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BL Research Bureau

Domestic jet fuel prices are likely to cool off significantly on the back of the 20 per cent correction in crude oil prices since July.

The 16 per cent cut in ATF (aviation turbine fuel) prices for September, announced by oil marketing companies over this weekend, reinforces this trend. Lower fuel prices will certainly spell relief for domestic airlines, who spend 35-40 per cent of their total costs on fuel and have put through a series of hikes in their fares over the past year by way of fuel surcharge. Low-cost carriers such as Deccan Aviation and Spicejet, who have been carrying liberal dashes of red on their profit statements with higher fuel prices taking a toll on profitability, may in particular benefit. Rising airfares pose a serious threat to continued demand for air travel, given the appreciable slowdown in passenger traffic growth over the past six months.

Seen in this context, the decline in jet fuel prices offers airlines — especially the low-cost carriers — an opportunity to trim down their fuel surcharge component in an attempt to boost traffic growth.

However, domestic airlines have, as of now, indicated that airfares may not be immediately lowered in response to the decline in ATF prices. While this may help margins in the short term, whether fare cuts are required to improve traffic growth will only become evident over the next few months. Besides the favourable impact on margins, falling jet fuel prices also seem to vindicate the domestic airlines’ decision to keep their fuel costs un-hedged during the upward spike in oil prices earlier this year. Hedging may have offset some of the gains that are likely to accrue to players from the now-falling fuel prices. However, it needs to be noted that ATF prices, even after the 16 per cent cut, are still over 50 per cent higher than levels prevailing at the same time last year.

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