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The custom duty hike on air turbine fuel will likely push up air fares by 10 percent, with airlines calling it an "additional burden".
The government had on Wednesday hiked duties on 19 items in an attempt to reduce current account deficit. The rate on ATF has been increased to 5 percent from zero. The rate change is effective from today.
"Any increase on the ATF will put additional burden on airlines. Furthermore, the depreciating Indian Rupee is an additional cost burden on the Indian carriers," IndiGo said in a statement.
Among domestic airlines, only IndiGo imports "some part" of its ATF requirement. Rest of the airlines, including Jet Airways and SpiceJet, buy it from refiners such as Bharat Petroleum.
Analysts expect the refiners to pass the duty hike on to the airlines.
"The effective impact of the duty hike on fuel costs will be about 7.5 to 8%," says Mark Martin, founder and CEO of Martin Consulting, an aviation advisory and consulting firm. "It's a harakiri to hike the duty when the fuel rate is at a three-year high. Usually, a duty rate is revised when fuel rates are low," added Martin.
Fuel makes up to as much as 40% of an airline's costs.
The only compensation is the peak season. "With the peak season kicking in, we are likely to see an increase in prices and strong loads as well, thereby providing relief to the airlines," said Sharat Dhall, B2C (COO), Yatra.com.
"The duty hike will be a catalyst for airlines to push up airfares," said Sarthak Mukherjee, research analyst at Stewart & Mackertich Research. Some of the airlines, he added, have already hike the rates with the onset of the festival season.
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