Domestic, International Flights Can Become 15% Expensive Due To This Reason

Oil marketing companies (OMCs) hiked Aviation Turbine Fuel (ATF) prices by 16.3% on June 16.

Second fare revision

The hike takes jet fuel prices to a record high of Rs 1.41 lakh per kilolitre in Delhi.

The prices of aviation turbine fuel are raised twice a month—Once on the first day and another on the 16th day of every month based on the average of benchmark international rates.

The rate was Rs 72,062 per kilolitre in January.

Contributing factors

ATF prices are linked to global crude oil prices which have steadily increased due to the war in Ukraine.

The geopolitical crisis ending is possibly the only way high oil prices could start to climb down.

Also contributing to the increase is the refusal of the Organization of the Petroleum Exporting Countries (Opec) and its allies to increase oil production.

This record increase combined with the depreciating rupee will make operations for airlines costlier.

Subsequently, this could lead to an increase in air fares by up to 15%.

Impact on cost of operations

Cost of ATF constitutes up to 50% of the cost of operations for airlines in India which are already dealing with a high cost environment and lower fares.

The rupee is 5.7% weaker since June 2021 against the US$.

As a result of this, airlines are now facing consequences of the rupee depreciation since costs like lease rentals, payments to foreign airport operators and expat pilots are all paid in dollars.

Impact on customers

Airlines will pass on the increased cost to end consumers who will have to shell out more for airfares.

This could mean an increase of up to 15% in fares.

Industry watchers say that it could be even higher, but a lot will depend on the level of competition among airlines.

Impact on the aviation industry

The industry has been on a path to recovery after Covid-induced financial losses.

Flights have crossed the pre-Covid numbers and are seeing further growth due to pent up demand especially for leisure travel.

Fares are already about 50% higher than last year, and any further increases will impact demand.

Any fare hikes will hit passenger demand since people may opt for alternative modes of transport like trains and roads, which are much cheaper than air travel.