Catch 22: Airlines want a 15% hike in airfares but fear a drop in traffic

This comes as jet fuel price hits an all-time high after hike on Thursday

SpiceJet Chairman Ajay Singh has pitched for an increase in airfares after the jet fuel price was hiked by almost 16 per cent to an all-time high of Rs 1,41,232.87 per kilo litre in Delhi on Thursday.

Simultaneously, a weakening rupee has doubled the challenge for airlines because key cost items, notably fuel, maintenance, lease rentals, and overhaul costs are priced in dollars.

“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 per cent increase in fares is required to ensure that cost of operations are better sustained,” Ajay Singh said.

Airfares are already high primarily due to the government mandated floors, which regulates price beyond 15 days.

The price of jet fuel used to be 40 per cent of an airline’s cost. But since the beginning of this year, jet fuel prices have increased every fortnight since the start of 2022. In the nine hikes beginning January 1, ATF prices have been increased by Rs 49,017.8 per kl (Rs 49 per litre) or nearly 55 per cent. The rupee breached the 78-mark against the US dollar for the first time on Monday.

“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. We have in the last few months tried to absorb as much burden of this fuel price rise, which constitutes more than 50 per cent of our operational cost, as we could,” Singh said.

While input costs are rising, airline executives are also wary that any increase in fare may lead to a decline in passenger numbers. After the previous two rounds of fare hikes there has been a decline in passenger numbers. From 407,975 passengers on April 17, it reduced to 339,175 on June 14.

“The impact of (fare hikes) has not been adverse for the past two months due to high demand on account of the summer holiday season. The impact is more prominent now as bookings are slowing down,” said Gaurav Patwari, vice-president (Air), Cleartrip.com

“While the traffic was 3-4 per cent higher in the first week of June on a month-on-month basis, it has slowed down. Growth has remained flat in the first fortnight of June on a month-on-month basis,” said Ameya Joshi, founder of aviation blog Network Thoughts.

Market leader IndiGo reported 29 per cent year-on-year growth in revenue in the fourth quarter of financial year 2021-22 (FY22) with better yields. Yet, its result was severely hit by the rise in jet fuel price and higher exchange rate and it posted a loss of Rs 1,681 crore. The airline’s fuel expense increased 68 per cent to Rs 3,220.58 crore in the quarter as against Rs 1,914.45 crore in the previous quarter.

Historically, supply and demand have driven fares higher and not fuel costs. Airlines reported their best yield in FY13 (after the grounding of Kingfisher Airlines), in FY15 (after SpiceJet’s cut in capacity after change of ownership) and latest in Q1FY20 (when Jet Airways shut operations).