Aviation ministry suggests cap on maximum airfare for economy class - Livemint

The ministry justified the move citing the fact that airlines have been offering huge discounts on airfares due to severe competition. Photo: Bloomberg

Mumbai: In the wake of SpiceJet Ltd ’s financial crisis, the ministry of civil aviation has suggested a cap on the maximum airfare for economy class “at a reasonable price” of around Rs.20,000 a ticket and the minimum price can be arrived at by “adding appropriate profit margin” to the break-even price. The ministry has proposed an external audit to ensure the reliability of the break-even prices.

The aviation ministry has also proposed a series of financial incentives for the ailing airline industry including capping the interest on bank loans at 8% annually and allowing these companies to access the external commercial borrowing (ECB) market where they can avail funds at much cheaper interest rate than locally.

In an internal note, the civil aviation ministry said there is a need to fix a cap on the maximum air fare of economy class at Rs.20,000, “beyond which the airlines should not be allowed to charge, exploiting the passenger’s urgency for travel due to various reasons”. It also suggested steps to be taken to fix the minimum airfare charged by each airline.

Mint has reviewed the note.

Referring to the minimum price, the ministry said the airlines can be asked to submit their break-even price per kilometre.

“This break-even price per kilometre will depend on the services offered, type of aircraft, etc. An appropriate profit margin can be added to the break-even price per kilometre and that can be minimum price per kilometre to be charged by the airline concerned,” the ministry said.

This will ensure that no airline in future will go into losses, it said.

“The airlines should be asked to fix their airfare in such a way that earnings before interest, depreciation and tax (EBIDTA) should be positive. Further, to ensure reliability of the break-even prices, an external audit, similar to that by Audit Bureau of Circulations (ABC) in case of newspapers, can be held in respect of each of the airlines,” the ministry said.

Not all agree that these measures will save the Indian airline sector.

“Regulating fares can never happen in India—both (capping fares and financial package announcements) are just rhetoric. The first bit of rhetoric is to tell the travelling public that the government intends to control prices,” said Bharat Mahadevan , an independent aviation analyst.

“They have been saying this for years. No government can control pricing—they don’t subsidize airfares, nor do they help the airlines with costs. In fact, the opposite happens with ridiculously high taxes on fuel and airports. Will they then say an Apple iPhone cannot cost more than Rs.15,000 and a Mercedes-Benz cannot cost more than Rs.20 lakh?” Mahadevan asked.

A senior executive with a low-fare airline said the ministry, or regulator Directorate General of Civil Aviation (DGCA), has no business to regulate fares adding that it is unlikely to get implemented. He requested anonymity citing sensitivity of the matter.

The ministry justified the move citing the fact that airlines have been offering huge discounts on airfares due to severe competition.

Some of the airlines are in danger of facing huge losses due to operating flights at very low fares that do not cover even the operating costs. If the situation is not contained, some of the airlines in the country may face closure in the near future, the ministry said in the internal note.

These measures come at a time when SpiceJet is restoring normalcy in its operations after a financial crisis. On 5 December, the civil aviation ministry asked SpiceJet—which was raising some of its working capital through advance ticket sales—to stop sales of tickets more than a month in advance. That restriction came after the airline cancelled around 1,800 flights in December after it shrunk its fleet, largely owing to financial reasons. This, along with reports of unpaid salaries, prompted the aviation regulator Directorate General of Civil Aviation (DGCA) to act fast to prevent a repeat of what happened with Kingfisher Airlines Ltd, the debt-laden airline that was grounded in 2012, although its bar on advance sales actually ended up precipitating the matter by drying up the airline’s source of funds.

Last week, SpiceJet had to briefly ground its fleet for more than 10 hours after oil companies refused to fuel the aircraft, citing dues.

Amid rumours that the airline was shutting down, the aviation ministry permitted SpiceJet to accept bookings till March-end, asked banks to give short-term working capital loans worth Rs.600 crore and requested state-controlled oil companies to extend a credit line for jet fuel for two more weeks.

In its letter, the ministry noted that closure of airlines leads to significant loss of jobs, increase in passenger fares, increase in lease charges and interest cost for airlines and passenger inconvenience due to disruption of flights and non-refund of booking amount.

The ministry thus suggested that incentives can be given to airline companies, in accordance with ministries concerned, state governments and departments of the government of India. The suggestions include capping interest on bank loans at 8% per year and allowing access to ECB.

The ministry also proposes an infrastructure industry status to airlines, so that they can access funds at lower interest.

Additionally, the ministry wants complete income tax exemption for a fixed period of time, as it is for SEZs, infrastructure companies, software companies, export income of companies, etc.

Pradeep Kumar , managing director and group executive- corporate banking group, State Bank of India, said banks will not be lending to any company below its base rate.

“Viability of the proposal will be key before taking any decisions on lending. The infrastructure tag will help in taking better decisions on long-term financing for these companies, since Reserve Bank of Inida’s 5:25 guidelines will help in better rescheduling loans. The air fare cap appears to be a negative,” Kumar said.

The 5:25 scheme allows banks to extend long-term loans of 20-25 years tenure to match the cash flow of projects, while refinancing them every five or seven years. On 18 December, Mint had reported that the aviation ministry is considering a special package for airlines in the wake of the crisis at SpiceJet, citing two unnamed ministry officials.