Commercial flight operations unviable amid sluggish demand and high ATF prices

Aviation fuel is a type of kerosene-based fuel, which is used to operate an aircraft. Aviation fuels reduce the risk of icing or explosion due to high temperature and are primarily used by military aircrafts as well as commercial airlines in order to maximize fuel efficiency, while lowering down the operational cost.

A steep decline in the number of commercial flights across the globe has been driving down the demand for aviation fuel.

In India, aviation turbine fuel (ATF) accounts for 35-50 per cent of the cost of running an airline. Steep hikes will make it difficult to add more flights and routes as it will be harder for airlines to cover their variable costs.

"Indian airlines spend at least 40-50 per cent more on ATF prices as compared to several of their contemporaries across the world. As international operations are closed, airlines don't even have an option to buy ATF at a cheaper rate from abroad," said a senior official of a budget carrier, who added that with passenger demand staying tepid amid the pandemic, it is difficult for airlines to pass on the entire cost increase to passengers.

The government should pass the benefit of low oil prices to travellers. The government has been talking about including ATF under GST (goods and services tax) for the past few years, but this is yet to happen.

A high-priced oil scenario will therefore have severe consequences for demand, airline revenues, the competitive position of airports and eventually airline network strategies and fleet development. In particular, transfer demand, short-haul and leisure traffic can be expected to be heavily affected by high oil prices due to their relative high price sensitivity.

Jet fuel prices were hiked by a steep 6.5 per cent on the back of a rally in international oil prices. Aviation turbine fuel or ATF price was hiked by Rs 3,663 per kilolitre, or 6.5 per cent, to Rs 59,400.91 per kl in the national capital.

This is the third increase in jet fuel prices since February. Rates were increased by 3.6 per cent on February 16 and by Rs 3,246.75 per kl on February 1.

The increase in rates will add to the margin woes of airlines who continue to operate flights at less than capacity, amid pandemic-driven travel restrictions.

For airlines, the volatility of fuel prices makes profitability difficult. For passengers, increased oil prices result in higher fares and the use of more affordable modes of transportation or the elimination of unnecessary travel.