It is an open secret that domestic airlines have hit a turbulent patch. High fuel costs followed by slow economic growth have dented profitability considerably. Now, there is more trouble on the horizon.
Mint reported on Friday that the Directorate General of Civil Aviation (DGCA) has said airlines that do not fly unprofitable routes to poorly connected cities—one of the conditions under which they are allowed to operate—could lose their operating licences. Previously, national airlines were allowed to buy seats from regional carriers on unprofitable routes to comply with the norms. Now, they have been limited to only trading with other national carriers.
While DGCA does have the power to order these changes, these are, in principle, bad for creating competitiveness in our skies. DGCA claims that “connectivity” is important. If that were the case, passenger demand would exist. Instead, national airlines don’t want to fly to these cities because it isn’t profitable to do so.
Now, DGCA has banned the trading—the market’s solution to its own directive on flying to these destinations. Before the emergence of regional carriers, national airlines were forced to fly to these destinations. The market solution to the problem—national carriers trading with regional carriers—is more efficient than forcing large airlines to fly to small towns. If it is connectivity that is paramount, it surely doesn’t matter how airlines service these destinations.
DGCA’s move could have an even more insidious impact on air connectivity in India. The regulator says that a certain proportion of national airlines’ flights need to be to and from various categories of cities. If these national carriers are forced to fly unprofitable routes to far-flung smaller towns and cities, they could conceivably cut back on certain metro flights to limit the number of regional flights they must undertake. On aggregate, this could decrease India’s flight connectivity.
Finally, focus and segmentation is as important in the airline business as it is in others. National airlines are better at servicing metros. Regional carriers are better at serving smaller cities, although these nascent carriers have limited offerings. DGCA’s mandate ignores this.
DGCA’s move could have broad consequences for India’s airline industry, and connectivity in the country more generally. India doesn’t need to ground its own planes during this downturn.
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