Airlines may not pass on benefit of fuel price cut to passengers

Airlines may not pass on benefit of fuel price cut to passengers

Airfares are not likely to come down despite a drop in jet fuel prices —the first time in the past two months—as a majority of India’s domestic airlines are consolidating their operations and looking to raise more money to support an aircraft acquisition spree, say analysts.

State-owned IndianOil Corp., the largest supplier of jet fuel in the country, reduced oil prices by about 2.3% on Friday, breaking a cycle of sustained increases mirroring a worldwide spike in crude oil prices. The prices, that are set on a monthly basis, were reduced to Rs38,163.23 per kilolitre from Rs39,059.45 per kilolitre last month, in Delhi.

“For the moment, there is some sanity in the (airline) market and we are not in favour of reducing prices," said Ajay Singh, director of the low-fare airline SpiceJet Ltd, referring to a slowing of price wars between competing airlines. With Jet Airways Ltd taking over Air Sahara (now JetLite) and UB Holdings, which runs Kingfisher Airlines, buying a majority stake in the country’s largest low-cost carrier, Air Deccan, two of the most aggressive price cutters are now in larger airline companies that don’t necessary resort to price wars.

Singh said SpiceJet will take a call on any reduction, if at all, today after seeing what other airlines plan to do. Kingfisher Airlines and Jet Airways also said they were yet to make a call on reducing prices.

Since the middle of last year, when the fuel surcharges were first applied by airlines, the tradition has been to arrive at a unanimous increase in surcharges—irrespective of short-haul or medium-haul flights. As a result, fuel surcharges simply go up and have almost never gone down.

Airline officials say that surcharges are a makeshift arrangement to offset some costs and based on a number of factors and so cannot change with minor fluctuations in oil prices. “Fuel prices have many times gone very high in the past year; it has never been passed on to the customer completely," claims a senior airline official who did not wished to be named. “But (to reduce or increase) I think it’s an industry decision. You need to ask: Are you finally profitable? Can you sustain your operations?"

The last two months have seen a fuel surcharge hike of Rs50 and Rs150, respectively.

“Keeping it intact is a nice way of signalling we are acting in concert," says one Mumbai-based aviation analyst, who did not wished to be named. “The fuel surcharge is important as you do not have to pay commission on it (to the travel agents)," he said.

“Ramming everything into (surcharge) triggers down the (overall) cost."

Internationally, airlines increase or roll back surcharges based on crude oil prices. On Thursday, for example, Air France, the French unit of Air France-KLM Group, said it will reduce fuel-related fees for short- and medium-haul flights by €1, bringing the cumulative fee to €13 on European routes and €9 within France.

Meanwhile, SpiceJet plans to raise about $80 million around the year-end for funding aircraft, while Jet Airways is looking at about raising $400 million. Jet fuel prices in India contribute significantly to the balance sheets of all airlines as they are heavily taxed. International carrier Air India alone spent Rs3,140.77 crore on fuel in 2005-06 against Rs2,187.74 crore the year before. That expenditure is nearly equal to the revenues the carrier generated from its North American operations the same year.

Andrea Rothman of Bloomberg contributed to this story.