Well-Meaning or Misguided? The Economics of Airfare Caps in Manipur

by Himat Tampakmayum

The Union Minister for Civil Aviation, Sh. Rammohan Naidu, recently, along with the Chief Minister of Manipur, Sh. N. Biren Singh flagged off Alliance Air flights on three routes, including two new routes. Alliance Air will now connect new routes from Imphal to Kolkata, Imphal to Guwahati, and Imphal to Dimapur. These flights, launched as part of a joint effort by the Ministry of Civil Aviation and the State Government of Manipur, have been made operational with Viability Gap Funding (VGF) support from the state. The key highlight is that the fare for these flights has been capped at 5000 Rs and is hailed by N Biren Singh’s Govt and Co. as a respite to the common people of Manipur amidst the sky-high rocketed flight fares in recent times following the Meitei-Kuki conflict. This might seem at first to be an overdue relief measure for the people of Manipur, but a closer look at its economic consequences reveals major flaws. As a student of economics, I find it impossible to sit idly by while observing the implications of the price-capping policy. My instincts have already been piqued, and I can’t shake the feeling that something is fundamentally flawed within this approach. It’s a concern that demands attention and must be brought to light.

Price Capping in an Inelastic Market: A Recipe for Disruption

To begin, it’s essential to understand that price capping—though often seen as a solution to prevent exploitative pricing—is a policy fraught with potential pitfalls, especially when the market conditions are such that both demand and supply are inelastic. In the case of Manipur, air travel has transformed from a luxury to an absolute necessity. With land routes rendered unsafe and inaccessible due to security threats, flying has become the only viable means of transportation for many, particularly the Meitei population. As a result, demand for flights is highly inelastic: passengers are willing to pay whatever fare is required because they have no other option.

Similarly, supply is equally constrained. Airlines cannot quickly expand their capacity or introduce additional flights in response to the sudden surge in demand. In such an environment, while a price cap can serve to prevent airlines from exploiting the situation by charging excessively high fares, its success hinges entirely on how well the cap reflects the market equilibrium price.

The government has set the cap at ₹5,000, a sum that is significantly above the usual equilibrium fare of ₹2,000 to ₹3,000, especially under normal market conditions. This disconnect between the capped price and the pre-conflict price structure creates distortions that undermine the very essence of the policy. Rather than providing genuine relief to consumers, the cap distorts market incentives and fails to address the core issues of affordability and availability.

 A Fraction of the Passengers Benefit, and Even That Is Limited

To illustrate the ineffectiveness of this policy, let’s dive into some hard data. According to the Directorate General of Civil Aviation (DGCA) report for 2022-23, the number of passengers traveling on the Imphal-Guwahati route alone was 417,685. However, under the new scheme, Alliance Air will operate its ATR-72 aircrafts only two flights per week, each with a seating capacity of 72. This means that the airline will be able to serve a mere 7,488 passengers annually—just 1.79% of the total passengers on this route.

Data Overview

(  Data retrieved from https://www.dgca.gov.in/digigov-portal/?page=4264/4206/sericename  )

Let’s break that down further: only 1.79% of travellers stand to benefit from the ₹5,000 fare cap, while the remaining 98.21% will be unaffected. Most of these passengers are already travelling with competing airlines, such as IndiGo and Air India, which offer fares that are often lower than ₹5,000. In fact, many passengers are already paying between ₹2,500 and ₹4,000, rendering the ₹5,000 cap almost irrelevant for the majority.

Thus, while the government’s intent may be to protect passengers from soaring airfares, it ends up benefitting only a small segment of the population—those who are flying with Alliance Air at a time when the price cap is being enforced. For the vast majority of passengers flying with other airlines, the policy does little more than offer an empty promise of affordability.

