Airlines in a Fix As Jet Fuel Costs Soar Amid Pick-Up in Passenger Traffic

March 4, 2022

Mar. 4—NEW DELHI — Indian airlines may find it difficult to pass on rising jet fuel costs to passengers, industry experts said, even as crude oil prices test new highs everyday following the Russian invasion of Ukraine.

The cost pressure comes at a time when the sector has been making a gradual recovery in passenger traffic after the pandemic's third wave though still below the pre-covid levels.

Indian air passengers are a price-sensitive lot, said a senior airline official, adding that airlines often find it difficult to raise fares steeply.

"Airlines these days are also competing against road and rail services that have improved substantially in the last few years," the senior airline official speaking under the condition of anonymity said.

"At the same time, demand is just recovering, so it may be difficult to pass on the costs entirely," the person added.

On Thursday, Brent crude traded as high as $123.38 a barrel, up 84% annually.

Jet fuel price, which is revised every fortnight, has already hit at an all-time high in India. It was hiked by 3.22% to INR93,530.66 per kilolitres in New Delhi on 1 March, according to a price notification of state-owned fuel retailers.

Jet fuel, derived from crude oil, accounts for about 30-40% of operating costs for airlines and varies across states due to varying value added tax (VAT).

Meanwhile, India recorded 308,885 arriving domestic air passengers on 2 March, according to the latest data from the Ministry of Civil Aviation (MoCA).

The current figures are way below the 400,000 daily domestic air passengers recorded before the outbreak of coronavirus pandemic during early 2020.

Credit rating agency ICRA Ltd expects domestic air passenger traffic to record an annual growth of about 50-55% in FY22 supported by the fast pace of vaccination and gradual relaxations in curbs by the regulatory authorities.

The domestic aviation industry will report a net loss of about INR25,000 crore- INR26,000 crores during FY 2022 amid a sharp rise in crude oil prices and a recovery hindered by a recent wave of the pandemic, ICRA said in a report on Thursday.

"Accordingly, it is estimated that the industry will require additional funding in the range of INR200-220 billion ( INR20,000-22,000 crores) over FY2022 to FY2024," the report added.

Both InterGlobe Aviation Ltd and SpiceJet Ltd, which run the two listed airlines IndiGo and SpiceJet, reported profits during the December quarter because of an improvement in air passenger traffic and, in the case of the latter, compensation it claimed for the grounding of Boeing 737Max planes.

The airlines are, however, likely to report steep losses during the March quarter if fuel prices continue to escalate.

Airlines tend to enjoy higher gross spreads (revenues — fuel costs) when fuel prices are low and can't completely pass on the rise in fuel prices through higher fares, ICICI Securities said in a 28 February report.

"The ability to pass on the increase in fuel prices will also be dependent on overall supply-demand (situation)," it added.

Airlines could also opt for fuel-hedging to protect their bottom lines from fluctuating oil prices.

Under government ownership, Air India had carried out fuel-hedging by buying at a set future price through derivatives to protect losses from rising prices.

An Air India spokesperson didn't offer comments on whether the airline, under the ownership of Tata Group, continues with fuel price hedging.

When contacted, spokespersons of airlines such as IndiGo, SpiceJet, GoFirst, Vistara and AirAsia India didn't offer comments on the impact of oil prices on fares.


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