Something good may still emerge from the ongoing crisis at SpiceJet. Sources have told Firstbiz that the civil aviation minister has asked secretary to devise a mechanism to regulate airfares.
The mechanism, which is probably the first time being introduced in India, will fix maximum fare to any destination for economy at Rs 20,000. The minimum fare will depend on the breakeven cost of each airline, the sources said. There will be no cap on business class fares.
Among other steps being considered are amending the Airports Economic Regulatory Authority (AERA) act to include airlines.
According to sources, the mechanism to regulate fares is likely to be devised in about a month’s time. However, this step will be a short-term measure and is being discussed because of SpiceJet’s near demise on offering fares below cost price.
The secretary is holding consultation with stakeholders before implementation of the scheme. Most airlines have informally told the government that they are okay with a cap on minimum fares.
On the contentious air turbine fuel taxation issue, the ministry will hold sustained discussions with state govts to ensure VAT on ATF is brought down to 5 percent or below.
Earlier Firstbiz had reported that the Ministry of Civil Aviation has finally woken up and sounded an alarm on domestic airlines and their precarious financial situation. It is widely believed that undercutting of fares to gain market share has been the bane of the industry which has been making losses for the last few years.
SpiceJet has been at the forefront of offering ridiculously low fares through most of 2014 in a bid to stimulate demand – forcing competing airlines to follow suit. Many analysts say this practice has hastened the airline’s decline.
As far as fixing of minimum fares is concerned, sources had earlier told Firstbiz that all airlines may be asked to submit their break-even cost per kilometer. Then after adding 5% to this figure as “margin”, the minimum fare would be fixed for a route depending on type of service offered and type of aircraft used etc.