New Delhi: Although ‘reasonable profit’ is among the factors considered by airlines while fixing tariffs, it has no set definition, a parliamentary panel has pointed out. It has recommended that the Ministry of Civil Aviation define it and devise a mechanism to calculate it.
The report ‘Issue of Fixing of Airfares’ by the Parliamentary Committee on Transport, Tourism and Culture comes in the backdrop of concerns over soaring airfares and calls for introducing fare caps on airline tickets.
In the report, which was tabled in Parliament Thursday, the panel noted that the government is not in favour of regulating airfares due to apprehensions that it would impact the sector’s growth — especially since most Indian carriers have registered an operating loss in the past three years. The panel, however, asked the government to review its policy so that passengers also receive a fair deal at all times.
“The Ministry, in consultation with the airlines, should devise a mechanism or a formula, so that the concept of ‘reasonable profit’ as provided explicitly in Rule 135(1) of the Aircraft Rules, 1937, is adhered to,” the committee headed by Rajya Sabha MP Vijayasai Reddy V. said in its report.
Rule 135 of the Aircraft Rules, 1937, forms the basis of the legislation for airfare regulations. According to these rules, airlines decide tariffs after considering factors such as reasonable profit, the cost of operation, characteristics of service and the generally prevailing tariff.
The lack of a clear definition makes such expressions “liable to be misunderstood, besides encouraging arbitrary actions”, the committee report said.
“…‘reasonable profit’ is embedded under the provision of Sub-Rule (1) of Rule 135 of the Aircraft Rules, 1937, under the ‘Tariff’. There is no separate rule or any other guideline ‘reasonable profit’ and ‘generally prevailing tariff’. These words are understood as per the common understanding,” the panel said.
It noted that despite the Aircraft Rules empowering India’s aviation regulator Directorate General of Civil Aviation (DGCA) to inspect airlines’ tariff records and issue directions in case they charge excessively, they continue to do so. This, it said, is leading to a surge in airfares.
“…the DGCA does not have any power to regulate tariffs…The Committee recommends that the Ministry should evolve a mechanism to reconcile between ‘tariff monitoring’ by DGCA and ‘deregulation of airfare’ to tilt the balance in favour of empowering the DGCA to regulate air tariff as per Rule 135(3) and expanding its responsibility beyond monitoring tariff only,” it said.
Deregulation of airfares is the process of removing government-imposed entry and price restrictions on airlines.
It also recommended setting up an autonomous monitoring and controlling body on the lines of the Securities and Exchange Board of India (SEBI) — which regulates the securities market and protects the interest of investors — under the Ministry of Civil Aviation (MoCA) “to enforce the collection of reasonable airfares from passengers”.
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‘Safeguard interest of air commuters’
On the issue of establishing tariffs on the basis of ‘reasonable profit’, the committee said that none of the airlines has adopted a mechanism to calculate the quantum of ‘reasonable profit’.
All the airlines are instead following the demand-supply dynamics. “(The panel) recommends that the Ministry, in consultation with the airlines, should devise a mechanism or a formula, so that the concept of ‘reasonable profit’ as provided explicitly in Rule 135(1) of the Aircraft Rules, 1937, is adhered to,” the report said.
It also quoted airlines’ responses to its queries on tariffs. According to the report, airlines said that the prevailing air tariff on a particular route is a result of demand-supply balance and works on a ‘Cost Recovery Model’ so airlines could recover all costs related to flight operations, rather than on a set target to achieve ‘reasonable profit’.
The panel said that there are sufficient legislative safeguards in the Aircraft Rules to ensure that airfares are affordable. In case of any violation, the government can take action regardless of the deregulation of tariffs — a policy under which domestic aviation has the freedom to fix fares.
In its report, the panel also asked the DGCA and Ministry of Civil Aviation “to safeguard the interests of the air commuters by invoking the overriding powers vested on it in the Rules”.
“The Committee is of the opinion that in the absence of a credible formula for the pricing of airfares, there remains a wide variation in the pricing of seats. Though sometimes it may benefit the customers, at times it may lead to very high fares. The Committee, therefore, recommends that feasibility of devising a formula may be examined to regulate excessive surge in fares as per the extant rules,” the report said.
It also asked the ministry to devise a mechanism to encourage all the airlines to implement the “price lock” option under which customers can reserve their booking with or without paying a nominal fee. This, it said, will be a favourable step for customers and in turn can spike the demand for air travel. “The feature would help the customers make better travel decisions by allowing them to book tickets by reserving seats without paying for the actual price of the ticket upfront,” it said.
The committee stressed the need to maintain a balance between the interests of the airlines and those of the passengers.
After analysing financial information of various airlines over the past three years (2020-21, 2021-22 and 2022-23), it noted that in most cases, the Operating Expenditure (opex) has increased substantially, while the income has reduced, leading to net losses for most of the airlines.
Opex is the money an organisation spends on day-to-day running of its business.
According to the committee report, the opex of Air India has increased every year, but its net income reduced from Rs -7,084 crore to Rs -11,381 crore. For IndiGo, even as total expenses incurred increased, the losses drastically reduced from Rs 5,818.1 crore in 2020-21 and Rs 6,153.7 crore in 2021-22 to Rs 304.4 crore in 2022-23.
SpiceJet, too, saw its opex increase by around 45 per cent from 2020-21 to 2021-22, while its net income fell from Rs 1,107.8 crore to Rs 60.2 crore in this period.
For Vistara, the Operating Expenditure has increased approximately three times from Rs 4,312 crore in 2020-21 to Rs. 12,753 crore in 2022-23, whereas the airline has reported losses amounting to Rs 1,612 crore in 2020-21, which reduced to Rs 1,393 crore in 2022-23.
AirAsia alone, according to the report, has reported a net income despite an increase in opex.
“AirAsia has incurred a net income despite incurring an increase in Operating Expenditure. The Committee would like to know the reasons why AirAsia has been an exception and could post an increase in net income despite incurring an increase in Operating Expenditure, like other airlines,” the report said.
The committee added that it was crucial to scrutinise the audited financial data furnished by the airlines on a regular basis.
“…DGCA should take cognisance of any discrepancies reported by the airlines and take corrective actions,” it said.
(Edited by Uttara Ramaswamy)
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