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Analysis: What India’s Domestic Cap Removal Means For Airlines

From October 18th, airlines in India will be able to operate their entire scheduled capacity after a year and a half. The carriers had already been pushing for a cap removal after noticing a significant increase in demand for air travel in the last couple of months. How have the airlines reacted to this decision, and what’s in store for them in the coming few months? Let’s find out.

From October 18th, Indian airlines can operate at full domestic scheduled capacity. Photo: Getty Images

Numbers don’t lie

There was immense skepticism following the devastating second COVID wave in India around whether air traffic would return to normal any time soon. However, looking at the data from the last few months, it’s pretty clear that passengers feel confident to fly again.

Over the last few months, air traffic has increased from 5 million passengers in July to 6.9 million in September. On October 9th, the number of passengers who flew within the country crossed the 300,000 mark at more than 70% of pre-COVID capacity. Long queues at major airports like Mumbai and New Delhi are further proof of Indians warming up to the idea of air travel again.

Chaos at Mumbai Airport today. Just sheer rush. Kudos to the CISF staff!

Thankfully I made it…for the free food at the lounge! Phew!

— Atul Khatri (@one_by_two) October 8, 2021

The airlines are clearly excited about the decision and received the news quite positively:

“Vistara welcomes the Government’s decision to remove the capacity cap. We believe that it will be helpful in accelerating recovery from the severe impacts of the pandemic as demand continues to grow, especially with the growing confidence in air travel and the much-awaited festive season.” – Vistara spokesperson.

A spokesperson for IndiGo reacted:

“It is a welcome move as we believe that with recent pent-up demand combined with the upcoming festive season, it will be great to operate flights on pre-pandemic levels. We are quite bullish about the overall growth and demand for domestic travel.”

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Busy months ahead

The timing of this decision couldn’t be more perfect. The peak season for airlines in India usually starts in the last few months of the year. Demand in travel picks up around the festive season in October and November and continues to reflect in the winter schedule. A significant bulk of revenue comes from passengers taking cross-country leisure flights starting from December and spilling over into the first few months of the following year.

IndiGo Airbus A320-200
Airlines are planning to make the most of the busy travel season ahead. Photo: Getty Images

Assuming there is no surge in severe COVID infections and judging from flying trends of the last few months, airlines can expect decent load factors.

Suprio Banerjee, vice-president and sector head of credit rating agency ICRA, expects a good aviation recovery, stating,

“In ICRA’s view this is a step in right direction… With onset of the festive and tourist season… 100% permissible capacity will allow the airlines to serve a wider market and in turn will encourage air travel.”

What about fare caps?

Even as capacity restrictions are lifted, voices within the industry are quite strong about the removal of fare caps as well. Restrictions on the upper and lower ends of fares were put in place to protect both airlines and passengers from unfair pricing during COVID-related travel restrictions.

While IndiGo, with its massive market share, was better placed in terms of finances, carriers like SpiceJet and Go First, which have lower capacity, gained from the fare caps.

Fare caps have helped struggling airlines like SpiceJet, but many feel they are no longer needed. Photo: Getty Images

With the demand back, many are wondering if the time is right for the fare caps to go. As reported by the Indian Express, a top executive of a low-cost carrier said,

“…it’s also about time the fare bands are done away with. These restrictions were brought in to prevent airlines from overheating and selling far below costs after the lockdown was lifted but there’s real demand now and a fare floor and a ceiling make no sense.”

While fare bands have come down to 15 days, the government is in no mood to altogether remove them as of now. The authorities are favoring a gradual reduction of one day at a time until it is completely removed.