Free flying

Competition is the best antidote for rising airfares. Government must not set price floors or caps

By: Express News Service | Published: December 27, 2014 12:06 am

According to an internal note of the ministry of civil aviation, the government is considering capping the prices of domestic economy-class airfares at Rs 20,000. With SpiceJet, whose market share came tumbling down from 17.3 per cent in October to 14.9 per cent in November, under a cloud, domestic airfares have been soaring in December. According to some estimates, they have risen by more than 15 per cent on average and doubled for major sectors compared to December 2013. While part of this can be explained by SpiceJet having to cancel more than 50 flights per day, a spurt in prices is par for the course in December, especially given that a healthy growth of foreign tourists has also been registered. There is simply no case, however, for the government to intervene in price-setting. For one, the limit of Rs 20,000 is arbitrary — the note apparently deems this to be “a reasonable price”. Two, airlines follow a dynamic pricing system, depending on the season, holiday calendar and their cost structure. The government simply doesn’t have the information or nimbleness to set market-clearing prices. Nor should it, for the same reasons, enter the business of determining price floors, which, the note indicates, it is also considering.

There is, however, a case for state intervention if there is evidence of collusion or cartelisation. But sniffing this out should be the remit of the Competition Commission of India. The commission should — and by all recent accounts, does — keep a close eye on all imperfectly competitive markets, including the oligopolistic airline sector. Market discipline should be enforced by imposing exemplary fines on players found to be indulging in anti-competitive behaviour, not by taking over price-setting.

Ultimately, there is no better antidote for high prices than competition and free markets. In fact, the scarcity signal the market has sent has already prompted airlines to add more flights on domestic routes. The two new entrants in the aviation sector, Vistara and Air Asia, are both products of FDI liberalisation. The government must pursue an open skies policy, liberalise further. A start could be made by scrapping the 5X20 rule — a minimum of five years and 20 aircraft are required to be allowed to fly overseas — to make the sector more attractive and encourage investment.

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