At a time when domestic airlines are struggling to keep their costs down, the steep rise in ATF prices will further stress airlines' finances
Eventually passengers will have to bear the brunt of rising ATF prices as airlines will have no options but to pass it on
New Delhi: The steep hike in prices of aviation turbine fuel (ATF) at major Indian cities, despite a fall in global crude prices, is set to hurt airlines as rising costs will add to their woes amid tepid demand due to the covid-19 pandemic.
Aviation turbine fuel accounts for about 35-50% of airlines' total costs. At a time when domestic airlines are struggling to keep their costs down, the steep rise in ATF prices will further stress airlines' finances.
"The price of ATF rose substantially during June, which is not a good sign, as airlines resumed domestic operations after two months of grounding on 25 May," said a senior airline official, who didn't want to be named.
"The steep hike in ATF prices will make it difficult to add more flights and routes as it will be harder for airlines to cover their variable costs," the senior airline official added.
The price of ATF (aviation turbine fuel), which is a state subject, has been hiked by 16.3% to ₹39,069.87 per kiloliter in New Delhi last week, according to Indian Oil Corporation Limited (IOCL). This is the second straight increase in ATF price in June after rates were hiked by a record 56.5% in the national capital on 1 June.
After price revision on 16 June, ATF prices at major cities like Kolkata, Mumbai and Chennai stood at ₹44,024.10, ₹38,565.06, and ₹40,239.63, respectively, according to IOCL data.
Meanwhile, global crude oil prices have fallen by about 35.29% during the last 12 months, according to Bloomberg data. Crude oil prices closed at $42.19 a barrel on Friday.
"Indian airlines spend at least 40-50% more on ATF prices as compared to several of their contemporaries across the world. As international operations are closed, airlines don't even have an option to buy ATF at a cheaper rate from abroad," said a senior official of a no-frill carrier adding that with tepid passenger demand amid the pandemic, it is difficult to pass on the entire ATF price hike to the passengers.
Airlines operated at below 33% capacity after starting operations in the last week of May, as they struggled to fill seats, monthly data released by the Directorate General of Civil Aviation (DGCA) showed.
"The government wants airlines to expand capacity to 45% and eventually to 50-55% in the coming months. However, we don't expect load factor to improve to pre-covid level anytime soon," the senior official of a no-frill carrier mentioned above said.
"With rising costs, including steep increase in ATF prices, airlines will be conservative about increasing capacity, especially on routes which have low demand. This will eventually lead to a delay in the capacity expansion process," the official added.
When contacted, spokespersons of IndiGo, SpiceJet, GoAir, AirAsia India, and Air India didn't offer comments.
“The increase in ATF prices significantly impacts cost of operations for any airline, as fuel remains the biggest cost contributor. In the current, difficult circumstances, this obviously hurts. We continue to review our network and make every effort to make our cost structure leaner by trimming non customer-facing expenses," said a Vistara spokesperson.
A senior official at a state-owned oil marketing company (OMC) said that oil companies follow import parity pricing and crude oil price has recovered from its historical low of $14 a barrel in April, while demand for ATF has picked up resulting in higher jet fuel prices.
"The ATF offtake has picked up with domestic flights beginning operations. We expect airlines to do better business when the international routes are opened," the OMC official said requesting anonymity.
Eventually passengers will have to bear the brunt of rising ATF prices as airlines will have no options but to pass it on, said aviation analyst Mark Martin, chief executive of Martin Consulting LLC.
"Clearly the government doesn't want to pass the benefit of low oil cost prices to travelers. Government has been talking about including ATF under GST (Goods and Services Tax) for the past few years, but this is yet to happen," Martin added.
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