Understanding Capacity Caps and Pricing Caps

September 2021 is the 17th month since the restart of scheduled domestic civil aviation in India. The days leading up to the start on May 25, 2020 were filled with confusion. As the country moved from a lockdown to unlock phases, the initial discussion revolved around allowing flights only between the green zones i.e. states which do not have any active cases of COVID-19. This, at that point, meant only Goa and Manipur !

In a surprise announcement, the then Minister of Civil Aviation – Hardeep Singh Puri tweeted and announced resumption of scheduled domestic air traffic from May 25, 2020. This came with a caveat and that was a cap on capacity and fare bands. Airlines were allowed to operate only 33% capacity to begin with and as the then minister said multiple times, the opening up will be in a “calibrated” and phased manner. 

As the capacity caps increase to 85%, the highest ever in the last seventeen months, there remains utter confusion on what capacity caps mean. Leading media houses have made a mockery of that understanding and many enthusiasts remain clueless on how a flight was full when there is a cap on capacity. This is an attempt to explain and simplify !

Capacity cap – what exactly is it ?

Capacity cap refers to the Number of Flights which an airline can operate, as compared to its approved flight schedule. 

Last May, the cap was linked to pre COVID numbers, i.e. February 2020 which was the last full month of operations before lockdown. 

Let us take an example! If an airline was operating 1000 flights a month pre-COVID and if the capacity is capped at 85%, it means that the airline can operate a maximum of 850 flights right now. These flights could be with any type of aircraft and the airline is allowed to offer all seats for sale. The capacity cap does not mean there is restriction on how many seats can be sold in a particular flight.

Is it still capped to pre-COVID ?

There is some ambiguity over this. In some references, the officials of the Ministry of Civil Aviation have said that capacity caps will be a certain percentage of approved schedule. If that is the case, nothing changes conceptually. 

Globally, airlines follow two scheduling seasons. Summer schedule – which begins on the last Sunday of March and ends on the last Saturday of October, with the remainder of the year being the Winter Schedule. 

Airlines have to file their schedule with airport operators and once cleared it is approved by the regulator. If the capacity is linked to approved schedule, it merely means that airline can operate 85% of the total number of flights which are approved in a particular schedule. 

Are there any exemptions? 

Yes, there are! Flights under Regional Connectivity Scheme (RCS) – UDAN (Ude Desh ka Aam Nagrik) are not part of capacity caps. Likewise, charter flights are not counted for the capacity caps. This is the reason why an airline like Star Air – which predominantly operates under the aegis of RCS-UDAN has more flights now as compared to pre-COVID times !

Fare caps – what has changed ?

The restart of civil aviation, also got along the fare caps in the skies. The government mandated a lower cap known as floor price or the minimum fare the airline should charge to a passenger. While this was a pro airline move and an effort to stop undercutting each other, there also was a pro passenger move. There also is an upper cap for fares – known as ceiling price. This is the maximum fare which an airline can charge to a passenger. 

How is the fare cap managed?

The routes are divided into six segments, based on the flight time. The shortest, for example, is classified as “A” and includes all routes up to 1 hour of flight time. The last bracket is “F” which is for the long flights in the country. Each bracket has a minimum and maximum fare.

The government would introduce a circular which would give the fares and a start and end date. Airlines were selling as per the floor price and ceiling price for the date range. For any date beyond the circular end date, airlines were free to price the tickets at will. 

Why was this challenging?

There was no set pattern on when the fare caps will be extended. Sometimes, they were done weeks in advance and at other times just a day in advance. This put undue stress on airlines and the varied pricing created confusion for passengers. 

Moving to rolling period and what does that mean?

Last month, the country moved to a fare cap for a 30 day rolling period which has been further revised to 15 day rolling period. As if the erstwhile confusion wasn’t enough, this has created even more confusion !

The new rules mean that fare restrictions – both at lower and upper end continue. But they are in place for the next 15 days which is rolling. Let us take an example, on Sept 20, the fare restrictions are in place until Oct 04. So between Sept 20 and Oct 04, both days inclusive, the airlines are mandated to sell the seats as per the fare caps prescribed. 

For any date beyond Oct 04, airlines can charge at will. But come tomorrow, when it is Sep 21, the fare restrictions are in place till Oct 05. Everyday, the restrictions are in place for the next 15 days!

Will this help?

Definitely, it will! This will help the airlines stimulate the market and offer cheaper deals in the market. The effect will be three pronged. 

Passengers will get cheaper fares on offer, airlines are facing challenges with forward bookings since passengers are booking last minute due to uncertainty – this is likely to change as lower fares stimulate the market and lastly the revenue management cycles will slowly fall back in place. 

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