the Ministry of Civil Aviation (MoCA) had mooted a proposal under the regional connectivity scheme to cap air fare at Rs. 2,500 for a flight of duration of an hour when flying on regional routes. The adverse impact of the proposal on the finances of regional carriers was sought to be mitigated through a plan dubbed as Viability Gap Funding (VGF). Under this plan, the regional carriers who were the only ones to be affected, would receive subsidy from the government. Funding requirement for the VGF was estimated to be around Rs. 1,500 crore annually and was proposed to be raised through a levy of two per cent on tickets booked on regular flights in the non-regional segment. While the proposal was aimed at fulfilling the mandate from Prime Minister Narendra Modi “to formulate a policy that will make it possible for the masses to fly through air fares that are more affordable”, it also served to provide an impetus to regional aviation. However, in the Indian airline industry, it was generally perceived to be a move by the MoCA to regulate air fares.

Fares charged by Indian carriers are highly labile and often appear to be designed to exploit the air passenger especially in the holiday season during which demand clearly outstrips supply. Sometime in 2014, over 100 Members of Parliament cutting across party lines from various states, including Jammu and Kashmir, the North East region as well as the Andaman and Nicobar Islands had written to the MoCA expressing their concerns over the volatility of air fares in India and had recommended that a mechanism be put in place to regulate air fares to alleviate unwarranted hardship on the hapless air passenger. On the other hand, cutthroat competition amongst the airlines often depressed air fares to levels at which it would be difficult for airlines even to survive. In accordance with Section 5 of the Aircraft Act, 1934, the Government of India is “empowered to frame rules pertaining to the economic regulation of air transport, including those related to tariff”. However, there was some ambiguity about the powers the government has under Aircraft Rules, 1937, to impose cap on air fares. The MoCA was of the view that “if the situation is not contained, some airlines may face closure in the near future. Therefore, steps may be taken to fix minimum airfare to be charged by each airline with appropriate profit margin”.

As for maximum fares charged by the airlines, the MoCA felt that there was a need to cap maximum economy class airfare at a reasonable level of about Rs. 20,000 to minimise the chances of airlines exploiting air passengers flying to destinations in Jammu and Kashmir, North East India and the Andaman and Nicobar Islands through what was described as ‘predatory pricing’. The Air Passengers Association of India had welcomed the proposal as in their perception, this would help prevent arbitrary and unreasonable pricing by the Indian carriers.

There was, however, lack of consensus within the MoCA on the issue of regulating air fares. Those opposed to the proposal for regulation of air fares based their argument on the fact that such a practice would militate against the principles of a free market economy and that air fares must continue to remain market-linked. Besides, such a practice was not followed in any other country in the world and as such it might appear somewhat incongruous for the Indian airline industry to be adopting such a system. Even while a Parliamentary Standing Committee on Transport, Tourism and Culture in its report had suggested a cap on maximum fares. In reply to a query in Lok Sabha, the Minister of Civil Aviation had stated that the government was not keen to regulate domestic air fares. On its part, the Indian airline industry was of the firm view that “there should be no regulation over pricing of air tickets and that any regulatory provisions for the Indian airline industry ought to be limited to security issues”.

The demand raised by the parliamentarians two years ago for regulating air fares appears to have got bogged down amidst dichotomous views with in the MoCA. In tackling this issue, there is certainly a need to find a balance between the financial imperatives of the Indian carriers and those of the travelling public. Unless there is a just and fair system in place to regulate air fares charged by Indian carriers operating in the domestic segment, Prime Minister Modi’s mandate “to formulate a policy that will make it possible for the masses to fly” will continue to remain a distant dream.