Meddling with markets

We Indians are known the world over for our price sensitivity. This has led to India becoming a global hub for low-cost innovation in many sectors such as automobiles, but it is also earning the country a bad name since we are extremely reluctant to pay for services. This aversion to paying for services has already prompted state governments of Delhi and Karnataka to place a ban on surge pricing by cab aggregators such as Uber and Ola.

These state governments have obviously not taken into account the fact that many times, rides on these platforms happen at fares lower than the auto rickshaws, precisely because of the demand-supply algorithm they follow to set fares. Surge is dependent on location and demand and reverse surge also applies, when rides are very cheap, based on the same location and demand metric. We want to cap cab fares without realising this could cripple on-demand cab hiring. This is just mindless interference in market dynamics. But politics must triumph over economics, even if the end result is disastrous.

Now, there is a rising chorus on capping airfares too. Dozens of Members of Parliament have been speaking in one voice on the urgent need to cap airfares, saying airlines are fleecing flyers. A Parliamentary Standing Committee has in fact recommended earlier this month that there should be a cap on at least economy class fares, alleging that airlines have been charging “predatory” fares during peak seasons. And the Ministry of Civil Aviation is now asking all airlines to provide monthly data on how much revenue has accrued from tickets sold in the highest fare bucket.

If the government actually accedes to MPs and caps airfares, it would be doing the airlines a huge disservice. In a highly competitive domestic airline industry, which has been bleeding for years due to government’s own skewed taxation policies, capping of fares is neither practical nor advisable. Besides, capping could embolden airlines to seek an assurance from the government over return on investment, like in the case of airports with regulated tariffs. Just like cab rides, flyers rarely complain when they get one-way, all-inclusive ticket for about Rs1,000 or Rs1500 or similarly ridiculous low prices. They also forget to vent their anger on social media when they book seats on an airplane at dirt-cheap prices through advance booking.

MPs and others agitated over airfares have been pointing to instances such as the recent Jat agitation when airlines charged exorbitant fares for even short routes. Earlier, Indians working in the Gulf region complained to the Prime Minister about exorbitant fares during holidays and peak summer season. 

The government must step in when airlines begin charging exorbitant sums during, say, natural calamities or unforeseen disasters. It already does, by asking Air India to offer seats at reasonable rates and warning private airlines against jacking up prices. This is a wise move but anything beyond this to regulate fares is going to be counter-productive.

In fact, the government perhaps needs to re-examine the findings of its own regulator, DGCA, on airfares, to get the correct picture. After analysing fares on 18 high-density routes, the DGCA concluded that average ticket price for air travel in 2014 was close to the minimum tariff charged by airlines. And that revenue generated by airlines in the highest fare bucket is minimal. In other words, most airline tickets are sold outside the highest fare bucket in India. Then, a check on airfares on 10 busy domestic routes by the ministry of civil aviation last Diwali again found airlines pricing tickets at “reasonable” levels.

Anyway, as per existing laws, airfares cannot be capped. With the repeal of Air Corporation Act in March 1994, the provision of airfare approval was dispensed with by the government. Under the prevailing regulation (Sub Rule (1) of Rule 135 of the Aircraft Rules, 1937), every air transport undertaking engaged in scheduled air services are required to establish tariff, taking into account relevant factors such as the cost of operation, characteristic of service, reasonable profit and the generally prevailing tariff. 

In addition to the legal hurdle on capping fares, the ministry is also bound by its own earlier directive which asked all airlines to display fares on their websites in compliance of Sub Rule 02 of Rule 135, Aircraft Rule 1937.

Airlines remain compliant to the regulations as long as the fare charged by them does not exceed the fare structure displayed on their website. And this stipulation has rarely been broken. The DGCA has a fare-monitoring unit (TAU) which regularly analyses fares and checks whether airlines are violating the fare buckets which are already pre-determined for each route. Then, the Competition Commission of India also steps in occasionally, checking airfares. 

The best way to allow the airline sector to grow is to let carriers decide how to price tickets, where all to mount flights and what business model to follow. The government has not exactly covered itself with glory over its handling of Air India, the sarkari airline which continues to guzzle crores of taxpayers’ money while remaining buried under a mountain of accumulated losses. Because of its parentage, this airline is forced to obey diktats on fares, routes etc. But if private airlines were to run their businesses on capped fares, we may soon have many more Kingfisher Airlines in our skies.