BY INVITATION

Why the govt shouldn’t decide what you pay for an air ticket

PRANAY KOTASTHANE

15.08.2021

Have you tried booking domestic flights recently? If yes, you would have noticed a strange and unpleasant phenomenon. Not only are the ticket prices high across the board, but all airlines seem to be charging the same high price.

You would have shrugged this occurrence off by blaming the government for raising taxes on fuel, and shelled out the ticket money anyway. Well, you are halfright. Indeed a government policy underlies the high ticket prices but it’s not the one you think. Turns out, a few restrictions that the Ministry of Civil Aviation had imposed since May last year, are still in place. These restrictions are playing havoc with the consumers, airlines, and airports. Here’s how.

Airline ticket prices in normal circumstances are determined by demand and supply considerations. The price broadly reflects the scarcity of the seat you occupy. That’s why you would have encountered significantly higher prices closer to the travel date when fewer seats are available. This pricing situation changed in the wake of the first wave of Covid when the Union government started intervening in both the pricing and capacity of airlines. Specifically, the government put three restrictions in place.

One, it puts a cap on the total capacity that airlines can deploy. Note, this didn’t mean a restriction on the number of passengers in a flight but a restriction in terms of the total number of flights that an airline can operate. Initially, in May 2020, airlines were allowed to operate only up to 33% of their total pre-pandemic flights. This restriction stands at 72.5% as of today. The stated intent of this capacity restriction was to discourage discretionary travel.

Two, the Ministry of Civil Aviation imposed a maximum and minimum ceiling on the ticket price depending on sector and travel time. This was apparently done to protect consumer interest so that airlines don’t overcharge to compensate for capacity restrictions.

This is where it gets even more interesting. The ministry has also imposed a floor on the ticket price meaning that tickets can’t be sold below a particular price, even if the airlines wished to do so! The stated intent of this restriction is to protect financially weaker and smaller airlines.

Now let’s try to anticipate the unintended consequences of this bizarre policy. What began as a Covid-19 emergency measure to discourage travel has taken the shape of a hydra-headed policy aiming to solve many problems at the same time.

An unintended consequence of government intervention that public policy analysts watch out for is rent-seeking. Rent-seekers often distort government policies to serve their interests. And that’s what seems to be the real reason behind these three-fold restrictions. The capacity restrictions and price floors appear to be a clientelist policy to clip the wings of the larger players in the market and give breathing space to the financially weaker airlines.

Next, public policy analysis differentiates probusiness policies from pro-market ones. The former means aiding specific companies while the latter means ensuring fair competition. Intervening in the pricing structure and operational capacity of a sector is clearly a pro-business, anti-market policy. We should be worried for three reasons.

First, the direct cost is being borne by the consumer — ticket prices of most airlines have conveniently settled to just below the price ceiling regardless of how early you book your tickets. Moreover, these restrictions are sure to further damage the fiscal position of Air India, which already incurs nearly Rs 20 crore loss per day. In the end, it’s all of us who will end up shouldering this burden in the form of higher taxes. Second, these restrictions have established a precedent for the government to intervene in the interests of “financially weaker” players, even at the expense of the consumer. Today, the government wants to protect weaker airlines; tomorrow it might extend its “protection” to weaker players in other sectors.

Three, these restrictions are preventing an already beleaguered sector from bouncing back. Not just airlines but airports are also facing higher losses due to lower footfalls. Airport Council International, a global trade body, calculated a $129 billion loss in 2020 and an estimated $108 billion loss in 2021. There are job losses across the globe in this sector. In an already dire situation, government restrictions are further depressing the recovery of the air travel sector in India.

Going ahead, the government’s primary responsibility should only be to ensure that airlines and airports don’t cause further spread of the virus. Given the wider availability of testing and vaccination, this goal can be achieved by mandating Covid-19 detection test results and fully vaccinated certificates for air travel. Price bands and capacity caps do not serve this purpose. These restrictions should be rolled back right away.

Kotasthane is deputy director at the Takshashila Institution. Views are personal.