Mumbai: Airlines are looking to raise flight ticket prices, cut non-fuel costs and boost non-aeronautical revenue to offset the impact of rising fuel costs and a weakening rupee.
IndiGo (Interglobe Aviation Ltd), India’s largest airline in terms of passengers carried, was the first to hike flight fares by levying a fuel surcharge of as much as ₹ 400 on domestic routes from 30 May to offset higher costs.
The company’s profitability may still come under pressure in the quarters ahead, as it may not be able to fully pass on costs to passengers if fuel prices rise further, brokerage IndiaNivesh said in a 3 May note on IndiGo.
Fuel constitutes 35-50% of an airline’s total costs. Airlines in India also make payments in dollars for salaries of expatriates, for maintenance and overhaul, purchase of new aircraft and for buying jet fuel. However, with India being a price-sensitive market in the commercial aviation segment, airlines often struggle to pass on costs to customers.
A SpiceJet Ltd spokesperson said the airline was evaluating whether to pass on rising costs to passengers. “No decision has been taken yet," the person said.
SpiceJet chairman Ajay Singh said earlier in May that Indian airlines might have to absorb the impact of rising fuel costs, if prices breach $100 a barrel. “So far, we have been able to pass on the increase in oil costs to passengers, which the market has taken well as we are currently flying with a load factor exceeding 90% at high yields," Singh said in an interview. “We don’t know the answer if this will be passable to passengers if oil hits as high as $100 a barrel."
A 13 May Elara Capital report on SpiceJet said that an aggressive price war may not affect the airline’s ability to pass on higher crude prices to passengers because it flies routes where demand exceeds supply.
During the past 12 months, Brent crude price has jumped 54.22% to $76.86 a barrel, while jet fuel prices have risen more than 28%. During the same period, the rupee weakened 3.85% against the dollar.
Among the three airlines listed on the stock exchanges, no-frills carriers SpiceJet and IndiGo reported a profit for the March quarter while full-service carrier Jet Airways (India) Ltd posted a massive loss during the same period due to revenue decline and cost increases.
A Jet Airways spokesperson declined to comment on how it plans to cope with rising costs. Jet Airways chief financial officer Amit Agarwal told analysts in a post-earnings conference call on 24 May that the airline is working to reduce its maintenance and sales costs, increase labour productivity and fuel savings, driven by the induction of the fuel-efficient 737 MAX aircraft and an enhanced cooperation pact with Air France-KLM.
“As we focus on reducing our fleet complexity in our narrow-body aircraft, the airline is working towards various revenue enhancement strategies, including network redesign, management—revenue management analytic—and innovative techniques to drive ancillaries of new streams," Agarwal had said.
An ICICI Securities research report on Jet Airways dated 24 May stated that the airline’s operating costs remain the highest in the industry and its operating environment would continue to be a challenge for the company in the future.