India’s Civil Aviation Minister, Hardeep Singh Puri, announced that domestic fare caps will remain in place until next February. The government has had a price floor and ceiling on all routes since flights restarted in May. However, he also signaled that the fare caps could be removed if passenger levels reach pre-COVID levels before February.
Fare caps to stay
India enacted a price floor and ceiling on all routes when domestic flights restarted in May after a two-month pause. The reason for this was two-fold: the first was to prevent astronomical fares due to pent-up demand, and the second was to ensure airlines were able to cover high costs during the pandemic.
Airlines usually price tickets based on demand, which means last-minute and the last few seats cost drastically more than those booked in advance when the flight is empty. However, price caps prevent airlines from engaging in price wars and protect passengers from surge fares.
In a press conference, Mr. Puri said the price caps for the lucrative Delhi-Mumbai route were ₹3,500 and ₹10,000 ($47 and $135), according to Mint. Additionally, 40% of the seats must be sold below the midpoint of the fare cap, i.e. ₹6,750 ($91) in this example.
Low demand means that these fare caps likely aren’t hurting revenues noticeably but rather preventing airlines from dropping fares to unsustainable levels. While this could impact airlines if demand picks up, Mr. Puri has already said the caps will be removed when demand reaches pre-COVID levels (which he estimates could be as soon as the end of the year).
How are fares set?
To decide what the fare caps will be on any route, the government divides routes by time of the flight. Section one contains flights under 40 minutes, two contains flights from 40 to 60 minutes, three contains flights from 60 to 90 minutes, and so on until section seven, which has flights from 180 to 210 minutes in length.
Based on the section, the price floor in between ₹2,000 ($27) and ₹6,500 ($87), while the price ceiling is between ₹6,000 ($80) and ₹18,500 ($249). This means that no domestic flight in India can cost over ₹18,500, regardless of demand on the route.
While the caps may be in place, passengers may notice fares are slightly higher. This is due to certain taxes and extras (seats, meals, etc.) since the fare cap is only on the airfare price. But passengers can be sure to not face a last-minute shock due to the price.
How is the domestic recovery?
India has seen domestic traffic recover well since flights resumed in May. Passenger numbers have crossed the 50% mark, reaching a high of 180,000 daily passengers this month. With India’s daily cases also dropping, we could see flight numbers continue to pick up over the winter months.
Fare caps are here to stay until a substantial recovery is made, but the impact on airlines may not be much. With airlines still losing millions every month, strong demand, and not high fares, will be the priority.
What do you think about fare caps? Should the government have them during the pandemic? Let us know your thoughts in the comments.