Aviation industry experts told that it would still be hard for airlines to pass improvements in operating prices on to passengers due to competition and fear of losing out on market share.
Indian aviation industry
- Only when it looked like things were looking up, the Indian aviation industry has once again run into turbulence with the outbreak of the Omicron variant of COVID-19 hitting request and oil marketing companies also improving the cost of aviation turbine fuel (ATF), the most significant cost component for airlines
Oil marketing companies hiked ATF prices by almost 3 percent this month after two price cuts in December. The price of ATF had peaked at Rs 80,835.04 per kg in mid-November before it was cut on December 1 and 15 by a total of Rs 6,812.25 per kg or 8.4 percent.
Hike in ATF price
The hike is likely to hurt airlines as rising prices will add to their woes at a time when they are working to fill seats.
“The hike in ATF price is a huge hindrance to the revival of the sector. Especially at a time when need is already taking a backseat due to increasing concerns of a third wave. Airlines will have no choice but to pass the prices to the passengers,” a senior airline official said.
Nonetheless, market experts told that it would still be difficult for airlines to pass improved operating prices on to passengers due to competition and fear of losing out on market share.
Crude oil prices
- Jet fuel prices are revised on the 1st and 16th of every month based on the average price of the international benchmark in the preceding fortnight. The increase in rates reflects a rise in international crude oil prices in the last 15 days.
- Crude oil costs have been on the rise as the Omicron variant has once again forced countries across the world to assume restrictions to prevent its spread.
ATF prices in India
ATF prices in India have yo-yoed in the past few months with oil marketing companies increasing rates in November by about 13.8 percent from October, before the two reductions in December.
Compared to the same time last year, ATF prices are still almost 91 percent higher, data from the websites of oil marketing companies shows.
“Aviation turbine fuel accounts for about 35-50 percent of airlines’ total operating prices. With airlines already working at a lower passenger load factor when compared to pre-COVID levels, the latest cost hike will further stress airlines’ finances,” an analyst at a domestic aviation consultancy told.
India spend 40-50 percent more on ATF prices
The rise in ATF costs will thus not only affect airlines’ ability to offer discounts to passengers in order to keep demand from falling but will also impact their profitability at a time when the industry is already struggling to keep prices down.
“Airlines in India spend 40-50 percent more on ATF prices as compared to international airlines. As international operations are closed, airlines don’t even have an option to buy ATF at a cheaper rate from abroad,” another senior official from a domestic airline told.
The rise in ATF will not only affect the bottom line of domestic airlines in the January-March quarter, but it will also limit airlines’ capacity to work for extra flights in order to save costs, multiple market experts also told.
“Some airlines may even look to reduce flights per week in order to reduce expenses until air passenger traffic begins increasing again. This then becomes a chicken and egg situation as airlines have to decide between profitability and offering discounts to fill more seats,” Lokesh Sharma, senior aviation analyst, told.
Air ticket prices in India
While air ticket prices in India are still regulated by the ministry of civil aviation, airlines are free to set costs of tickets beyond a 15-day time from the date of booking.
Airlines in India had at the end of December declared discounts on tickets in order to ensure that day-to-day passenger traffic does not drop off from the 380,000 daily passengers witnessed during most of December, which was about 98 percent of pre-pandemic levels, the highest since the beginning of the pandemic.
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However, the new ATF price hikes will now force airlines to hold off on more discounts as people are reconsidering journey plans in the wake of the rise in Omicron cases and curbs by state governments.
Additionally, the January-March quarter is a relatively less busy season for non-business travel.
ATF prices are hiked again on January
“It would be very challenging for airlines to keep offering discounts to customers if ATF prices are hiked again on January 16. Airlines will once again be forced to go back on the defensive and try and cut prices, thereby lowering discounts,” the analyst from the domestic aviation consultancy told.
Market experts expect the rise in ATF costs to first be seen on the costs of tickets on regional routes, which are still working at below pre-COVID levels and are anticipated to be most affected due to the latest state-wise curbs.
They expect airfares to be around 10 percent higher by the end of January compared to the end of December, if ATF prices are hiked again on January 16. The January 1 growth in ATF costs is expected to lead to a 2-5 percent rise in airfares.
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Source: Moneycontrol