The Fallacy of a One-Size-Fits-All Solution

In the context of air travel, fares fluctuate based on the time of travel, demand, and various other factors. Historical fare data paints a clearer picture of how the ₹5,000 cap fails to address the realities of the market. According to data from popular travel agencies, airfares on routes like Imphal to Guwahati or Kolkata can range from ₹8,000 to ₹5,000 during peak demand (Days 1-4), but drop to around ₹3,500 during less-demanding periods (Days 5-8), and stabilize at ₹3,000 during the off-peak period (Days 9-12).

In contrast, Alliance Air’s fare structure under the cap is only marginally lower. For example, Alliance Air charges ₹3,700 during peak travel (Days 1-4), ₹3,200 during the middle period (Days 5-8), and ₹2,850 in the quieter window (Days 9-12). While this fare structure does offer some relief during the peak period, it offers little to no significant benefit for passengers traveling during the quieter periods when fares would typically be lower than ₹5,000.

In essence, the ₹5,000 cap serves as a safety net that prevents fares from rising excessively, but it fails to adjust to the underlying market realities. By setting a price cap that is higher than the equilibrium price, the policy inadvertently allows airlines to charge near the cap, thereby failing to provide tangible benefits to passengers who are accustomed to paying lower prices during off-peak periods. The policy, rather than offering a real solution, becomes a band-aid that misses the wound.

A Better Approach: Direct Subsidies and Passenger Empowerment

Rather than restricting prices and favouring only a small subset of passengers, the government should focus on empowering consumers through direct subsidies or travel vouchers. A direct subsidy of ₹2,000 for passengers—redeemable across any airline—would allow passengers the freedom to choose the airline they prefer. This would foster healthy competition among airlines, driving down prices overall while ensuring that consumers are not tied to a single airline.

A travel voucher system would also have the added advantage of ensuring equity. It would allow the government to target those most in need of financial assistance—passengers who are stranded by the inaccessibility of land routes—and ensure that they are not locked into overpriced flights with a single provider. Moreover, such a model would help the government achieve its goals of affordability and accessibility, without inadvertently distorting the airline market or exacerbating the inefficiencies that price capping introduces.

Simulating the Impact: A Clearer Picture of Economic Consequences

To further illustrate the economic consequences of the current policy, consider the following simulation of four different pricing scenarios, each with its own impact on consumer surplus, producer surplus, and deadweight loss:

*(Author’s estimation. This is a simplified scenario to give an estimate of the surplus. In-depth estimations call for a complex calculation techniques)

From this table, it is evident that the ₹3,000 price cap creates a favourable environment for consumers, providing a larger surplus while not drastically affecting airline companies. However, the most efficient and equitable policy would be the ₹2,000 subsidy, which redistributes benefits to consumers without creating any deadweight loss or market inefficiency.

Need for Dynamic, Consumer-Centered Policies

The government’s subsidy for Alliance Air sounds like a half-hearted, airline-specific solution to a problem that is wider in its burden of affordability and accessibility. And although the motivation for regulating prices to protect passengers against exploitative fares is well-meaning, the execution is problematic. With a capped fare that would be used by only a small fraction of travellers, leaving the majority untouched, the reach and equity of the policy are unfortunately very limited.

The government could take steps that would not only put more power into the hands of passengers but also increase competition among airlines. Subsidising passengers with Direct Benefit Transfers or travel vouchers would give passengers the freedom of picking the airline they want to travel on, encouraging fair competition between airlines. The existing ₹5,000 airfare cap, however well-meaning it may be, is ultimately self-defeating. It is a windfall for airlines, barely a bandage for passengers and introduces yet more inefficiencies that undermine the policy’s goals. There is a more nuanced, passenger-focused approach — one based on competition, equity and dynamic recalibration — that would also answer the need. Without a more nuanced, passenger-focused approach rooted in competition, equity, and adaptability, this policy risks becoming a symbol of grounded aspirations and constrained potential — truly well-meant but misguided.

(The author is a PhD scholar in Economics.He can be reached at himatampak@gmail.com)