A steep increase in jet fuel prices by state-run refiners will swell the operating costs of Indian carriers at a time when they are struggling to reboot operations after a two-month halt due to the pandemic.
Aviation turbine fuel (ATF) accounts for 35-50% of the cost of running an airline in India. The flurry of price increases will further stress the balance sheets of airlines who are making desperate efforts to stay afloat.
“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 will make it difficult to add more flights and routes as it will be harder for airlines to cover their variable costs. »
The price of ATF was raised by 16.3% to ₹39,069.87 per kilolitre in New Delhi last week, according to Indian Oil Corp. Ltd (IOCL). This is the second straight increase in jet fuel prices this month, after rates were hiked by a record 56.5% in the national capital on 1 June.
The sharp increase in jet fuel prices is despite a more than 35% drop in global crude prices in the past year, 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 budget carrier, who added that with passenger demand staying tepid amid the pandemic, it is difficult for airlines to pass on the entire cost increase to passengers. Airlines operated at below 33% capacity after resuming operations, 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 levels anytime soon, » said the official cited above.
The official said rising costs, including that of fuel, and the uncertain demand scenario will make airlines conservative on expanding capacity, especially on routes which have low demand.
“The increase in ATF prices significantly impacts the 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.
Spokespersons for IndiGo, SpiceJet, GoAir, AirAsia India, and Air India declined to comment.
A senior official at a state-run oil marketing company said 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 ATF 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 official said, requesting anonymity.
Eventually, passengers will have to bear the brunt of rising ATF prices as airlines will have no option 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 prices to travellers. The government has been talking about including ATF under GST (goods and services tax) for the past few years but this is yet to happen, » he said.