The aviation turbine fuel (ATF) prices have been hiked by 18 per cent to cross the Rs 1 lakh per kilolitre mark for the first time. This is the sixth time that ATF prices have been hiked this year.
The ATF prices are revised on the 1st and 16th of every month depending on the average international crude oil prices in the preceding fortnight. Over the past few weeks, the crude oil prices have soared to a 7-year high nearing $140 per barrel, as the Russian invasion of Ukraine escalated.
Experts pointed out that with an increase in ATF prices, the prices of air tickets will also increase.
Marginal Increase In Air Fares
Amrit Padurangi, who is the former head of Infrastructure in Deloitte said, “The air ticket prices will marginally increase because the Indian aviation companies would love to increase much steeper prices. But, when you increase the ticket prices by a high percentage the demand drops immediately both for the business segment as well as for the non-business segments because people will defer their holidays’ people will travel by other means, in the business segment. So, clearly, it is not going to be easy to increase the prices substantially.”
“They will do marginal increases because without that the losses will be very high. But anything very significant will not be accepted by the traveling public. So we have to wait and see if any one of the aviation companies behaves very erratically and comes with the highest discount, then everybody will have to go for it,” he added.
Airlines in India have earlier urged the civil aviation ministry to increase caps on domestic fares, given the sharp rise in prices of aviation turbine fuel over the past two months and expectations that crude oil prices are expected to remain high due to the Russia-Ukraine conflict.
“Indian aviation companies don't have access to an option because if they don't hike prices the losses will continue in a much bigger way because oil prices are high, the ATF prices are high. Even with the current level of pricing, there will be losses and if they don't hike it, the losses will continue in a big way. So I think they will increase but only marginally,” Padurangi noted.
Earlier this year, Indigo posted a profit in the three-month period ending December 31, 2021, after seven successive quarters of losses, thus bringing cheer to the loss-making aviation industry. Similarly, Air India has been taken over by Tata Group and a resolution plan for Jet Airways is underway.
Padurangi said, “With the Air India being taken over by Tata Group, the capacity of the Air India will only increase. And when that increase happens, there will be more supply and not enough demand. So, there may be a margin increase in air prices because otherwise, the loss will be very high, but nothing more than that.”
Recovery To Be Slower For Aviation Sector
The Indian aviation industry had been witnessing a lull in the past two years, owing to the Covid-19 pandemic. The airlines and airports in India incurred an estimated loss of Rs 19,564 crore and Rs 5,116 crore, respectively, in 2020-21 due to disruption caused by the Covid-19 pandemic, Minister of State for Civil Aviation V K Singh had informed Rajya Sabha in December last year. Apart from disrupted domestic air travel, International air travel was in a hiatus since March 23, 2020. The international flights are now set to resume beginning March 27.
Padurangi said, “With an increase in ATF prices, the recovery of the Indian aviation sector will be much more difficult and much slower. Because we don't see the ATF prices going down for quite some time. And the demand is picking up only very slowly. We continue to be sensitive to prices, including the business segment. You can't increase the prices too much. At the same time, you can't have too many losses, so it will be a slow pickup. It may take much longer than what people had thought. So instead of the next few months, probably the whole of 2022 will be only a recovery period. And hopefully by 2023 things may improve in terms of ATF prices as well as demand picking up but it will still not be the same as the pre-pandemic period, it'll probably take two more years for it to come back to what we had in 2019 or so. But I would say 2022 is a write-off as far as the Indian aviation industry is concerned.”
Mark Martin, the Founder, and CEO of Martin Consulting said, “An 18 per cent hike in ATF prices will directly impact the travelers. Moreover, if airlines pass on the increase, travelers absorb it,"
However, he pointed out that there would be no significant impact on demand. “If people have to travel they will travel. They have to pay for it. Even when the petrol prices get hiked, the transportation through cars or buses doesn’t stop. And people have to pay for the prices. They can’t avoid it. So this is a reality,” Martin said.
Regarding the decrease in aviation demand amid a hike in ATF prices, Martin said, “The same argument happened in the 2008 financial crisis, but both railways and the aviation sector survived. That's the uniqueness of transportation. People will have to pay for the increase in prices. People will have to shell out more money from their pockets, that’s the only recourse.”