Our Procrustean policy on airfares is pointless

Source: Livemint

Relevance: Issues related with Aviation industry

Synopsis: Heavy regulation on Aviation sector impact its efficiency and are much too arbitrary.

Background

• The aviation business has always been one of India’s most heavily regulated. The covid pandemic, has left it even more so.
• After lockdown relaxations, regular flights resumed in late-May 2020 with a number of rules on flying capacity, fares and certifications.
• Many pre-1991 restrictive tools such as quantitative restrictions and price controls were imposed by the centre.
• For instance, carriers could operate only a third of their flight capacity; and price caps had to be imposed to balance the demand.
• Last week, the Centre revised rules again. Airlines can now fly at 72.5% of their strength and sell seats within price bands hiked in one go by 11-13%, about twice our annual rate of inflation.
• The ministry raised the minimum charge for a seat on a flight up to 40 minutes to ₹2,900 and the top rate to ₹8,800.
• Barring the odd exception, the private carriers have not complained, perhaps content with this central plan.

But it is time to resist such intervention. Aviation can be an ideal free market.

Need for regulation

• The use of common facilities like airports and public resources like airspace makes regulation necessary. we are left with too few carriers for competitive prices to prevail.

Still, these conditions do not justify price distortions that cause inefficiency.

Moderate regulation

• Airlines are in the business of perishables, as unsold seats can’t be sold once a flight takes off. We have a mix of emergency flyers and bargain hunters. For optimal flight realization, must-fly passengers should pay premium fares to subsidize others while saleable seats must not perish, even if they go ultra-cheap.

As every carrier has its own calculations, a one-size-fits-all scale can’t be fair to all players. Fairness calls for pricing freedom.