The civil aviation policy was cleared by the cabinet yesterday. There was a presentation on the policy by civil aviation ministry in front of media followed by a question answer session. Although this new policy includes many path-breaking changes, which can be referred to as so called ‘big bang reforms’, there was one single point that got the most attention on both news media and social media. This point is, the Government has capped the price of air tickets at the rate of ₹2,500/- per hour of air travel.
Here are some of the media articles that mention that air fare has been capped at ₹ 2,500/- per hour:
But has the Government of India really capped the price of air tickets? If you were paying attention to the presentation of ministry and the subsequent press conference, you will find that the reality is far from it. The fact is, there is no such cap on existing routes on which airlines are operating at present. This cap is applicable only on connecting to some new airports that will come up under Regional Connectivity Scheme introduced in the civil aviation policy today.
Let’s see some detail regarding this.
The central government has realised that India has one of the lowest domestic air connectivity for its size. India needs many more airports to improve this situation and provide connectivity to tier 2 and tier 3 cities. But building new airports in those places will be hugely expensive and time consuming. Incidentally, there are around 350 airstrips scattered across the country which are presently not used. Many of those were built during WW-II, some were built later but were abandoned as the demand was not enough to sustain air operations to those places. Now government has decided to convert some of these airstrips into functioning airports at investment of around ₹100 crore per airport. These airports will come under Regional Connectivity Scheme (RCS). This scheme will require support and participation of state governments which want such airports in their states.
Now, even after these airports are developed, air connectivity to these places will not be economically viable as demand is less in these sectors compared to metros and tier 1 cities. Because there are not enough people in those places who will buy air tickets at current prices. This is the reason some of the existing airports in such places are non-operational at present. Hence government has decided to cap air fare ONLY on these routes at ₹2,500/- per hour of flying, on pro-rata basis. Means for 2 hours of flight it will be ₹5,000/- and so on.
This cap will not be applicable on flights between two existing functional airports, it will be applicable only on flights between an existing airport and a new RCS airport, or between two RCS airports.
And, the Government is not forcing airlines to sell ticket at low price, but it is helping in bringing the price to such level, by taking following steps:
• Service Tax will be charged on only 10% of the ticket price. Means if a ticket costs ₹2,000/-, service tax will be applicable only on ₹200/-, making the tax amount only one-tenth of normal amount.
• The state government will be required to charge only 2% VAT on aviation turbine fuel purchased at these airports.
• The airports will not charge any kind of charge from the airlines for use of the airports.
• State governments will have to provide police and fire services free of cost.
• For any loss that airlines have to bear due to the cap in ticket price, Government of India will fund them through Viability Gap Funding, which will be collected through a cess applied on ticket prices of non-RCS routes.
So, the Government is implementing this cap by reducing its share in the ticket price, which is substantial, and also by providing Viability Gap Funding. Hope this clears the confusion created by usual misleading news by mainstream media.