“Easing” Cancellation Will Lead to Higher Air Fares

Mint reports that the Union Civil Aviation Ministry is seeking to “ease rules for air ticket cancellation” in a bid to make air travel more customer-friendly. According to the draft rules,

  • Passenger allowed Lock-in option for 24 hours(after booking ticket) in which the passenger can cancel or amend the ticket without any additional charges.

While at first sight this might look like a passenger friendly move, it is likely to result in an overall increase in air fares.

I have argued before in Pragati that a reservation to travel consists of two instruments – the travel itself and the option to travel on the said route on the said day and time. In other words, the cancellation fees can be looked at as an option premium paid by the customer to exercise an option to travel on the particular route on the particular day.

When a ticket gets cancelled, the customer is effectively choosing to not exercise her option to travel. So it is fair that they not pay the cost of travel itself, and be refunded that amount. The reason travel companies levy a cancellation charge is to compensate them for the cost of the option to travel (the price of an option doesn’t depend on whether the holder chooses to exercise it).

The proposed regulation by the Civil Aviation Ministry requires airlines to offer this option for free for a limited period of time (24 hours after booking). While 24 hours may not be a high number, it can still result in people taking advantage of the free option by making bookings that they may later cancel or reschedule. And the airlines will want to get compensated for the free option they are providing.

It is likely that they will achieve this compensation by adjusting prices elsewhere – such as the price of travel itself or the price of the options where there is no price cap. And this is likely to hurt passengers.

All the new regulations from the Civil Aviation Ministry will achieve is to redistribute from passengers with firm schedules (who are more likely to be “retail customers”, from the middle class, etc.) in favour of those who may want to keep their schedules open for a day (more likely to be premium, corporate customers).

Once again invoking Ravikiran Rao, #thatzwhy we need strong regulations.

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