With aviation turbine fuel (ATF) prices rising to an all-time high – the steepest so far – on Wednesday, airlines are expected to increase fares by around 15% on key routes in the next 15 days.
In fact, airlines are expected to urge the civil aviation ministry to increase the cap on air fares put in place by the government during the pandemic times, which has set an upper and lower limits on air fares.
The increase in jet fuel prices, effected by the oil marketing companies after the recent upheaval in the international oil market, led to prices soaring past the Rs 1-lakh-per-kilolitre mark for the first time ever. The previous peak of Rs 71,028.26 per kl was recorded in August 2008, when international crude oil prices had touched $147 per barrel.
International oil prices had climbed to a 14-year high of near $140 per barrel last week on fears of supply disruption following Russia’s invasion of Ukraine. Rates have since mellowed to around $100 per barrel.
ATF prices effective from March 16 is up 18% in Delhi compared to a fortnight ago, at Rs 1,10,666.29 kilo litre. Compared to March last year, it is up 86.3%. ATF prices are one of the biggest cost component – around 40% – for airlines.
In fact, ATF prices have increased every fortnight since the start of this calendar year. In six hikes beginning January 1, ATF prices have been increased by Rs 36,643.88 kl or almost 50%.
With Wednesday’s hike, the ATF price went up to Rs 109,119.83 a kl in Mumbai, Rs 114,979.70 in Kolkata and Rs 114,133.73 per kl in Chennai.
The prices are revised on the 1st and 16th of every month based on the average international price of benchmark fuel in the preceding fortnight.
As per the current regulation, airlines can hike fares for travel after every 15 days of bookings. This means the hiked fares on select routes where demand elasticity is less, would come into effect if bookings for travel are made after a fortnight.
Read More:-Gujarat state budget cuts VAT on auto fuels, offers tax relief
Aviation industry executives said that fares are expected to go up in the Delhi-Mumbai, Delhi-Bengaluru, Delhi-Chennai, Delhi-Hyderabad and Delhi-Kolkata routes. Among these routes also, the steepest hike is expected on the Delhi-Mumbai route where maximum capacity is deployed. Currently, fares on the Delhi-Mumbai route range between Rs 2,400-14,000.
In shorter distance routes like Delhi-Lucknow or Delhi-Jaipur, fares are not likely to be hiked because airlines are facing competition from roads and railways here. “Fares on shorter routes, which can be covered via road, need to be competitive or else we lose traffic,” said an industry executive.
“On the pricing strategy front, the experiment will bring about the willingness and ability to pay for air travel versus other choices of opting for rail travel and reducing frequency of travel. We note that this is for the first time in our assessment that air fares are 20% or more expensive than comparable 2 AC air-conditioned rail travel even for journeys planned more than a month out,” Kotak Institutional Equities said in a report. According to its analysis, in the pre-Covid times, air travel used to be comparable to 2 AC rail fares two weeks out and 20-30% cheaper 4-6 weeks out.
According to Kotak, airlines are likely to persist with high current fares for some time before reassessing their pricing strategy. “The route taken by airlines to increase prices opens up the possibility of retaining a part of the increase even if crude oil prices were to ease,” it said.
