As reported in Mint today, the Directorate General of Civil Aviation (DGCA), the sectoral regulator, wants to play a proactive role in checking “exorbitant” airfares charged by airlines. It should focus its energies elsewhere.
Under draft rules that are being considered, airlines may be asked to be more transparent in what they charge from consumers. That is harmless, but hardly the core of what DGCA wants. The regulator wants to keep airfares within a “reasonable” level. Not only that, when it comes to passing fuel costs, the prices charged from flyers should be commensurate with operating costs.
“Basically the intention is to check airfares from going up extraordinarily in these difficult times,” DGCA chief Bharat Bhushan told Mint.
This is an undisguised effort to put in place price controls, however indirect they may be. The fact is, in any open economy, it is the provider of service—in this case aviation services—that has to have the final say in price setting. This is a simple matter of demand and supply. If at any particular time—say during the holiday season, festivals and some sporting event—the demand for services goes up, it is natural that prices will go up.
There could be one conceivable argument for asking airlines to reduce prices—in case they collude with other airlines to rig prices. But in this case, the diktat should come from a different authority—the Competition Commission of India (CCI). In fact, DGCA is hardly equipped to handle these matters. If anything, adequate understanding of how airlines fix prices requires expertise in finance and economics, something DGCA does not possess.
DGCA, especially when it comes to its ability to enforce and ensure that aviation safety norms are followed scrupulously, has been found wanting. That aspect of regulation is part of its core expertise. If it cannot fulfil that mandate competently, it is anybody’s guess whether its attempt to control fares is going to be any better.
There is another argument against such intervention. Many private airlines in the country are known to be in financial trouble. This has been purely their own creation—bad business planning and the breakneck pace of expansion without consolidation being two reasons. If the government tries to control airfares, these companies can, conceivably, demand help when they are in trouble. The government cannot control prices and then claim the losses airlines make are of their own making. If only to avoid bailouts and other forms of favouritism, it should steer clear.
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