Get ready to shell out more for your flight ticket as airfares are likely to rise further in the coming days following the latest hike in the aviation turbine fuel (ATF) prices effective June 16, 2022, coupled with the depreciation of the rupee.
The oil marketing companies (OMCs) raised the ATF prices by 16.3 per cent on Thursday (June 16), taking jet fuel rates to a record high of Rs 1.41 lakh per kilolitre in Delhi, Rs 1.46 lakh per kilolitre in Kolkata, Rs 1.40 lakh per kilolitre in Mumbai, and Rs 1.46 lakh per kilolitre in Chennai.
The latest hike in ATF prices along with the depreciation of the rupee has left the domestic airlines with no choice but to immediately hike airfares, said Ajay Singh, Chairman and MD, SpiceJet, on Thursday. He said in a statement that a minimum 10-15 per cent increase in air fares is required to ensure that the cost of operations is better sustained.
“ATF prices have increased by more than 120 per cent since June 2021. This massive increase is not sustainable and governments, central and state, need to take urgent action to reduce taxes on ATF that are amongst the highest in the world," Singh noted.
What’s behind the sharp rise in ATF prices?
ATF rates are linked to global crude oil prices and have risen consistently because of the Russia-Ukraine conflict, which has removed Russians from the international market. The ATF price hike is in line with the firming global oil rates.
Brent, which is the world’s most popular crude oil benchmark, was trading at $119.16 per barrel on Thursday, the highest in almost 10 years. ATF prices have been raised every fortnight since the beginning of 2022 and have doubled, rising 91 per cent in the six months of the current year.
What will be the impact on Indian airlines?
Domestic airlines have already reported huge losses over the last few quarters because of the COVID-19 pandemic, which coupled with lower fares and the high-cost environment was a big concern for them. ATF, which constitutes up to 30-40 per cent of the cost of running an airline in the country, has also hurt the profit margins with an increase in its prices.
The fall in the value of the rupee against the US Dollar has also exacerbated problems for airlines since overheads such as payments to expat pilots and foreign airport operators as well as lease rentals are all greenback-denominated. Higher ATF prices not only hurt the airlines' bottom line but also hamper their ability to run extra flights.
Seeking respite from high fuel prices, the airline industry had called for the rationalisation of jet fuel taxes in March this year. The domestic airlines had also demanded a cut in excise duty on ATF or by bringing jet fuel under the ambit of Goods and Services Tax (GST), which would help bring down prices and also let carriers claim input credit tax on the GST paid.
IndiGo’s CEO Ronojoy Dutta was quoted as saying then, “This situation adversely impacts us, given that ATF constitutes over 45 per cent of our operational costs. We have been in talks with the government to bring ATF under GST as it brings the benefit of input tax credit.” He added that such steps are essential now more than ever to countervail this rise in cost and make flying operable for airlines and economical for consumers. Although bringing ATF under GST appears implausible for now, the Aviation Ministry had sought a reduction in excise duty on jet fuel by requesting the Finance Ministry to cut it by 2 percentage points to 9 per cent. The Finance Minister, despite that, did not slash any taxes on ATF.
What will be the impact on passengers?
Flyers will end up paying more for their air tickets as the airlines will pass on the burden of increased cost to end consumers. Flight tariffs have risen sharply in 2022 and have already been hiked around 20 per cent on average in the last two months. According to travel industry insiders, domestic airfares have jumped 50-75 per cent on popular routes as against the year-ago period.
SpiceJet chairman Ajay Singh has said in a statement that the airline will have to transfer the end cost of the ATF fare hike to passengers, which will lead to an increase of up to 15 per cent in airfares.
Meanwhile, the industry watchers opine that cost pass on could even be higher, however, a lot will hinge upon the competition level among airlines. The airfare hike will also impact demand as people choose alternative travel means like roads and trains, which are way cheaper than flying.