Airlines sounded the alarm on Thursday about rising aviation turbine fuel (ATF) prices, saying the latest rise of more than 16% is unsustainable and they will raise rates to pass on the rising costs. The continued increase in jet fuel prices will impact the profitability of Indian airlines, and with the increase in air fares, the demand for air travel could also be dented, impacting passenger taxes.
On Thursday, SpiceJet chairman and chief executive Ajay Singh said ATF prices have risen more than 120% since June 2021 and airlines should pass the price increase on to passengers. “The sharp rise in jet fuel prices and the depreciation of the rupee have left domestic airlines little choice but to raise fares immediately and we believe that a rate increase of at least 10-15% is needed to ensure operating costs are reduced. be better supported,” he said in a statement.
The price increases come at a time when the operating and profitability environment for airlines was improving as passenger load factors increased and revenues stabilized. This is the first summer travel season after a two-year hiatus from the pandemic, so companies are hoping for good ticket sales thanks to pent-up demand.
Raising the long-standing problem of high taxes on ATF in India, airlines have again asked central and state governments for a cut in the tariffs. An Indigo spokesperson said: “To facilitate the recovery of the aviation sector and make flying feasible for everyone, we would request that the government at least bring ATF under GST so that the pre-tax advantage can be taken advantage of.” The company said the government of Jharkhand has reduced the value-added tax on ATF from 20% to 4%, and that more such steps are needed.
Singh also called for support from central and state governments, declaring that the massive hike is unsustainable, and to cut taxes on ATF, one of the highest in the world. “Over the past few months, we have tried to absorb as much of this fuel price increase as possible, which accounts for more than 50% of our operating costs. The weakening of the Indian rupee against the US dollar is further having a significant impact on airlines as our substantial costs are either dollar-denominated or dollar pegged,” he said.
The price of crude oil, now above $116 a barrel, continues to be a major headwind for the aerospace industry. May and June are traditionally strong months for airlines with a peak in travel demand in the summer, but the continued rise in the ATF could adversely affect this seasonally good quarter, putting pressure on their finances.
According to analysts, airlines are in a difficult position because they cannot pass on the entire increase, which damages margins. Suprio Banerjee, vice president and sector head (corporate assessments), Icra, said that given the highly competitive nature of the airline industry, a proportional increase in fares with every increase in ATF prices is not always possible.
“Airlines are looking at strategies to expand their RASK-CASK (revenue per available seat-kilometre-cost per available seat-kilometer) spread, which is becoming their main measure of profitability. Given the continued rise in ATF prices, CASK for the airlines will also rise and the (RASK-CASK) spread will become further negative unless a commensurate rate increase is implemented. The near-term impact is negative, although the magnitude of the impact will depend on the airlines’ negotiating power to raise ticket rates to cover the rise in ATF prices,” he said.
With ATF making up 30-40% of airlines’ total costs, there are fears that airlines would scrap the profits they’ve made in recent months as passenger taxes increase and people return to the plane. According to Icra, annual domestic passenger traffic increased 4.4-fold to nearly 11.4 million in May. Also consecutively, domestic air traffic was 5% higher than in April 10.9 million.
The rise of more than 16% from June 16 is by far the steepest and has once again pushed ATF prices to an all-time high. Prices have increased by Rs 19,757.13 per kiloliter, or 16.26%, to Rs 141,232.87 per kl in the national capital. The price of ATF is now Rs 140,092.74 per kl in Mumbai, 1146,322.23 per kl in Kolkata and Rs 146,215.85 per kl in Chennai. The new rise comes after jet fuel prices fell 1.3% on June 1 – after 10 rounds of continued hikes.
The latest rise is the highest price ever touched by ATF. The rate is higher than Rs 71,028.26 per kl reached in August 2008 when international crude oil prices reached $147 per barrel. Jet fuel prices are revised on the 1st and 16th of each month based on the average price of the international benchmark over the previous two weeks.
