Don't let fare caps clip airlines' wings

There has been much headline news on airline price surges during this festival season, with calls for ticket price caps. While such sentiment is understandable, the efficacy of capping fares is debatable. Airlines serve a network of destinations with varying load factors that need cross-subsidies. Imposing hard ceilings on fares affects an airline's ability to serve lean routes. Airlines in India operate on thin margins because of expensive jet fuel in a predominantly low-cost aviation market. Losing flexibility over airfare pricing would impact plans to build fleets. Shortage of aircraft would lead to the very outcome fare caps attempt to avoid: expensive aviation. Fares regulated below market rates shift the job of rationing from price to time. Flights would fill up as soon as bookings open, shutting out a section of passengers who decide to travel later.

Which is why governments prefer that airfares move within an acceptable range depending on demand conditions. Of course, they insist fares are transparent for customers to make informed travel decisions. The need to intervene arises in an emergency such as natural disasters or operational gridlocks. But these are supply-side interventions. This is how India sensibly approaches airfares. Regulators reserving the right to decide on what constitutes an emergency situation can't be faulted either. Eye-watering fares during festivals are a signal for flyers to explore other modes of travel.

Capping fares to influence demand is not a good idea, and has pernicious effects. Airlines seek to make up for lost revenue through add-on charges for seat selection and carry-on luggage. Connectivity may be affected if airlines reduce flight frequency or drop unprofitable routes. The solution lies in healthy competition among airlines that keeps prices in check while the industry builds capacity to meet rising demand for air travel in the country. Interventions on the input side, such as those involving fuel costs and airport infrastructure, have a deeper impact on airfares.