As crude rises, airlines might be forced to hike fares despite capacity addition

Capacity addition by airlines and persistent competition may have spared domestic fliers of steep fares during the holiday season, but higher crude prices may spoil the party for both carriers and fliers. Crude costs make up for more than half of an airline’s expenditure.

“If oil stays at current levels, so will fares,” said Sharat Dhall, COO (B2C), Yatra.com, the online travel company.

But with crude forecast to test $90/bbl this year, fliers may have to brace for higher air fares. Crude is hovering around $68/bbl at present, compared to about $50/bbl during the same period last year.

Likewise, airlines have been shelling out more for aviation turbine fuel. According to leading ATF supplier Indian Oil, the price increased to Rs 57, 349/kl in December 2017, as compared to Rs 54, 143/kl a month earlier. Data from the state-owned refiner’s website shows that the December rates are a three-year high.

Also, industry analysts say the Goods and Service Tax has increased costs for airlines by nearly 30 per cent since it was introduced in July 2017.

Also Read: IndiGo launches New Year airfare sale, offers tickets starting Rs 899

In check

Stiff competition among airlines — particularly between low-cost carriers like IndiGo and SpiceJet — kept fares under control despite the peak traffic during the New Year season. “We didn’t see any major spike in fares in December,” said Dhall.

Also, airlines, led by market leader IndiGo, have increased capacity. IndiGo, which increased capacity by 13 per cent and 14 per cent in the September and December quarters, respectively; will increase the push in the final three months of the year to meet its annual target of 19 per cent.

That’s a reason why online travel companies like Yatra.com have seen fares for the upcoming January 26 –weekend trending on similar, or even slightly lower levels, than last year.

This would mean that rising crude prices will put pressure on the margins of airlines. Oil, say reports, had its strongest start to a New Year since 2013, and the US is looking to further trim its inventories. This will test airlines’ capability to rein in the fares.  “I think fares will probably go up,” Ajay Singh, SpiceJet Chairman, told a newspaper in the first week of January. But soon after, a Parliamentary Panel rapped the airlines on high fares, and asked for a cap on the higher limit rates could go.