Airlines cut fares, but to still grapple with losses

Written by Shaheen Mansuri | Mumbai | Updated: Dec 30 2008, 06:17am hrs
The decision by private carriers Jet Airways and Kingfisher Airlines to reduce air fares spells good news for passengers who have been curtailing air travel in the past few months. According to Air Passengers Association of India (APAI), air travel has dipped nearly 30% in the July-September financial quarter. But, analysts say that though the oil marketing companies have reduced the cost of aviation turbine fuel (ATF) by nearly 11% in the past 15 days, airlines will not be able to reap immediate benefits since they have to grapple with the growing losses before breaking even in the ensuing fiscal.

Jet has already lowered its fares ranging from 15-40% on various destinations from Monday. For instance, a round trip on the Mumbai-Delhi route, which cost nearly Rs 15,000 earlier, would now be below Rs 10,000, depending on the availability of seats. Similarly, Kingfisher will slash its fares by over 15% from January 1 on its network. The airlines have slashed their fares because the jet fuel now costs them 11% lower than the previous month. ATF now costs Rs 33,719.46 per kilolitre against Rs 38,103.19 kilolitre earlier in Mumbai. Similarly, in Delhi, it has come down by Rs 4,208.37 to Rs 32,691.28 per kilolitre.

It may be recalled that civil aviation minister Praful Patel had recently asked airlines to respond to the new reduced ATF rates and consequently slash their airfares. The minister had a week ago said, Airlines must reciprocate the governments gesture to help the aviation industry, which has been going through rough weather this year. We supported the industry when they were in difficulty. We gave them extended credit, staggered repayment of their dues and abolished customs duty on ATF.

Says D Sudhakara Reddy, president, APAI, Air travel will pick up in the short term due to low fares. But immediately, travellers might not reap the benefits as there is a dip in air travel due to global recession. He further added air fares have increased nearly 130% in the past 12 months against the backdrop of escalating cost of aviation turbine fuel. It is for the first time in the calendar year that carriers have announced a cut in fares, adds Reddy.

However, on the flip side, airlines will not gain by lowering fares, say industry observers. First, as carriers start earning healthy yields per passenger, they will have to settle the dues they owe to oil companies. Second, their immediate attempt will be to narrow down on their losses to at least marginal profits in the medium term. Airlines can reap benefits only when the trend of declining ATF prices continues in the ensuing fiscal with an additional advantage of uniform sales tax on it, an analyst said. It may be noted that collectively, the sector has posted Rs 4,000 crore losses in the 2007-08 fiscal, which is likely to mount to Rs 9,000 crore in the current fiscal.