Mumbai / New Delhi: Sometime today, India’s airlines are bracing for some bad news: an increase of 9-10% in prices of jet fuel, also known as aviation turbine fuel, or ATF, from state-run oil companies, the majority suppliers of such fuel.
The hikes, based on international prices, will come into effect from 1 May. And early indications are that most airlines will pass on the costs to passengers.
Growth affected: Jet Airways CEO Wolfgang Prock-Schauer.
Indeed, based on early indications from the fuel suppliers, the top brass of Jet Airways (India) Ltd, which runs the country’s largest airline group by passengers, has in principle already decided to increase, across-the-board domestic ticket prices by 10%, besides moving up the scales on what airlines in India call fuel surcharges that are designed to move in tandem with fuel prices, by up to 17.5%.
The Jet Airways decision, effective 3 May, will take the surcharge on short flights to Rs1,950 a ticket and on long haul routes to Rs2,350.
The May hike in Indian ATF fuel will follow a 14% jump in ATF prices in April that led to airlines increasing fuel surcharge from Rs1,650 to Rs1,800 on short-haul flights and to Rs2,000 on longer routes.
Other airlines are expected to follow Jet’s hikes as they have typically done in the past.
“Once we get the final increase, we are going to break our heads (over it) tomorrow,” said low-fare carrier SpiceJet Ltd’s chairman Siddhanta Sharma.
He said the airline will continue to use a differential surcharge model applied last month wherein short-haul sectors, such as Delhi-Jaipur, command a smaller surcharge compared with medium-haul sectors such as Delhi-Bangalore.
Such differential charges aim to address an underlying problem. As India’s airlines, most of them dealing with some two years of losses that are also predicted to top $1 billion (around Rs4,000 crore) for the current fiscal year, steadily raise ticket prices after three airline mergers last year, they are faced with the problem of slowing airline passenger growth.
In the March quarter this year, the number of domestic air passengers grew just 11.12% over the year-ago quarter. In the previous quarters, especially in early 2007, year-on-year growth rates were as high as 45%.
Meanwhile, the proposed new round of fare increases will again hit passenger growth rates.
“Growth rates will definitely be affected with increased airfares as one can see in the past few months,” said Wolfgang Prock-Schauer, chief executive of Jet Airways, specifically talking about high ATF charges. “If we are not able to reduce input cost, reduce capacity, the result would be reduced growth and the financial viability will be in jeopardy.”
But, amid little indication that Union and state governments will comprehensively reduce levies on fuel, the reaction of many airlines to the slowing expansion of passenger numbers has been predictable: go slow on their fleet expansion.
While some are cutting proposed aircraft deployment, others are adopting flexible fleet induction plans that match demand. Kingfisher Airlines Ltd, which also controls low-fare carrier Simplifly Deccan, has decided to slash the capacity addition by 50% while Jet Airways is only going for a “modest” increase of planes.
“The Kingfisher-Deccan combine has realized that the group is not going to be benefited in this increased capacity. Therefore, we have decided to cut down the aircraft induction substantially. Now we are looking at 8-10 aircraft a year instead of 20 (planned earlier),” said a UB Group executive, who did not want to be named. He said that the group is in talks with Airbus SAS on realignment of aircraft deliveries considering the overcapacity and high jet fuel costs.
SpiceJet is considering using new aircraft to replace old planes without adding to its net capacity, and rival GoAir is adopting flexible fleet plan to react to the situation.
“We are only opting for a modest capacity expansion in this context of overcapacity. We would be adding only five ATR planes and two Boeing 737 planes for Jet Airways. JetLite would also add one or two planes by end of December,” said Jet’s Prock-Schauer. Jet claims 29.8% market share for January-March along with its subsidiary, low-fare carrier JetLite.
And while InterGlobe Aviation Pvt. Ltd-run IndiGo’s president and CEO Bruce Ashby maintained there has been no change in the airline’s delivery schedule, a person close to the development said a rethink was under way. “We will have taken delivery of about 35 aircraft by the end of calendar 2010,” Ashby said.
A 19 March statement by IndiGo, which currently operates 17 aircraft, said it plans to serve about 30 Indian cities by 2010, with a fleet of around 40 Airbus-made A320 planes.
The strategy of Indian carriers seem to echo what is happening in the international aviation market.
US low-fare carrier JetBlue Airways Corp. plans to reduce its fleet expansion plans in face of rocketing oil prices. Southwest Airlines Co., another US low-fare carrier, is also considering flexible fleet plan in the wake of jet fuel prices. Southwest was the model followed by Naresh Goyal’s low-fare carrier JetLite.
The International Air Transport Association or IATA, which represents some 240 airlines comprising 94% of scheduled international air traffic, has sharply revised downward its profit outlook for 2008 to $5 billion from the earlier forecast of $7.8 billion.
The spike in fuel prices is expected to add $14 billion to the industry fuel bill, driving it up to $149 billion (based on an average price of $78 per barrel).
This week, global crude oil prices touched a historic high of $120 or Rs4,800 a barrel before tumbling on Tuesday to $116.06 per barrel (in an unrelated development, India’s commodity futures market regulator on Wednesday said it has permitted the Multi-Commodity Exchange of India to launch futures trading in ATF).