Air travel to become cheap with government plans to cap airfares

With a vision to make air travel affordable to many more, the Narendra Modi government plans to cap airfares between small towns and cities.

A proposal under consideration by civil aviation ministry will allow airlines to bid for the right to operate flights between hundreds of small towns and cities located within one hour of flying distance from each other. Airfares between these cities will be capped at Rs 2,000 or Rs 2,500 per passenger. The balance will be paid back to these companies by the government through the levy of a cess on national and international flights.

A senior civil aviation ministry official told ET that India can become the third-largest aviation market in the world, if it makes its 300 million middle class Indians fly at least once a year through these initiatives.

The plan is part of the new civil aviation policy that is likely to be out for public consultation by the end of this month and has the in-principle approval of Prime Minister Narendra Modi.

Some industry and government experts believe this could be the Indian aviation's mobile phone moment. Just as the Atal Bihari Vajpayee government in 1998-2004 sparked a telecom revolution through cheaper call rates, the Modi administration's plan could eventually lead to surge in flying due to cheap fares and easy availability of flights.

But there is a caveat here. Cities to benefit from this scheme will only be from states that have lowered VAT on jet fuel to 5 per cent or less.

"We are aiming at addressing two key issues with this proposal. One is to increase air connectivity in the interiors of the country and the second is to ensure that states reduce valueadded tax (VAT) on jet fuel to 5 per cent or lower, which will go a long way in making the aviation business viable," said a senior civil aviation ministry official, who did not want to be identified.

While regional connectivity is going to add to the number of fliers in the country, a reduction in VAT on jet fuel would lower cost of operations for the aviation industry and would mean cheaper tickets.

Many Indians now travel to their destinations using crowded and rickety state transport bus services or trains. Only a few are able to afford air travel. Previous initiatives to expand flying opportunities through low-fare airlines did not work as costs were still high and many of them paid high maintenance and terminal charges.

The government's plan if approved would mean a revamp of existing air strips and small airports in the country and the creation of several new ones.

Small aircraft operators believe that the policy will not just work but also be sustainable. "If India dreams of becoming an elite economy in the world, we should do it now. This regional connectivity push will not just make India fly but also ensure business for a number of small aircraft operators who are in the market for a long-term perspective," said Rajesh Kumar Bali, secretary of Business Aircraft Operators Association.

However, a passenger body feels that it might not work.

"It will not work between smaller cities as alternative models like roads and railways between smaller cities is much more effective than taking a flight. We would also oppose the proposal of a cess, as that would increase fares for passengers," said D Sudhakara Reddy, president, Air Passengers Association of India.

While the consumers in smaller cities will be charged between Rs 2,000 and Rs 2,500 for a flight ticket, the deficit for a particular route will be arrived at through a bidding process and will be compensated by the government.

"The operator seeking lowest viability gap funding for a particular route will be allowed to operate for a period of time. The deficit arrived at through bidding would be funded through a regional connectivity fund to be created by the central government," said the official quoted above. The regional connectivity fund will be provided funds through a 2 per cent cess on both domestic and international flight tickets.

The official added that these flights connecting smaller cities of the country are likely to start operations from the next fiscal as the government is likely to announce a service tax waiver for these routes in the Budget for next year.

Capping short-haul airfares makes absolutely no sense. Carriers would simply jack up fares on the regular routes, and demand higher pay-outs to cover their costs. We certainly need to boost air connectivity to smaller towns. But the focus ought to be on low-cost airports and other infrastructure support, not artificially repressed fares. Besides, lower taxation of jet fuel is required. The high taxation of aviation fuel in most states is anachronistic harking back to pre-reform days when a tiny elite, comprising mostly the political executive, top mandarins and corporate chieftains, flew. Lower taxes would shore up air traffic

(Image credits: Indiatimes)