ATF Price- Airfares set to take off on aviation turbine fuel price hikes

ATF Price: Airfares set to take off on aviation turbine fuel price hikes

Airline companies on Thursday sounded an alarm over rising aviation turbine fuel (ATF) prices, saying the latest hike of over 16% is unsustainable and they will be raising fares to pass on the increasing costs. The continuous rise in jet fuel prices will impact the profitability of Indian carriers, and with the rise in air fares, the demand for air travel may also take a hit, impacting passenger load factors.

On Thursday, Ajay Singh, chairman and managing director of SpiceJet, said ATF prices have surged over 120% since June 2021, and that carriers will have to pass on the price increase to passengers. “The sharp increase in jet fuel prices and the depreciation of the rupee have left domestic airlines with little choice but to immediately raise fares and we believe that a minimum 10-15% increase in fares is required to ensure that cost of operations are better sustained,” he said in a statement.

Raising the long-standing issue of high taxes on ATF in India, airline companies have again asked the central and state governments for a reduction in levies. An Indigo spokesperson said, “To facilitate recovery of the aviation sector and to make flying viable for everyone, we would request the government to at least bring ATF under GST so that the benefit of input tax credit can be availed.” The company said the Jharkhand government had slashed value added tax on ATF to 4% from 20%, and more such steps are needed.

Singh, too, called for support from central and state governments, stating that the massive increase is not sustainable and to reduce taxes on ATF, amongst the highest in the world. “We have in the last few months tried to absorb as much burden of this fuel price rise, which constitutes more than 50% of our operational cost, as we could. The weakening of the Indian rupee against the US dollar further significantly impacts airlines as our substantial cost is either dollar denominated or pegged to the dollar,” he said.

Crude oil prices, which are now at over $116 per barrel, remain a major headwind for the airline industry. May and June are traditionally strong months for airline companies with peak summer travel demand, but the continuous rise in ATF could have a detrimental impact on this seasonally good quarter, thereby straining their finances.

According to analysts, airlines will find themselves in a difficult spot, because they will not be able to pass on the entire hike, and that will hurt margins. Suprio Banerjee, vice president and sector head (corporate ratings), Icra, said given the highly competitive nature of the airline industry, a proportionate rise in fares with every rise in ATF prices is not always possible.

“Airlines look at strategies to expand their RASK-CASK (revenue per available seat kilometre-cost per available seat kilometre) spread, which becomes their core profitability metric. Given the consistent rise in ATF prices, CASK for the airlines will also be on the rise and the (RASK-CASK) spread will turn further negative, unless proportionate fare rise is taken. The impact in near term is negative, though the quantum of impact will be dependent on the airlines’ bargaining power to raise the ticket rates to cover the rise in ATF prices,” he said.

With ATF forming 30-40% of the overall cost of airline companies, the fear is that carriers would shave off the gains made by them over the past few months as passenger load factors picked up with people returning to air travel. Domestic passenger traffic surged 4.4 times on a year-on-year basis to nearly 11.4 million in May, according to Icra. Sequentially, too, the domestic air passenger traffic was 5% higher compared to 10.9 million in April.

The over-16% hike effective June 16 is the steepest seen by far and has again taken ATF prices to an all-time high. Prices have been raised by Rs 19,757.13 per kilolitre, or 16.26%, to Rs 141,232.87 per kl in the national capital. Price of ATF is now Rs 140,092.74 per kl in Mumbai, 1146,322.23 per kl in Kolkata and Rs 146,215.85 per kl in Chennai. The fresh increase comes after a 1.3% cut in jet fuel prices on June 1— after 10 rounds of continuous increases.

The latest increase is the highest ever price touched by ATF. The rate is higher than Rs 71,028.26 per kl reached in August 2008, when international crude oil prices touched $147 per barrel. Jet fuel prices are revised on the first and 16th of every month based on the average price of the international benchmark in the preceding fortnight.