The Hindu Business Line : Jet fuel prices will singe, but traffic growth may reduce sting

Global jet fuel prices have climbed by about 30 per cent over the past six months to $65 per barrel now. Domestic airlines already pay 70-80 per cent more for jet fuel than their global peers, thanks to import duties and local taxes. They are also barred from hedging their fuel purchases through forward contracts. Government-owned oil companies - Indian Oil, HPCL and BPCL are the only suppliers of jet fuel to the Indian carriers. Prices of jet fuel are pegged to global crude oil prices and are revised every month.

All of the Indian carriers may have to trim their profit projections for the year, if fuel prices hold at the current levels. Fuel typically takes away 20-25 per cent revenues for full-service carriers, and this may go up to 30 per cent for low-cost carriers. This suggests that a 30 per cent hike in fuel costs could dent profit margins for airlines by as much as 8-9 per cent.

But robust growth in traffic could help reduce the impact of the fuel price increase on airline profits. With domestic passenger traffic climbing by well over 20 per cent in the past six months, Indian carriers may be better placed on this score than their global counterparts, as they will be able to offset some of the higher fuel costs through healthy revenue growth.

Expansion in passenger/cargo traffic usually allows an airline to spread its fuel costs over a larger number of customers, reducing the impact on the overall cost structure. Take Jet Airways. In the half-year ended September 2004, with crude prices spiralling, the company shelled out 25 per cent more for every litre of jet fuel, when compared to the previous year. It also consumed 6 per cent more fuel, as it added more flights. Yet, its fuel costs per passenger rose only by 14 per cent, with the load factor on operations improving from 61 per cent to 68 per cent.

The government's stand on duty and taxes will also decide whether airlines will bear the full brunt of the fuel price hike. The recent Budget has already trimmed the import duty on jet fuel from 20 per cent to 10 per cent; the effect of this is likely to kick in from this year.

The tax waiver on jet fuel used to service international flights will also help the domestic carriers who plan to ramp up global operations. Any proactive move by the State governments to clip the sales tax on jet fuel, which adds about 22 per cent on an average to the fuel price, will also be a big factor.

Much will also depend on whether airlines are able to hike their fares to compensate for the cost increases. Though airlines in India have been able to do this in the past, the entry of the low-cost carrier - Air Deccan has changed the equation, as it might decide not to follow suit. Also, promotions and price-offs are becoming the key selling point for air travel.

Airlines may be wary of taking a hike in airfares, at the crucial time when many train passengers are being wooed to the skies by the increasing affordability of plane tickets.

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