Airfares may climb as jet fuel prices surge to a record
NEW DELHI: Record jet fuel prices threaten to further strain airlines’ financials just as a rebound in travel demand appeared to provide some relief to an industry pummelled by the pandemic.
Jet fuel prices, revised every fortnight by state-run fuel retailers, have now more than doubled in the past year to ₹1.41 lakh per kilolitre in New Delhi. Prices have increased 16% just this month. Interestingly, the rate is double the ₹71,028.26 per kl price recorded in August 2008, when crude oil prices reached a record $147 per barrel. In comparison, crude oil was trading at about $116-117 per barrel on Thursday.
Airlines now face the dilemma of raising prices and compressing travel demand or reporting wider losses, given fuel makes up 30-40% of the cost of running an airline in India. High ticket prices are already frustrating passengers as airlines have passed on the rise in fuel costs to offset losses.
While Brent crude prices have risen by about 57% during the past year, the cost of jet fuel has surged 120%. The high fuel price is largely due to taxes levied by state and central governments.
“The sharp increase in jet fuel prices and the depreciation of the rupee have left domestic airlines with little choice but to immediately raise fares, and we believe that a minimum 10-15% increase in fares is required to ensure that cost of operations is better sustained,” said Ajay Singh, chairman and managing director of Spicejet Ltd.
“This massive increase is not sustainable and governments, central and state, need to take urgent action to reduce taxes on ATF that are among the highest in the world,” Singh added.
The steep rise in jet fuel comes at a time domestic air passenger traffic has registered a recovery following a slump due to the spread of the pandemic.
However, senior industry officials said that a further rise in airfares could slow down the recovery witnessed by the sector.
“A large portion of domestic air passengers is a price-sensitive lot. A steep hike in airfares could lead to some of them moving to other cheaper modes of transport such as roadways and railways,” one of the officials said, requesting anonymity.
“The time is ripe for the government to intervene and expedite the process of placing ATF under the GST (goods and services tax regime), which will bring down high taxes on the fuel, giving some respite to airlines,” the person added.
ATF prices are linked to global crude oil prices, and have risen steadily due to the Russiaukraine conflict, which has removed Russian oil from the market. Meanwhile, Organization of the Petroleum Exporting Countries (Opec) and its allies have refused to increase oil production, leading to a further escalation in prices.
However, the economic slowdown in major economies such as China, which remains one of the largest importers of oil, could lead to a decline in oil prices in the future.