Mumbai: The rise in fuel prices will offset gains for Indian carriers, who are offering discounts to lure hesitant customers ahead of the vacation season, and even force them to hike fares, industry officials say.
Almost all airlines have offered discounts on advance day bookings in a bid to compete with train fares, and are rapidly expanding their network in tier-2 and tier-3 cities.
But a recent hike in prices of aviation turbine fuel (ATF), which makes up around 40% of an airline’s operating costs, may put the brakes on near-term relief.
“Airlines profitability may be affected as they have been giving aggressive discounts to boost load factors. But price cuts and ATF price hikes will put them in a similar problem they faced last year when ATF was rising sharply and they were not able to raise prices,” said Vijay Nara, analyst at Centrum Broking.
High operating costs and a fall in demand caused the Indian aviation industry losses of about $2 billion on an operating level in FY09, Kapil Kaul, CEO India and Middle East, Centre For Asia Pacific Aviation, told Reuters.
In a bid to attract tourists in the summer season, Jet Airways and state-owned Air India introduced 30-day advance purchase fares across tier 1 cities and certain smaller towns, at rates comparable to railway fares.
Jet, for example, is offering advance bookings in the busy Mumbai-Delhi route at Rs2,600, only marginally higher than first class train fares at Rs2,000.
“This is a new scheme that runs parallel to existing fares. In the second day (of the scheme) there was a jump of close to 60% (on bookings),” said a Jet Airways spokeswoman.
Airlines are also rapidly expanding their network among smaller towns.
Kingfisher Airlines, for instance, started flights on five regional routes to draw in corporate travellers as well as pilgrim traffic.
Budget carriers such as SpiceJet and GoAir are also playing their “buy early, pay less” card. SpiceJet cut fares on all bookings a month in advance by up to Rs600 a ticket.
Higher fares again?
But the recent discount spree coincided with a 10% increase in ATF prices, which came into effect on 1 April, the second rise in a month, and airlines are once again mulling raising fares.
“We are evaluating (raising fares)... we will decide later this month,” said Samyukta Sridharan, chief commercial officer of SpiceJet. He added that discounts on advance bookings was still in effect and “there has definitely been an uptrend”.
Kingfisher will also consider hiking fares in case ATF prices are raised again, its spokesman said.
ATF, a volatile commodity has a 95% co-relation to crude, and often dictates the pricing strategies of airlines.
“With crude again getting stronger airlines are caught in a trap”, Centrum’s Nara added.
ATF prices had hit a high of Rs73,673.56 a kilolitre in August 2008, following global crude’s historic peak over $147 a barrel in July, 2008.
Crude has since softened to around $48 a barrel, but a recent rally in global stock markets and crude production cuts helped raise prices by 9.5% in January-March.