Domestic airlines in a tight spot

T E Raja Simhan |K Giriprakash | Updated on: Jun 26, 2022
Aviation turbine fuel: Prices after the increase on June 16 have gone up by 16%

Aviation turbine fuel: Prices after the increase on June 16 have gone up by 16%

Galloping price of aviation turbine fuel and government’s refusal to lift airfare cap have neutralised their gains

It is turning out to be a Catch-22 situation for domestic airlines, for which under the current circumstances, there seems to be no way out.

With leisure travel witnessing an unprecedented boom, soaring airfares might have just neutralised any gains. Aviation turbine fuel (ATF) prices have increased to such an extent that a flight ticket from Chennai to Hyderabad costs nearly two times what it was during the pre-Covid period.

There are two reasons for the steep increase in airfares. One is the surge in leisure travel, and another is the more obvious one: the aviation turbine fuel prices which have skyrocketed during the last six months. The ATF price after the increase on June 16 has grown 16 per cent to ₹1.41 lakh per kilolitre compared with the price a fortnight ago. Oil marketing companies usually revise fuel prices every fortnight. While the current fares fall short of what the airlines would be comfortable with, the government's insistence on continuing with airfare caps on domestic fares has neutralised any gains that they could have made. At present, the minimum fare for a flight under 40 minutes has been fixed at ₹2,900, and the maximum is ₹8,800. For those flights with 180 to 210 minute duration, the minimum fare has been set at ₹9,800 and a maximum of ₹27,200. These fares apply only if the tickets are booked 15 days in advance.

Even though IndiGo commands a share of over 55 per cent in the domestic market, it has been unable to take advantage of any headwinds during the fourth quarter. It posted losses of ₹1,680 crore for the fourth quarter of FY21-22, which was way above the estimated loss of ₹1,020 crore due to lower than expected yields. Ticket yield was flat q-o-q at ₹4.4 (estimate: ₹4.7).

RASK or revenue available per seat km, which is a measure of how much each seat per kilometre has generated for the airline, declined 3 per cent q-o-q to ₹3.97 and was below the estimate of ₹4.25 due to weaker revenue yields during Jan and Feb (third wave impact) and due to lower load factor (76.7 per cent in Q4 vs. estimate of 79.1 per cent). The other airlines too are expected to post higher losses during quarter four. “Any meaningful reduction in fuel costs, whether led by easing present geopolitical tensions or otherwise, can act as a material upside trigger for the stock. This is because lower fuel costs give airlines more room to stimulate demand through lower fares and discounts while sustaining their gross spreads,” airline analysts Ashish Shah and Vaibhav Shah of Centrum Broking, said.

Increasing airfares

Ajay Singh, the Chairman and Managing Director of low-cost airline Spicejet, believes there should be a minimum 10-15 per cent increase in fares to ensure cost of operations is better sustained.

But these are brave words as most airlines fear a further increase in airfares will only dent the passenger numbers. In April this year, daily domestic traffic crossed 4 lakh but declined to around 3.2-3.5 lakh in May and June. So the only way out for the airlines is to get the government to remove airfare caps, but it is easier said than done. “The best way to overcome the situation is for both central and State governments to reduce their tax components to support the sustainable existence of Indian aviation,” B Govindarajan of Tirwin Management, a Chennai-based aviation consultancy, said, something which even the CEO of Star Air, Simran Singh Tiwana, agrees. He pointed out airlines in India are among the highest taxed and are all operating with negative margins.

The airlines will also have to factor in other issues, such as the rupee depreciation against the dollar. For Q4, IndiGo’s forex loss was ₹612 crore, which could go up for the next quarter.

“We have tried to absorb as much burden of this fuel price rise in the last few months, which constitutes more than 50 per cent of our operational cost, as we could. The weakening of the Indian rupee against the US dollar further significantly impacts airlines as our substantial cost is either dollar-denominated or pegged to the dollar,” Ajay Singh said in a statement last week.

With a few more airlines expected to take to the skies in the next few months, the government will have to review its decision on airfare caps sooner than later.

Published on June 26, 2022
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