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High prices on domestic flights in Ecuador? Regulate air fares It is not the way for the tickets to go down, but lower taxes and increase supply.
The current context of high demand and low supply in air transport Ecuador has generated comments on ticket prices and has revived the political proposal to regulate fares, setting maximums or minimums. Nevertheless, Peter Cerda, Regional Vice President for the Americas THERE IT IS and CEO of HIGH, warns that this state intervention would have a devastating effect.
The industry outlook is clear: Regulation not only does not solve the problem of costs, but it aggravates it.
The negative impact of putting a price cap
During the ALTA Forum held in October in Lima, I was able to talk exclusively with Peter Cerda regarding the challenges that Ecuador has to have more competition and cheaper air tickets.
Cerda is emphatic when pointing out that "Any tariff restriction imposed by the government will have a negative impact on the country's connectivity". Market freedom is essential, because airlines must compete based on what «the consumer considers fair, not what the government considers". History proves it: in countries where governments try to put controls, "in the end, the passenger will pay more, and the country will suffer with less connectivity, less competition and less of its citizens traveling". Instead of implementing reforms that attract more competition, falls into the temptation of "wanting to regulate the market", an approach that harms the country, limiting the travel possibilities of Ecuadorians and the arrival of foreigners.
The risk of missed flights
The Ecuadorian market, although with great potential, It is seen as a market "not very volatile" by the airlines. This means that when operating conditions become complicated due to political or social situations, Airlines have the ability to react quickly. Cerda emphasizes that "The airline is very quick to react and make decisions to reduce capacity or flights". A rate cap reduces profitability and the incentive to operate, especially on routes with low demand or high operating costs. If the income ceiling is restricted, the model is directly affected supply and demand on which these companies depend. As a result, "fewer Ecuadorians will be able to travel in a good way and more foreigners will stop going to the country" due to the reduction of options and the possible increase in prices in the few remaining seats.
If the objective is for the market to have more accessible rates, the solution is not regulation, but the elimination of barriers and the review of the cost structure. Cerda indicates that it should «rethink the root of the matter, see and evaluate where the problem is, if it is domestic, why, "If it is a reason for lack of connectivity or competition". It is essential to sit down with the different ministries and evaluate what the real problem is..
One of the biggest obstacles to price reduction is the tax burden. IATA/ALTA executive reveals eye-opening statistic: The average tax on air tickets globally is 27%, while in the region the average is around 40%. This means that "The government has to do its part". As a positive example, Cerda remembers that the reason why he saw a "Increase in connectivity in Ecuador was the moment they reduced taxes". For the future, the key is to ensure political and regulatory stability, because the country has a “great potential to continue growing”. The goal, in Cerda's words, es «follow the policies, the agendas that are being developed that will help tourism development [and] air Transport. We have to ensure that they continue to be fulfilled.".
The elimination of the fuel subsidy
Peter Cerda mentioned the complexity of eliminating the fuel subsidy at specific airports, like that of Cuenca and Manta. He explained that this subsidy was essential for "keep the operation viable" in those destinations, since there is often not enough demand to fill a plane every day, and subsidies helped "maintain the profitability of those flights". The concern is whether these operations will remain viable without state aid., due to the high costs involved for airlines in operating in markets with limited demand.
In this situation, the industry, via IATA and ALTA, has made a request to the government, offering studies and support to the Ministry of Transportation. The objective is to work in a joint plan to ensure these important flights can continue to operate. The key is prevent the suspension of the subsidy from generating a negative effect in the connectivity of those cities, highlighting the importance of public-private collaboration to find mechanisms that offset this potential increase in costs and guarantee the continuity of air service.
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For this, an efficient and law-compliant DAC is needed to promote commercial civil aviation and not put as many obstacles as possible to scare away investments and overlap flag sales to LATAM AND AVIANCA as they do by allowing airlines to operate with leased aircraft without requiring Ecuadorian registration plates because no one finances or leases planes with the Ecuadorian flag and privileged wings if they allow them to operate with CC and HK registration plates AMONG OTHERS which gives them a great advantage
Then, what do you recommend? That Ecuador regresses and loses more competitiveness versus the air markets of its neighbors where they can operate with foreign registration.?