SpiceJet fallout: Government may cap economy class air fare at Rs20,000

The government is considering a proposal to cap the maximum fare to any destination for economy class passengers at Rs20,000. The minimum fare will depend on the breakeven cost of each airline. There will be no cap on business class fares. The mechanism to regulate fares is likely to be devised in about a month's time.

The civil aviation secretary will hold consultation with stakeholders before implementation of the scheme. Most airlines are understood to have informally told the government that they are okay with a cap on minimum fares.

With air fares skyrocketing amid the peak season due to the downfall of SpiceJet, the civil aviation minister has asked its officials to devise a mechanism to regulate them.

On Wednesday, the civil aviation ministry issued an internal note for discussions, with an aim to cap the maximum fare for economy class at a ''reasonable price'' of around Rs20,000. The minimum fare will be based on the per seat break even cost of airlines.

A top ministry official said that the mechanism will likely be finalised in a month after the secretary, civil aviation holds consultations with stakeholders such as airlines and the Directorate General of Civil Aviation (DGCA).

''This will be a major policy shift and is a direct consequence of the SpiceJet crisis. We will see if DGCA can issue an executive order for regulating air fares, or if the Airports Economic Regulatory Authority of India (AERA) Act will need to be changed to include airlines. The maximum and minimum fares will be designed as per the sectors,'' he said.

''Severe criticism is there from many quarters, including members of Parliament, tour operators, passengers, etc that the airline companies are charging very high fares on the immediate day preceding travel and the date of actual travel. There is a need to fix a cap on the maximum fare of economy class at a reasonable price of around Rs20,000 beyond which the airlines should not be allowed the charge,'' the internal

Data compiled by Makemytrip.com on 17 December showed that on the back of SpiceJet's cancellations, average spot fares had jumped 45 per cent YoY on the Delhi-Mumbai route to Rs14,484 and 57 per cent on the Delhi-Bangalore sector to Rs17,570.

The proposed price regulation also aims to tackle alleged ''predatory pricing'' by airlines, by specifying the minimum fare an airline has to charge. This refers to cases of selling tickets at very low prices such as Re1 or Rs5, as done by airlines like SpiceJet and AirAsia in the recent past.

Such marketing schemes allegedly favour new players with deep pockets, and make pricing unsustainable for competitors, who are driven into losses. In fact, on 1 April this year, the DGCA had asked SpiceJet to ''immediately stop'' its Re1 fare offer just hours after the low-cost carrier announced the super sale.

The DGCA can regulate air fares as per Section 135 of Aircraft Rule (1937). ''Where the director-general is satisfied that any air transport undertaking has established excessive or predatory tariff under sub-rule (1) or has indulged in oligopolistic practice, he may, by order, issue directions to such air transport undertaking,'' it says.

Section 134 (1A) further gives powers to the government to regulate fares. It says, ''The central government may, with a view to achieving better regulation of air transport services and taking into account the need for air transport services of different regions in the country, direct, by general or special order issued from time to time, that every operator operating any scheduled air transport service shall render service in accordance with the conditions specified in such order including any condition relating to their due compliance.''

The ministry note issued on Wednesday also specified several other issues that need to be addressed to improve profitability for the industry. The aviation ministry plans to ask the finance ministry for tax exemption for the income of airlines, lower interest rates for loans at around 8 per cent and access to external commercial borrowings, as well as declaration as an 'infrastructure' industry.