Oil marketing companies (OMCs) hiked Aviation Turbine Fuel (ATF) prices by 16.3% on Thursday (June 16), taking jet fuel prices to a record high of Rs 1.41 lakh per kilolitre in Delhi.
The record increase in ATF prices, combined with the depreciating rupee, is set to increase the cost of operations for airlines, which could lead to an increase in air fares by up to 15%.
What kind of impact will ATF prices have on the cost of operations?
The cost of ATF constitutes up to 50% of the cost of operations for airlines in India that are already struggling due to the high cost environment and lower fares in the country.
Airlines have been facing the consequences of the fall in the value of the domestic currency (the Rupee is 5.7% weaker since June 2021 against the US$) since costs like lease rentals, payments to foreign airport operators and expat pilots are all dollar denominated.
The airline industry had sought respite from high fuel prices through a cut in excise duty on ATF or by bringing jet fuel under GST, that would have brought down prices and also allowed airlines to claim input credit tax on the GST paid.
While bringing ATF under GST seems unlikely for now, the Aviation Ministry had requested the Finance Ministry to reduce excise duty on jet fuel by 2 percentage points to 9 per cent. The Finance Ministry, however, did not cut any taxes on ATF.
What will be the immediate impact on customers?
Flying will become more expensive, as airlines will pass on the increased cost to end consumers.
SpiceJet chairman Ajay Singh, in a statement, has said that they will have to pass on the increase in ATF prices to fliers that will lead to an increase of up to 15% in fares.
Industry watchers say that it could be even higher, but a lot will depend on the level of competition among airlines.
And what will be the impact on the aviation industry?
The airline industry has crossed the pre-Covid flight numbers, and has been seeing further growth due to increase in demand for travel on the back of a huge demand for leisure travel.
Travel industry insiders say fares are already about 50% higher than last year, and any further increases will impact demand.
Any increase in fares impacts passenger demand since people opt for alternative means for travel like trains and roads, which are much cheaper than airlines.