Thursday, February 11, 2021

What the fare cap and capacity limit extension mean for airlines

In a surprise announcement, the government has extended the cap on airline capacity until the end of March. The announcement comes as a surprise, because the earlier ones have been about a gradual increase in capacity, and this is the first time that the government has put an end date to the existing capacity cap.

And this comes a day after airlines operated 2,327 domestic departures—the highest ever since the restart of India’s domestic aviation on May 25, 2020. The numbers translate to 74.2 percent of pre-COVID capacity.

February 2020 was the last full month of operations pre-COVID, seeing an average of 3,136 daily domestic departures and 425,179 daily domestic passengers, as per data released by the regulator DGCA. While the Civil Aviation Minister has been making statements about returning to pre-COVID levels very soon, passenger traffic has not returned at the rate the ministry would have wanted. On Sunday, February 7, 287,210 domestic passengers took to the air. The highest number ever translates to only 67.55 percent of pre-COVID levels.

Along with the capacity cap, the aviation ministry has also revised the floor and ceiling prices of the fares  These fare caps have been extended multiple times in the past, but never revised.

While the floor price has seen an increase of 10-12 percent, the ceiling price has seen an increase up to 30 percent. In an environment where occupancy levels are far from their all-time highs, airlines have little manoeuvring ability to charge the ceiling price, which would be applicable to a handful of sectors, and very few days between now and the end of March until when the pricing is in place.

Traditionally, Q1 of the calendar year is weak for travel and also one without many long weekends or festivals - times when there is a spike in travel and demand. The extension until the end of March makes it out of sync with global scheduling time tables.

Airlines the world over follow two schedules, summer schedule and winter schedule. The Summer 2021 schedule comes into effect on March 28, 2021 this year. (Last Sunday of March). Airlines will have to plan for a capacity adjustment for four days of the schedule, assuming that the capacity caps would not be extended further. This is one of the quarters that have seen regular sales in the past as airlines have tried to stimulate demand and look for cash flow.

The move is likely to benefit airlines which are not operating near the 80 percent capacity mark. Airlines operating on fewer routes that what they would like will have less to worry about the price dynamics or competition.

That means a fare restriction would be a disadvantage to IndiGo, which operates on far greater routes than competition. India’s largest airline though has the kind of cash reserves it takes to sustain further hits on the revenue side in lieu of expansion of services across the country.

11/02/21 Ameya Joshi/

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