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2% rise in ATF prices may not impact fares, demand

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As long as crude oil hovers at $91-92 a barrel, passengers will be able to absorb minor increases. However, if crude oil prices go beyond $95 a barrel, airlines might find it difficult to pass on the increase without impacting traffic.
As long as crude oil hovers at $91-92 a barrel, passengers will be able to absorb minor increases. However, if crude oil prices go beyond $95 a barrel, airlines might find it difficult to pass on the increase without impacting traffic.

Shubhra Tandon

Mumbai, Jan. 19

Airline passengers can heave a sigh of relief for now, as the recent 2 per cent increase in aviation turbine fuel prices is unlikely to significantly impact air fares.

The maximum increase in fares could be “around Rs 200-250 a ticket, depending on the sector and distance,” the Yatra.com Vice-President- ir Product, Mr Sunny Sodhi, told Business Line.

Rising Demand

“There has been a growth of approximately 17 per cent in air traffic last year. Hence, air option increasingly seems to be the choice of travel for people. An increase in ATF by around Rs 200-250 should not impact the growth in the sector by much,” he added.

As a result, travel industry representatives too are not worried at the moment, as the passenger air traffic is growing.

In fact, the ICICI direct.com Senior Analyst, Mr Rashesh Shah, says as long as demand for air travel is on the rise and crude oil hovers at $91-92 a barrel, passengers will be able to absorb minor increases. However, if crude oil prices go beyond $95 a barrel, airlines might find it difficult to pass on the increase without impacting traffic.

“In Mumbai, the ATF costs Rs 49,046/kilolitre. So till about Rs 53,000-54,000 would not be a difficulty for airlines in terms of passing on the increases. But beyond that might prove to be difficult,” he said.

While the carriers still contemplate their next move, they have made it clear that there will not be selling below cost. Recently, the Jet Airways Chairman, Mr Naresh Goyal, had said, “If you run a business, you can't sell an item costing Rs 10 at Rs 8 unless you decide to go bankrupt.”

Govt intervention

The Minister for Civil Aviation, Mr Praful Patel, has said that the Government will not interfere in the airlines present pricing strategy, clarifying further the Government intervention in December was because the hike in air fares was “unjustified”.

However, despite those high spot fares, the passenger traffic in December crossed the 50-lakh mark for the first time in the history of the country's civil aviation, according to the Directorate General of Civil aviation data released on Tuesday.

So the ball lies in the court of oil prices, to decide which way air fares will go from here!

(This article was published in the Business Line print edition dated January 20, 2011)
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