With the onset of third quarter from October which is seasonally a strong quarter for air traffic in India airlines might look at a moderate hike in fares of about 3% says a report by ratings, research and advisory firm CRISIL. The third quarter accounted for 27% of annual revenues and 26% of annual traffic for listed airlines last fiscal.
This will reverse the current declining trend in domestic air fares which has made Indian carriers bleed as the operating costs have skyrocketed due to rising crude prices, imposing of duties and levies on air turbine fuel (ATF) by the government and also a depreciating rupee pushing airlines’ operating cost up by 20% and putting severe stress on their balance sheet.
Airfares for the first quarter of this fiscal declined by 4% -6% despite a challenging operating environment. Operating costs have risen by a fifth over last fiscal primarily because of a 30% rise in crude oil prices and 9% depreciation in the rupee and airlines will use the third quarter as demand remains robust with low sensitivity to fares to hike fares.
But a 3% hike will not offset the increased operating costs and margin pressures will remain. “Operational profitability was under the pump in the first and second quarters due to low fares. But despite any fare rise, operating margins would likely be in the red this fiscal compared with 9-10% estimated for last fiscal,” said Prasad Koparkar, Senior Director, CRISIL Research.
Analysts say a percent increase in fuel cost adds 40-50 basis points to the operating cost of the airlines but over the last 12 months oil has gone up by almost 40% (Brent Crude, October 17-October 18). “To reflect that in ticket pricing airlines need to hike fares in at least double digit, says Hetal Gandhi, Director, CRISIL Research, “but that is not seen to be happening in India due to a different competitive environment,” she adds.
The introduction of customs duty meant oil marketers increasing the price of aviation turbine fuel by 7-8%, over and above the already elevated crude oil prices an since oil is the largest component of an airline’s operating cost nearly 35% it hits airline companies the hardest.
“Apart from fuel-side pressures, the fall in the rupee-dollar exchange rate has made matters worse for the industry. For the first half of this fiscal, the rupee has plunged 9% on-year against the dollar, compared with the same period last year”. So if depreciating rupee is factored in then the equation changes as with rupee depreciating one percent a 100 basis point impact is seen if there is two percent increase in fuel cost.
“If airlines want to maintain the operating margins that they had in FY18 then there needs to be a 29% increase in fuel costs, Gandhi says. For example average fare between Mumbai and Delhi is Rs 4,500 currently and if the cost increase is reflected in full it should be actually Rs 5,800.
But some analysts say that airlines may not hike fares across board. “Yes, given the sharp rise in fuel costs this year, its inevitable that airlines may have little choice but to hike fares. That is not to suggest they will go across board but certainly on less profitable routes or those that cost more to operate due to airport fees for example, there may well be a propensity for both low cost and full service airlines to increase prices,” says Saj Ahmad, Chief Analyst at StrategicAero Research, a UK based aerospace and airlines research and intelligence firm.
At the moment, everyone is waiting for someone else to make the first move – there’s no advantage being first because it’ll ostracize passengers who’ll go elsewhere – so the reluctance is evident. But with oil prices getting close to $90 a barrel, it won’t be long before and puts its fares up, he adds and also the airlines may look to shore up its ancillary revenues as fuel costs are likely to hover around $90 a barrel.
Airlines in India have primarily not increased fares due to two reasons- fear that demand will start subsiding if the fares are increased thereby impacting loads negatively and second the competition has not done so.