DNA Money Edit: Cancellation fee relief may raise airfares

On the face of it, the relief given to flyers in the draft air passenger charter on cancellation charges may seem to be in their favour. It may, however, work counter-productively if the airlines decide to restrict the number of lowest fares to ward off its revenue impact.

Roughly, airlines earn 2-3% of their total revenues from cancellation fees. This revenue serves as an insurance for the lowest fare they offer when a flight booking is opened. The fear is that if cancellation charges are done away with for 24 hours after a ticket is booked then the airlines may most likely have fewer lowest fares than they offer now.

Cancellation fee is typically a substantial source of income for the low-cost airlines. Full services carriers like Jet Airways, Vistara and Air India do not earn much from it.

Today, cancellation fee of domestic airlines range anywhere between Rs 2,500 and Rs 4,000 per ticket. This is likely to find its way into the fares in some or the other way. With air carriers already staring at the prospect of lower profits, or even losses, as global crude prices head northwards, it is unlikely that airlines will absorb the hit due to the proposed guideline on cancellation fee.

And as they transfer the loss due to the proposed new rule, it could adversely impact the demand for air travel, which has been growing at more than 20% annually over the last few years.