Oct 24, 2008

Business - India;ATF prices to fall by 16%

Anirban Chowdhury

Aviation industry experts expect the ATF prices to fall by 16 per cent in November, compared with the current month. This, they say, translates into bridging of nearly half the gap between the airlines’ operational costs and total revenues.

There could also be more good news. With Civil Aviation Minister Praful Patel pushing for decrease in taxes on ATF (taxes constitute 30 per cent of the cost) and meeting Finance Minister P Chidambaram for that purpose next week, any cut would have a positive impact on the break-even levels of carriers. Chidambaram today said that while the government was looking at rationalisation of taxes on ATF, he had posed a question to the petroleum ministry on the issue of excise duty on jet fuel.

“At the moment, ATF constitutes 50 per cent of the operating cost of an airline. The average gap between revenue and our costs for the industry is around 15 per cent. So we will require an ATF fuel decrease of 30 per cent if we need to achieve the operational break-even,” said Ajay Singh, director of low-cost carrier SpiceJet. In the last two months, ATF prices have dropped by 20 per cent.

According to industry statistics, the current average base price (excluding taxes) of ATF is Rs 44,526/kilolitre. The expected decrease of Rs 6,300/kilolitre will bring the base prices down to Rs 38,226/kilolitre. An addition of 8.24 per cent excise duty and an average of 25 per cent sales tax gives the price of ATF as Rs 50,931/kilolitre, around 16 per cent lower than the current average ATF price of Rs 60,663/kilolitre.

The decrease, according to industry experts, would have been more had factors like the weaker rupee had not stemmed the fall of ATF prices.

The average price of the Indian crude basket this month was around 24 per cent lower than the average prices last month. But the average value of the rupee has also decreased by 5.71 per cent.

However, opinion is divided on whether the ATF cut will be passed on to the customers. “We cannot take a call on fares before the ATF prices completely stabilise. We have to watch the trend for at least a couple of months,” said Hitesh Patel, EVP, Kingfisher Airlines. But a senior director of a LCC said: “We might have to pass on part of the ATF fuel cut in lower fares to regain our market share as well as improve our passenger load factor. It is a complex balancing exercise.”

According to industry statistics, the slowdown in demand has affected the low-cost carriers more than the full-service airlines.

“While sales for the full-service carriers have only gone down by 13 per cent from September to October, sales for LCCs are down by 37 per cent,” said a travel company executive.

According to civil aviation ministry figures, while loads for full-service carriers like Jet and Kingfisher declined by a mere 3-4 per cent, loads for low-cost carriers declined by around 6 per cent (SpiceJet) to as much as 13 per cent (GoAir).

“With the number of passengers fast declining for LCCs, any benefits from decrease in ATF prices will have to be passed on to consumers, thereby again keeping the gap between revenue and costs more or less constant. This is unless the loads go up from around 50 per cent currently to around 60-65 per cent, something that is unlikely in the current scenario,” said an industry expert

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