Fuel price hike may lead to increase in air fares: experts

Mumbai: The nearly 30 per cent increase in aviation turbine fuel (ATF) over the last one year could compel domestic airlines to go for a upward fare revision to offset the increased cost of operations, according to experts.

Since the jet fuel accounts for 45 per cent of an airline's cost of operation, the carriers could think of hiking the prices by up to 15 per cent, the experts feel.

While the airlines refused to come on record on the issue, executives of some private carriers said a call on how to offset the increase in the ATF was yet to be taken even though the situation demands hiking of the fares.

The ATF price has witnessed an increase of nearly 30 per cent over the last one year and about 25 per cent in just last six months. "There is an increase of 25 per cent in the jet fuel prices from last November till date and this definitely calls for an increase in ticket prices to meet some of the increased costs. But the question is who will bell the cat," said a private airline executive on condition of anonymity.

"We are in catch 22 situation as far as the issue of hiking fares is concerned. There is so much capacity in the market and then you have to fill the seats also," said a senior executive from another airline.

Commenting on the situation, Amber Dubey, partner and India head of aerospace and defence, KPMG, said, "We are expecting a 10-15 per cent increase in fares to partially compensate for the near-30 per cent increase in ATF prices over the last year."

He said the central and state governments should reduce the excise duty and VAT (value added tax) rates as soon as possible. "The Union and state governments earned a bonanza from the aviation sector, thanks to low crude oil prices. It's time to give back a bit," he said. Some state governments levy as high as 40 per cent VAT on the ATF, making jet fuel in India one of the costliest in the region.

The unprecedented increase in ATF prices has triggered a call for bringing it under the purview of the goods and services tax (GST). According to Dubey, the low season of July-September will be tough for the airlines.

John Nair, head, business travel, Cox & Kings, said the airlines have managed to absorb much of the fuel hike in the last one year but now they may be forced to pass on the impact, at least partially, to the travellers.

Nair estimated that in the last six months, airfares have already risen by at least 15 per cent, both on the domestic and international sectors.

However, the Sydney-based aviation think-tank CAPA sees a marginal rise in overall ticket prices, a phenomenon which is expected to last till June. "We see a marginal increase in overall fares till end June but closer-to-departure fares(D7) may be higher than the overall average," said Kapil Kaul, chief executive officer and director, CAPA South Asia.

Kaul, however, feels that there was no scope for a rise in airfares during the September quarter, given the capacity (aircraft induction by airlines) profile of the domestic carriers. "Fares in Q2 will see higher discounting than in the previous years driven by large capacity inductions," he added.

The domestic carriers have placed large aircraft orders with the world's two leading plane makers - Boeing of the US and Airbus of Europe - which are to be delivered over the next several years.

Airbus in March this year had said that it expects to deliver one aircraft per week on an average to Indian carriers over the next 10 years.

The twin impact on costs and revenue could impact airlines' bottomline, Kaul warned. "We see a downward bias on full-year profitability estimates at this stage."