Why ATF prices no longer fuel airfares

Riken Mehta, Shaheen Mansuri & Sagar Salvi

Cash-strapped airlines will now be breathing easy, after a 4.3% cut in aviation turbine fuel (ATF) prices, the steepest decline in three-and-a-half months. However, the jury is still out whether this would translate into cheaper air fares.

Airlines and even travel agents don’t see fares easing. According to industry watchers, ATF price movement no longer dictates fares. In fact, airline representatives on several occasions have made it clear during media interactions that airfares will be market-driven and not by volatile ATF prices. They also say that due to a very high tax structure, ATF is almost 70% costlier in India than what airlines pay globally. Therefore, even if fuel prices decline, airlines can’t pass on the benefit to consumers.

Sample this: Fuel expense was approximately over Rs 6,000 crore for major full service airlines in FY11-12, up 40% (YoY), thereby making up a third of the total operating cost. As a result, even if fuel cost comes down by a percent or so, as it happened recently, airlines do not react due to the already existing fuel cost pressure on them. But they also say that they can bring down fares only if the ATF price falls continuously.

Meanwhile, data collected from several online travel portals and travel agents suggest that fares have not reacted to the movement in ATF prices. In fact, it is market dynamics that drive fare pricing. For instance, fare on the Mumbai-Delhi sector which averaged at Rs 23,000 in the first week of October last year due to the F1 races when ATF cost was 20% lower than what it is today. Interestingly, the average fare is around Rs 10,000-15,000 these days. Around that time even Kingfisher had started shrinking capacity due to financial stress and frequent pilots strike. Air India too had curtailed flight operation during the month due to a section of pilot not resuming work. So, one may not track ATF prices and hope for revision in airfares.

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