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Explained | How will rising ATF prices affect the aviation industry amid tapering demand and concerns of a third wave?

Market experts said that it would still be difficult for airlines to pass increased operating costs on to passengers due to competition and fear of losing out on market share.

January 04, 2022 / 02:20 PM IST
Representative image

Representative image

Just when it looked like things were looking up, the Indian aviation industry has once again run into turbulence with the outbreak of the Omicron variant of COVID-19 hitting demand and oil marketing companies also increasing the price of aviation turbine fuel (ATF), the biggest cost component for airlines

Oil marketing companies hiked ATF prices by around 3 percent this month after two price cuts in December. The price of ATF had peaked at Rs 80,835.04 per kl in mid-November before it was cut on December 1 and 15 by a total of Rs 6,812.25 per kl or 8.4 percent. The hike is likely to hurt airlines as rising costs will add to their woes at a time when they are struggling to fill seats.

“The hike in ATF price is a huge hindrance to the revival of the sector. Especially at time when demand is already taking a backseat due to rising concerns of a third wave. Airlines will have no options but to pass the costs to the passengers,” a senior airline official told Moneycontrol.

However, market experts said that it would still be difficult for airlines to pass increased operating costs on to passengers due to competition and fear of losing out on market share.

Why are ATF prices rising?

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Jet fuel prices are revised on the 1st and 16th of every month based on the average price of the international benchmark in the preceding fortnight. The increase in rates reflects a rise in international crude oil prices in the last 15 days.

Crude oil prices have been on the rise as the Omicron variant has once again forced countries across the world to adopt restrictions to contain its spread.

ATF prices in India have yo-yoed in the past few months with oil marketing companies raising rates in November by about 13.8 percent from October, before the two reductions in December.

Compared to the same period last year, ATF prices are still around 91 percent higher, data from the websites of oil marketing companies shows.

How will the ATF price hike affect airlines?

“Aviation turbine fuel accounts for about 35-50 percent of airlines’ total operating costs. With airlines already operating at a lower passenger load factor when compared to pre-COVID levels, the new price hike will further stress airlines’ finances,” an analyst at a domestic aviation consultancy said.

The rise in ATF prices will thus not only impact airlines’ ability to offer discounts to passengers in order to keep demand from falling but will also affect their profitability at a time when the industry is already struggling to keep costs down.

“Airlines in India spend 40-50 percent more on ATF prices as compared to international airlines. As international operations are closed, airlines don’t even have an option to buy ATF at a cheaper rate from abroad,” another senior official from a domestic airline said.

The rise in ATF will not only impact the bottom line of domestic airlines in the January-March quarter, but it will also limit airlines’ ability to operate extra flights in order to save costs, multiple market experts also said.

“Some airlines may even look to reduce flights per week in order to reduce expenses until air passenger traffic starts rising again. This then becomes a chicken and egg situation as airlines have to choose between profitability and offering discounts to fill more seats,” Lokesh Sharma, senior aviation analyst, said.

What will happen to ticket prices due to the rise in ATF prices?

While air ticket prices in India are still regulated by the ministry of civil aviation, airlines are free to set prices of tickets beyond a 15-day period from the date of booking.

Airlines in India had at the end of December announced discounts on tickets in order to ensure that daily passenger traffic does not drop off from the 380,000 daily passengers witnessed during most of December, which was about 98 percent of pre-pandemic levels, the highest since the start of the pandemic.

However, the new ATF price hikes will now force airlines to hold off on more discounts as people are reconsidering travel plans in the wake of the rise in Omicron cases and curbs by state governments.

Additionally, the January-March quarter is a relatively less busy season for non-business travel.

“It would be very difficult for airlines to keep offering discounts to customers if ATF prices are hiked again on January 16. Airlines will once again be forced to go back on the defensive and try and cut costs, thereby lowering discounts,” the analyst from the domestic aviation consultancy said.

Market experts expect the rise in ATF prices to first be seen on the prices of tickets on regional routes, which are still operating at below pre-COVID levels and are expected to be most impacted due to the new state-wise curbs.

They expect airfares to be around 10 percent higher by the end of January compared to the end of December, if ATF prices are hiked again on January 16. The January 1 increase in ATF prices is expected to lead to a 2-5 percent rise in airfares.



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Yaruqhullah Khan
first published: Jan 4, 2022 02:20 pm
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