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Fixing of domestic airfares by Indian government: a mode to be replicated by other countries?

News / 04-06-2020 / India

Setting aside our aspersions on the manner in which domestic air travel was recommenced in India – by way of a tweet by the aviation minister catching the airlines unawares  - the government’s decision to “control” the ticket prices, at least in the short term (3 months), is, I feel, a masterstroke.

Just from a policy perspective, the government has consistently maintained that it is against capping of airfares in any form in India, citing that the competition amongst the airlines will take care of any pricing concerns. It is imperative to point out that price controls are usually counterproductive in the long run. Price controls typically tent to lead to problems of shortages, rationing, deterioration of product quality, and even black markets and thus, the Indian government had previously avoid the temptation of setting prices and, instead, allowed the airline market to function independently through the auspices of demand and supply.

However, with the instant announcement, the Indian government has ‘bit the bullet’ and has taken a stoic position, albeit in the short term. Seemingly, the government’s position stems from two poignant reasons: First, to ensure that the airline tickets do not become overtly priced for the consumer, and second, to dissuade / prevent the ‘stronger’ airlines from using their deeper pockets to indulge in predatory pricing.

Issues of “predatory pricing” have to be analysed by considering various factors including, without limitation, market power, cost structures etc. That is the topic for a separate discussion and is not under the purview of the current commentary.

While we appreciate that the Covid-19 situation has thrown the Indian economy (and indeed the world economy) into turmoil, we also know that extraordinary times call for extraordinary measures, and this is where the government’s initiative to ‘cap the airfares’, seems to be a step in the right direction, as it should ease the airlines into staggered operations without any undue financial burden on the paying customers.

With the easing of the movement control order and the commencement of domestic air travel, passengers can look forward to returning to the ‘new normal’ – both professionally as well as to meet with their loved ones. The airlines, on the other hand, have to ensure adherence to safety protocols like additional aircraft sanitisation requirements, temperature screenings, reduced capacity owing to social-distancing protocols etc. Be that as it may, domestic flights taking off in India are welcome in today’s economy, especially for the airlines who have been bleeding money for the last two months. It is a widely-recognised principle in the aviation circle that an aircraft in the air is always significantly better than grounded aircraft. Thus, even with reduced capacity, the airlines would be somewhat in a better position than what they’ve been facing in the recent past. 

Whilst all of us, passengers as well as the airlines, would love to be in the pre-coronavirus era, it is safe to say that the onset of the 21st century has not been a very happy one. With the government’s initiative to re-start domestic flights with the requisite price controls in place, it is hoped (rather than expected) that the Indian economy would slowly revive, if not to the pre-virus levels, then at least to a level from where it can jumpstart, as and when the coronavirus situation improves globally.

In fact, the Indian government’s decision of price controls for the short term, can and indeed should, be replicated by other larger countries having substantial ‘domestic travel’ opportunities.

[1] https://twitter.com/HardeepSPu...

[2] https://www.bloomberg.com/news...

[3] https://www.thehindu.com/news/...

[4] https://timesofindia.indiatime...

[5] Supra, at 3 above

Piyush Gupta

Piyush Gupta Head of Aviation and Competition

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