Study recommends ticket pricing regulation in aviation

Are we moving towards some sort of pricing regulation by the government over airline tickets? A report of the National Transport Development Policy Committee (NTDPC), headed by Rakesh Mohan, has proposed economic regulation for airlines while noting that Indian carriers are perhaps not behaving rationally while adding capacities (more seats through new aircraft) and are also not achieving optimal productivity in performance.

At present, the Director General of Civil Aviation (DGCA) monitors prices across all domestic airlines and has already asked them to keep ticket prices within specified buckets. Just last week, the DGCA called CEOs of all domestic airlines and asked them to lower fares which have shot up drastically in the last few weeks. Airlines, left with no option but to comply, promised up to 20 percent reduction in fares in the highest bucket. They also promised to look into the practice of releasing highest priced inventory first - which means advance booking would not get any price advantage for you, the passenger.

But this action of DGCA comes when the industry is bleeding, domestic air traffic has begun to decline and even though airline yields are rising (revenue per passenger) but a faster increase in costs is making matters worse. Besides, rupee depreciation has also impacted airline bottomlines significantly.

A report in the Times of India this morning quotes a survey by IATA to say that airfares in India are lower by up to 280 percent or nearly three times when compared to markets such as Australia, Canada, China, UK and USA. At the same time, cost of operation of airlines is much higher in India than in these nations.

So should government be actually fixing ticket prices for air travel? Specially, when it has been unable to offer a sustainable cost environment to airlines in terms of taxation on Aviation Turbine Fuel (ATF)? The NTDPC report noted that “certain market developments concerning pricing behaviour of scheduled carriers in India point to the need for some form of pricing regulation. Price regulation need not necessarily mean fixing of prices”. It said a regulatory framework governing airline prices could be used to test the pricing practices that may arise in the market from time to time, bringing in transparency and avoiding predatory pricing.

The report also warns against any laxity in monitoring the merger & acquisitions happening in the civil aviation space, lest they create a behemoth which kills competition. But Rakesh Mohan should not worry. Two mega mergers in the Indian skies-Naresh Goyal bought out Air Sahara and Vijay Mallya bought out Air Deccan-have not only been unable to create a giant airline, both are suffering because of the ill-conceived acquisitions. JetLite (which is what Air Sahara was renamed as) has been incurring losses since the takeover; and Kingfisher Airlines has already reduced it operations to a fourth due to large losses.

The proposed economic regulation of airlines also involves “a well thought out” exit policy for unviable players. Is this meant to benefit airlines like Kingfisher, which have become unviable? Besides the report notes that the existing system does not provide for processing and dissemination of financial data of airlines and airport operators, which needs improvement. “Availability of financial data of carriers and airport operators would go a long way in providing the basis for investment analysis for the industry as a whole.”