Hike in jet fuel price: Limited ability of airlines to increase fares might hit profitability

Even as the yearly increase in ATF prices may be slower in India than the global average, on an absolute basis though, it is significantly more expensive for airlines here.

Written by Pranav Mukul | New Delhi | Updated: October 4, 2017 6:36 am
aviation turbine fuel, civil aviation, ATF, India's civil aviation sector, domestic airports in india, International airports in India, International Air Transport Association, IATA, CST Act, Goods and service tax, GST laws, indian express, business news jet fuel prices for domestic airlines are nearly at the same levels now as they were during the beginning of the year, on a year-on-year basis, the rates are almost 13 per cent higher.

From being priced at an average of Rs 48.65 per litre last month for domestic airlines in four metros, aviation turbine fuel (ATF) has become dearer to cost Rs 54.62 per litre from October 1. Industry experts and analysts suggest that while the airlines may pass on a part of this hike to customers to offset their costs, India’s civil aviation sector is in need of urgent policy interventions to ensure that an eventual rise in the crude oil price does not end up stunting the growth in the country’s passenger traffic.

“Airlines may look to pass some of this (hike) on to the customers, but it may not result in a significant fare hike. Right now, average airfare is around Rs 4,000 per flight in India, it may go up by Rs 100 or so. The growth in the Indian aviation market, so far, has been on the back of lower jet fuel prices arising out of a slump in crude prices, and if these were to rise significantly going ahead, it could cause a slowdown in market growth,” Sharat Dhall, chief operating officer (B2C), at online travel portal Yatra.com told The Indian Express, adding that jet fuel costs account for nearly 40 per cent of overall expenses for airlines in India.

Concurring with this argument, KPMG’s partner and India head of aerospace and defence Amber Dubey said that a part of the increase in jet fuel prices is expected to be passed on to passengers, even as the extent may differ from airline to airline. “What may restrict significant increase in fares is the combined effect of cut throat competition, capacity expansion by airlines and the slowing passenger growth, especially on the domestic front,” said Dubey.

While during the calendar year 2017, jet fuel prices for domestic airlines are nearly at the same levels now as they were during the beginning of the year, on a year-on-year basis, the rates are almost 13 per cent higher. This was lower than the increase in global average prices of the International Air Transport Association (IATA), which according to IATA data, as on September 29, was 21.9 per cent costlier than a year back.

Even as the yearly increase in ATF prices may be slower in India than the global average, on an absolute basis though, it is significantly more expensive for airlines here. “Indian ATF is a whopping 60-70 per cent higher than global prices. That makes it difficult for Indian carriers to make air travel affordable to the common man. That’s why the market is stuck at just about 120 million domestic passengers per annum. We could be doing three times of that, if the government brings ATF prices at par with global prices for just a three-year period,” Dubey said. He further said that a steady rise in ATF prices, along with concerns around infrastructure constraints at major airports, and engine issues with some airlines, could “cool down” the annual growth of over 20 per cent in domestic traffic.

Regional air traffic growth, which is already expected to be hurt due to ATF being out of the ambit of the goods and services tax (GST), is likely to be affected more if the fuel becomes costlier beyond a point. The civil aviation ministry was learnt to have been in discussions with states to relax the tax applicable on ATF for smaller aircraft, on which, under the previous system of central sales tax or value added tax was capped at 5 per cent. Under the CST Act, a list of declared goods was mentioned on which taxes were capped at 5 per cent. This list included ATF sold for use on aircraft with a maximum takeoff mass of less than 40,000 kg operated by scheduled airlines. With the GST laws replacing the old tax laws, ATF for small aircraft has lost its declared goods status. However, since petroleum products are out of GST ambit, states are free to consider ATF bought for all purposes, as one.

A costlier ATF only adds more fuel to the fire. “To some extent RCS (regional connectivity scheme) operators are covered against increase in ATF price. But if the ATF prices rise to, say, Rs 60 or 65 rupees per litre, we may see a negative impact on traffic. We also hope that the government may give a relief on the import duty and other taxes imposed on ATF if there’s a sudden shock in terms of the crude oil price and rupee depreciation,” Dubey said.

“Under the regional connectivity scheme, the airfares are not just subsidised by the government but there are caps on fares as well. Unless the airlines are able to negotiate the scheme to adjust for such cost increases with the government, it might not be profitable to the airlines. But since the airlines are looking to utilise their deployed capacity into new markets the regional connectivity scheme with still be sought after,” said Balu Ramachandran, head (air & distribution), Cleartrip, adding that low fares are important to sustain the high growth levels, and ability of airlines to pass on higher fares to customers will only be limited, thus affecting profitability.

For all the latest Business News, download Indian Express App

    Live Cricket Scores & Results