Catch 22: Airlines want a 15% hike in airfares but fear a drop in traffic

SpiceJet boss Ajay Singh on Thursday pitched for an increase in airfares as jet fuel prices have been hiked by almost 16 per cent. Aviation Turbine Fuel (ATF) prices have hiked to Rs 141,232.87 per kilolitre in Delhi, an all-time high.

Moreover, a weakening rupee has doubled the challenge for airline boardrooms because of the higher exposure to the US dollar. Some key cost items like fuel, maintenance, lease rentals, and overhaul costs are billed in US dollars.

“The sharp increase in jet fuel prices and the depreciation of the rupee have left domestic airlines with little choice but to raise fares immediately, and we believe that a minimum 10-15 per cent increase in fares is required to ensure that cost of operations are better sustained,” Ajay Singh said.

However, executives are also wary that any increase in fares may lead to a decline in passenger numbers. Since the two rounds of the fare hike, there has been a decline in passenger numbers. From 407,975 passengers on April 17, it came down to 339,175 on June 14.

ATF prices typically account for 40 per cent of an airline’s cost. But since the beginning of this year, jet fuel prices have increased every fortnight. In the nine hikes since January 1, ATF prices have increased by Rs 49,017.8 per kl (Rs 49 per litre) or nearly 55 per cent.

The Indian rupee plunged to an all-time low on Monday as it breached the 78-mark against the US dollar for the first time.

Market leader IndiGo posted a loss of Rs 1,681 crore in the three months to March (Q4FY22), hit severely by the rise in jet fuel prices and higher exchange rate. Fuel expense of the airline increased by 68 per cent to Rs 3,220.58 crore during the three months ending March as against Rs 1,914.45 crore during the same period last financial year.

“This massive increase is not sustainable, and governments, central and state, need to take urgent action to reduce taxes on ATF that are amongst the highest in the world. In the last few months, we have tried to absorb as much burden of this fuel price rise, which constitutes more than 50% of our operational cost, as we could,” Singh said.

Historically, supply and demand have been the driver for higher fares compared to fuel prices. Airlines reported their best yield in FY13 (after grounding Kingfisher Airlines), in FY15 (after SpiceJet’s cut in capacity post change of ownership), and latest in Q1 FY20 (when Jet Airways shut operations).

The airfares are already high due to the government-mandated fare floors, which regulates price beyond 15 days. Market leader IndiGo reported a multi-quarter high yield of Rs 4.41, an increase of 19 per cent year-on-year (y-o-y) and 5.2 per cent sequentially.

“Ticket prices are subject to supply and demand. They are subject to capacity. I don’t think there will be a direct reaction to the fuel price hike on air ticket prices. If demand drops, fares will have to correct themselves,” Vistara CEO Vinod Kannan said.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor