Impact Of Air Fare Regulation On Aviation Growth In India

By Kamal Shah

The 1990s marked a revolution in India’s aviation sector, fuelled by the deregulation of the domestic market and the entry of private airlines. This bold move transformed the skies into a playground of competition and innovation, allowing airlines the freedom to deploy capacity and dream bigger. Yet, amidst this commercial dynamism, the government introduced a game-changing mandate—the Route Dispersal Guidelines (RDG). Far from being just another regulation, the RDG became a beacon of socio-economic responsibility, ensuring that even the remotest corners of India could access the gift of air connectivity.

This policy was not just about business; it was about nation-building. Under RDG, airlines ventured beyond bustling metropolises to open up routes to underserved areas, unlocking opportunities for communities once isolated by geography. The story doesn’t stop there! The introduction of the Regional Connectivity Scheme (RCS) further solidified this commitment. With the Regional Connectivity Fund Levy collected per flight, scheduled mainline carriers have partnered with the government to bring a new wave of progress. Together, they have extended air travel to smaller towns and rural landscapes, making flying a luxury and a lifeline.

Airlines have, however, always been free to decide the prices (fares) that they charge from their customers, barring short-term management of airfares by the Ministry of Civil Aviation post the COVID-19 lockdown wherein fare floors and ceilings were imposed, and which were withdrawn when the pandemic ended.

The airline business in every country is characterized by certain common factors and outlooks, some of which are detailed below:

• Airlines incur costs to “produce” seats on flights that they operate. If a flight departs with empty seats, then the revenue that those empty seats could have generated is lost forever.

• Demand for air travel is highly seasonal – all markets undergo cycles of high (peak) and low (off-peak) demand. These demand cycles arise due to various factors – religious events, school holidays, climate patterns, financial year adherence, number & type of economic centers & activity, etc. Demand for travel also varies by day of the week as well as time of day.

• Given the need to ensure air connectivity on round a yearly basis across their networks, scheduled airlines typically prefer to operate air services also for the entire year. This requires them to manage variations in revenues and profits/losses due to seasonality and other factors without any external support or subsidies.

All airlines therefore endeavor to maximize revenues in a manner that the profits in peak seasons cover their losses in the lean seasons such that the airlines also generate adequate surplus to ensure further growth of their fleet – a highly capital-intensive exercise. A proven financial track record, backed by adequate cash reserves, also impacts an airline’s ability to negotiate better aircraft purchase as well as aircraft leasing deals. Further, as most airlines across the world are funded by private enterprises and many also have public shareholding, it is incumbent on them to generate returns for their public shareholders who have placed their faith in them.

Of late there has been an increased clamor in the public sphere for capping airfares. These demands do not take into account the impact of such a move, some of which are enumerated below.

Airlines in India have been stimulating the demand for air travel by offering low airfares. This stimulation of demand is critical not only for the growth of air travel but also for the general economy as increased air travel for various reasons has a multiplier effect on hotels, local transport, local tourism revenues, airport revenues, airport concessionaire revenues, etc. Airlines in turn subsidize these low fares from the higher fares charged by them in line with their estimation of demand coupled with the revenue management principles followed by all airlines globally. Any capping of fares will impact the ability of airlines to stimulate demand for air travel in India, increasing the low-end fares, in turn resulting in a decline in the growth of the Indian air travel market. Furthermore, in such a scenario, airline revenues will decline, impacting their ability to induct more aircraft, creating a more expensive air travel market on the whole.

Also, if airfares are capped, airlines will not be able to generate sufficient revenues in the peak season to sustain operations in the off-peak/low-demand seasons, which can be expected to result in seasonal operations on many routes. The resultant decline in capacity will only push up airfares in the lean seasons, to the detriment of the traveling public.

The impact of such a move also needs to be seen in the context of the fact that the Indian airline industry has not only recovered from the losses of COVID-19; Indian carriers continue to incur heavy losses even now – the cumulative losses of Indian carriers in FY23-24 were approx. USD 0.5 Billion (as per CAPA). Despite their precarious finances, Indian carriers cumulatively continue to add aircraft and expand operations to newer destinations, endeavoring to create an aviation ecosystem that benefits the Indian economy as a whole. The Economic Survey 2023-24 also recognizes the need for a vibrant and financially strong airline industry in India, to support the government’s goals for India’s economy.

India is one of the cheapest air travel markets in the world. A comparison of airfares across some countries with large domestic air travel markets shows airfares in India, over three weeks before the flight departure date, are three times cheaper. We compared all-inclusive airfares for travel in India, Indonesia, China, USA, Australia and Japan for three booking intervals – 1, 2 and 3 weeks before departure and for peak demand travel times (morning 0630-0830 & evening 1830-2030) for routes of comparable distance. The airfares taken for comparison include elements such as check-in baggage charges, seat selection, cost of buying a meal, etc., as applicable from country to country, to enable a fair comparison. Also, for equal comparison, airfares have been taken only to/from the main airport of the respective city as India is yet to have secondary airports in major cities.

It is seen from the airfares tabulated below, that India is the cheapest country for air travel amongst all the above countries. It is also seen that the average fare per km in India is INR 5/km compared to an average cost of INR 16/km for the other countries listed above. The analysis also reveals that airfares typically increase as one approaches the departure date in every country.

The momentum built jointly by airlines, airports and other civil aviation stakeholders is evidenced not only by the fact that the Indian air travel market continues in double-digit percentages year on year, but also by the fact that more than 40 airports have been added in India between 2015 and 2023 and that the govt. Plans to double the number of airports, from 149 to 300 by 2047. While airline capacity is acting as a catalyst for building new airports and vice-versa, Indian airlines need to be able to maximize revenues to be able to fund continued expansion and bring air travel within the reach of more and more Indians, adding value to the Indian economy at the same time through increased employment opportunities, creation of hubs in India, increased tax revenues for the exchequer, etc. Therefore, there is a need to leave airline pricing to market forces and commercial judgment of the airlines, especially as India is also a free market economy.

Another important consideration is airline costs. It cannot be ignored that, like in other industries and other walks of life, airline costs have been increasing. While international crude prices fluctuate up and down, since most of this is imported and then processed to ATF, the increasing value of the US Dollar to the Rupee translates to an increasing landed cost for airlines. Similarly other dollar-denominated costs especially lease rentals and maintenance costs impact airline cost structures materially. More recently, Indian airports have been increasing their charges both to airlines and to passengers (through pass-through mechanisms such as UDF) materially, driven by their funding requirements for growth and a regulatory pricing mechanism that guarantees them returns, a privilege not available to airlines. Regular escalation in costs and salaries is always a pressure. And let’s not forget that while mandated routes (either through RDG or Udaan) are deployed by airlines for social good, operations on many of these routes are loss-making on a commercial basis, which needs to be subsidized by profits on other routes. All-in-all airlines face a continuously challenging environment of increasing costs, that need to be offset with adequate increases in fares to remain profitable and keep the virtuous cycle of attracting investment to fund future growth.

At all times, we must remember that Indian airlines have no vested interest in keeping fares high. They have huge fleet orders coming and to viably operate these growing fleet sizes, they need to stimulate demand. Demand is best stimulated through attractive pricing. So it is in the airline’s long-term interests to keep pricing affordable. But at the same time, affordability is only feasible if airlines are financially healthy at those price points. Therefore, the industry and its regulators’ efforts should be focused more on bringing costs down to enable stronger viability at lower price points, rather than regulating the end of the entire supply chain by controlling fares.

A detailed breakdown of cost per kilometre, by time prior to departure is as follows:

The table below details how much cheaper airfares in India are, as compared to average of the airfares in other countries.