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Monday, Oct 03, 2022

Government does well to do away with price restrictions in the aviation sector

Considering the then economic environment, and the considerable uncertainty that the pandemic had injected in the aviation sector, some airlines did in fact support the imposition of these pricing restrictions.

The easing of the last of the Covid-era restrictions comes at a time of fresh developments in the airline sector.

In the early days of the pandemic, the Union government had imposed capacity and price restrictions on domestic airlines. While restrictions on capacity were put in place to contain the spread of Covid, from the government’s point of view, the rationale to impose both price floors and ceilings was two-fold. One, to prevent a price war among the airlines so as to protect the financially weaker airlines during an economically turbulent period. And two, to prevent consumers from price gouging as airlines sought to recoup their losses during a period of demand and supply mismatches.

Over time, the government did do away with the restrictions imposed on capacity — in October last year it allowed for 100 per cent capacity utilisation — but the restrictions on pricing were kept in place. On Wednesday, the civil aviation ministry announced that the last remaining restrictions on pricing will be removed with effect from the end of this month. This is a long overdue corrective.

The price restrictions, imposed in May 2020, when the airlines had resumed their operations after the two-month lock-down, were based on the duration of flights. The seven price bands ranged from Rs 2,600 for flights under 40 minutes to Rs 8,700 for flights over three hours. Last year, these prices were adjusted upwards, though marginally.

Considering the then economic environment, and the considerable uncertainty that the pandemic had injected in the aviation sector, some airlines did in fact support the imposition of these pricing restrictions. But by intervening in the functioning of the market, by making commercial decisions which should be the prerogative of airlines, these price caps ended up distorting the market, having unintended consequences on both demand and supply. While various justifications have been marshalled in favour of the imposition of this policy during the pandemic, the reality is that price restrictions by the government are the norm, not the exception. Across a range of sectors, ranging from urea to medical devices, price restrictions are prevalent, despite their well-known economic consequences.

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The easing of the last of the Covid-era restrictions comes at a time of fresh developments in the airline sector. Air India has been recently sold off to the Tatas. A new airline, Akasa Air, has been launched. And Jet Airways is reported to have secured the permits to restart operations. At this juncture, the government must desist from playing an interventionist role, it must limit itself to facilitating the growth of the sector.

First published on: 13-08-2022 at 04:10:15 am
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