Lower ATF prices will benefit domestic carriers
Aviation turbine fuel accounts for about 50% of the operating expenses for an Indian AIRLINE. BUT, LOWER AIRFARES MAY CANCEL OUT THE fiNANCIAL BENEfiT FOR THE AIRLINE.
The receding crude oil prices resulting into lower prices of aviation turbine fuel (ATF) is expected to improve the financials of India’s aviation sector. However, such improvements might not suffice to make the loss-making sector profitable. Worries about Greece and turmoil in the Chinese stock market have weakened Brent crude prices (down to $ 56/ barrel) by about 14% in the last one month. Fuel has been the largest cost items for airlines globally in recent years and in India it forms about 40-50% of airlines operating expenses, so any relief on that front is being welcomed by the industry. But the past trend shows that “whatever benefits that might arise from the reduction in ATF prices is largely being enjoyed by the passengers and not by the airlines,” says Binit Somaia, a senior aviation analyst, Centre for Aviation (CAPA).
The advantage that airlines would have obtained from having a larger profit margin has effectively being given away in form of lower fares. “Such is the nature of any competitive market,” adds Somaia. Such (un)competitive spirit has been unleashed by the Indian carriers partly because (almost) everyone has lost huge money in recent years by pricing tickets below its cost. This has forced them to focus more on generating cash flows rather than on restoring their profitabil- ity. Such tendencies, says analysts, destroys the prospects of restoring airline’s viability. This has pushed domestic Indian carriers to end-up living with more or less same market share but with lower pricing.
Indigo, the only profit making airline, would soon be listed on stock markets. Its public offering is expected to be well-received by the market and such successful listing would cast a fairly positive spell across the industry thereby suggesting that “there is an opportunity to make money in Indian aviation industry provided it is run professionally,” says Somaia.
Other challenges that dogs the sector is the 5/20 rule which require domestic carriers to complete five years of domestic operations and to have 20 aircrafts to be eligible for flying abroad. Flying abroad is compara- tively more profitable than domestic operations. Aviation mavens feel that such a regulation serves no valuable purpose as it discriminates Indian carriers against foreign airlines. Other regulatory challenges relate to the ancillary revenues that carriers want to generate by selling their tickets with zero baggage allowance. Current regulation obligates airlines to offer 15 kilos of free baggage with every ticket. Domestic airlines feel that allowing them to charge for baggage could make a difference to airlines profitability as baggage fees (elsewhere in the World) have become a very significant contributor to airline’s profitability.