Flight Plan

Airlines test willingness to pay higher airfares

K Giriprakash | Updated on: May 29, 2022

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Key reasons behind the move include rising fuel prices, rupee’s weakness and losses incurred due to the pandemic 

When fuel prices shoot up, an increase in airfares is par for the course. But an increase of up to 50 per cent in airfares is being seen as an attempt from the airlines to test customers’ ability and willingness to pay more for air travel.

“The sharp increase in airfares takes airlines’ into uncharted territory and can be seen as an experiment,” Aditya Mongia and Teena Virmani of Kotal Institutional Equities pointed out.

The “experiment” is expected to test customers’ willingness to pay more, and whether it will nudge the government to improve the cost structure for airlines. The endgame would likely be airlines retaining a part of the increase even as oil prices moderate, according to Kotak analysts. The argument may seem unusual, but looking at the increasing losses key airlines in the country have been posting, they might be trying to neutralise the impact from higher fuel prices and losses accumulated during the pandemic.

Rising fuel prices

According to an analyst, fuel accounts for about 30 per cent of an airline’s operating cost and a 10 per cent increase in fuel cost results in a 3-4 per cent increase in expenses, which are bundled into the airfares.

Last week, IndiGo was the first to announce its fourth-quarter results for 2021-22, posting a dismaying net loss of ₹1,682 crore, attributing it to a surge in aircraft fuel expenses. The total income of ₹8,207.5 crore was 29 per cent higher during the same period. For the entire year, the total loss was ₹6,162 crore. Fuel expenses during the year had shot up by 153 per cent, while airport fees were up 42 per cent, and supplementary rentals and aircraft repair and maintenance were higher by 45 per cent.

Gaurav Patwari, Vice President, Airlines, at an online travel technology company, Cleartrip, pointed out the rise in ATF price has been steep and is trending at 90 per cent higher in May 2022 on a year-on-year basis. “This has a significant impact on the operating cost of the airlines and is a key reason behind the jump in airfares. The other reason is the weakness in rupee value, which again hurts the P&L of the airlines. To battle this impact, airlines will have to take their yields up substantially,” Patwari said.

Other analysts argue it is time the government kept away from being a backseat driver for the airline industry. “Airfares continue to be propped up by government-mandated price floors, which are in direct contravention of stated policy goals of inclusive access. As a result, airlines are unable to discount, and flyers are denied access to fares that would have been lower ,” says an aviation analyst, Satyendra Pandey, who is a managing partner with aviation advisory firm AT-TV. He said the only way airfares could come down is if the government does away with price capping.

Finding a balance

But Civil Aviation Minister, Jyotiraditya Scindia, explaining the reason behind the fare cap, has said it is his responsibility to protect both the passengers and airlines. He said passengers should get a fare which they can afford, and at the same time, airlines should be able to survive, especially when the aviation turbine fuel (ATF) has increased to ₹1.20 lakh per kilolitres; which translates to a difference of about 60 per cent in just 18 months. He said the fare applicable for 15 days is on the rolling system. The decision to remove it will be taken at an appropriate time.

But there seems to be more to the sudden increase in airfares. Mongia and Virmani say airlines are giving importance to making money more than growing the market. The price increase happens when most airlines, barring IndiGo, are nowhere close to pre-Covid passenger levels. This is a sharp contrast to the fundamental tenets of the pricing strategy of airlines of (1) matching supply and demand in the near term and (2) growing air travel over the medium term by incentivising first-time fliers, they said.

They pointed out that for the first time, airfares are around 20 per cent more expensive than comparable 2 AC rail travel, even for journeys planned over a month ago. In pre-Covid times, air travel used to be equal to 2 AC rail fares two weeks out, and 20-30 per cent cheaper four to six weeks out.

What remains to be seen is who will blink first. Capping fares is a quick-fix solution that cannot be sustained for long as, over time, it will hurt the industry, impacting every stakeholder, including the passengers. Hence, it may be the right time to bring ATF under the GST regime.

Published on May 29, 2022
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