Will rising jet fuel prices dampen air passenger growth?

Mumbai: Indian aviation has been on a roll for sometime now, but all that may change now, given rising jet fuel prices which may in turn increase air fares.

India’s domestic traffic soared 21.8%, marking the 20th month of double-digit traffic growth and the 13th consecutive month in which it has led domestic markets in the world. According to International Air Transport Association, or Iata, that represents some 260 airlines comprising 83% of global air traffic, Indian growth is being propelled by the comparatively strong economic backdrop as well as by substantial increases in service frequencies.

For India, lower jet fuel price was the game changer. In India, fuel costs account for about 45-55% of the revenue of domestic airlines and a 4% drop adds around two percentage points to the operating margin of airlines. And, in financial year 2015-16, Brent crude fell by 28.14%. Not to forget, cheap air fares has also helped make India the fastest growing aviation market.

“Passenger growth in India was partly propelled by falling oil prices and demand stimulation measures by domestic airlines as they had a lot of empty seats and they discovered that selling them at a discount was better than flying empty,” said Sanjiv Kapoor, chief strategy and commercial officer, at Vistara, promoted by TATA SIA Airlines Ltd. But that is no more the case.

On 1 June, oil marketing companies hiked jet fuel prices by a steep 9.2%. In the fourth straight monthly increase in rates, jet fuel prices at Delhi airport were increased by Rs.3,945.47 per kilolitre, or 9.2%, to Rs.46,729.48 per kilolitre.

“The scene is no more the same. Airline load factors especially in economy class are high (so less seats are left to fill) and oil prices have started moving up as well. Airport capacity and slots at some major airports are also not available for additional growth,” Kapoor said.

Therefore, if oil prices continue to rise, it could dent the robust passenger demand that is growing in double digits for the last two years, Kapoor said.

From hovering at $30.84 a barrel on 20 January 2016, it rose to $49.69 on Wednesday, registering a 61.12% increase. “However, higher oil prices may or may not translate into higher air fares as jet fuel cost is just one input costs among other decisive factors such as capacity available and competition dynamics in the market,” Kapoor added.

Sharat Dhall, president, online travel agency firm Yatra.com, said lower jet fuel prices have acted as a stimulus for air traffic growth over the past few months, encouraging people to take flights for their summer holiday travel.

“With the price of Aviation Turbine Fuel (ATF) increasing by a steep 9.2% (for next 15 days announced by oil marketing companies), this could result in an increase in airfares as fuel constitutes approximately 40% of an airline’s operating costs. Any increase in airfares will act as a dampener for travellers planning trips going forward,” Dhall said.

Experts tracking the aviation sector also endorse that Indian civil aviation has not seen a decent upwards fare revision and the current spike in ATF prices may warrant an increase in the base prices of Indian airlines.

Rating agency firm ICRA Ltd on Wednesday said that with new airlines expected to enter the runway, the competitive intensity in the domestic aviation industry is expected to increase going forward, with potentially significant over-capacity in the next 12-24 months if the demand growth is not sustained in the event of fare hikes due to an increase in fuel prices.

The domestic airlines are likely to add 55 new aircraft in this period as against 33 during 2015-16, ICRA said. The addition of aircraft in the fleet, coupled with improved network planning and operational efficiencies, are likely to boost overall industry capacity, with the industry ASKMs (available seat kilometers) expected to report strong double-digit growth in 2016-17.

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