The government’s decision to impose a 5% import duty on aviation turbine fuel (ATF) could adversely impact airlines’ plans to cash in on the upcoming holiday season. The customs duty comes at a time when the ATF prices are at a four-year high and rupee value has significantly depreciated.
While the major domestic carriers were looking to raise fares for the Diwali festival season owing to strong demand traditionally, the duty could offset their plans to recover rising input costs with these fare hikes.
The government on Wednesday announced increase in the import duty on 19 major commodities, including ATF, to support the domestic currency.
To be sure, the import of jet fuel is just 4-5% of the total consumption by airlines. India imported ATF valued at $76 million in April-August FY19, up 27% over the year-ago period.
Airlines have not been able to pass on rising input costs to passengers due to intense competition in the domestic market, as carriers undertake massive capacity addition exercise. Despite a significant growth in the local travel market, airlines have found it difficult to raise fares and had pinned hopes on the festival season.
Sector watchers believe that the import duty was unnecessary and could further strain airlines’ capabilities to cover rising costs.
“The hike in ATF will severely affect the airlines which were looking to increase yields in the upcoming festival season. Its an additional burden on the aviation sector. This to an extent neutralise airlines’ attempt to increase prices in the festival season,” an airline executive said.
An IndiGo spokesperson said the import duty will put an additional burden on the carriers. Airlines had indicated that fares could be hiked by up to 10% during the festival season, starting with dussehra, due to high air travel demand in that period.
“In the coming quarter, airlines will pass on some of the costs. Yields will have to rise 10-15% to offset the higher costs,” Ajay Singh, chairman and managing director of SpiceJet, had recently said.
Founder and CEO of Martin Consulting Mark Martin expects the airlines to pass on the import duty impact to travellers. “Passengers are going to suffer. Airlines do not have capacity to take further cost increases. This comes at the time of the peak season which is unfortunate for both airlines and passengers,” Martin said.
Travel companies also believe that the government’s decision will have a negative impact on the sector.
“There is bound to be a negative impact on the sector as the input cost borne by the carriers will increase. However, the silver lining to the situation is that with the peak season kicking in, we are likely to see an increase in prices and strong loads as well,” Sharat Dhall, B2C (COO) of Yatra.com, said.