Airlines in a position to pass ATF price cut benefit to customers

Indian carriers can pass on some of the reduction in cost due to the dramatic fall in aviation turbine fuel (ATF) prices to customers without taking a major hit on their bottomlines. Airlines have also cut costs on a variety of areas, including manpower and distribution, while increasing the fares steeply.

While ATF prices have decreased by around 45 per cent in the last four months, ticket prices have increased by more than 100 per cent over the same period. With ATF constituting 50 per cent of the operational cost of airlines, they have been able to reduce their costs by 20 per cent due to the lower ATF prices, which was the gap between airlines revenue and expenditure. In other words, they are closer to operational break-even.

So, companies can now reduce airfares and increase passenger load factor (PLF) to improve their bottomlines rather than keep airfares high and keep the PLF low.

According to its half yearly results, Kingfisher has increased its average price per passenger by 55 per cent in the six months to September this year. Jet, in its Q2 numbers, disclosed that its average passenger fare per ticket had gone up by 33 per cent.

The cost cutting has not come only on the ATF side. While the government has already given numerous benefits on ATF, the airlines have taken care of the other half by laying off employees, especially expats, decreasing distribution costs by cancelling commissions paid to travel agents and increased synergies in ground handling, engineering and maintenance.

Kingfisher, for instance, has already cut its staff by 650 employees and aims to bring the employee to aircraft ratio from 104 to 94 employees per aircraft.

The other benefits that the airlines are looking at include a 50 per cent reduction in airport charges, which is expected to give them overall savings of Rs 55-60 crore, if implemented by the government.

“But, the airlines cannot expect the government to take care of their losses. They have to understand that the government is giving them the benefits for the overall benefit to the consumer,” said an industry expert.

Also, the fact that full-service carriers have got lesser benefits from the festive season and given a large share of the market to low- cost carriers, seems to show that they should go for more innovative pricing.

Other experts, however, say that airlines still have a huge gap between their revenue and costs. “The steep rise in fuel prices during the five months from April to August made for an additional burden of Rs 3,000 crore on Jet, Kingfisher and Air India and they are in no position to pass on any benefit. Also, the depreciation of the rupee has increased their overall costs by 10 per cent since 40 per cent of their costs are in dollar terms. What the full-service carriers should, however, do is go in for some innovative pricing, which will help instill demand,” said Kapil Kaul, CEO Indian sub-continent, Centre for Asia Pacific Aviation (CAPA).

Kaul also said that even after the 25-30 per cent cut in capacity during the last one year, there were still 20 extra aircraft flying in the country that would have to be taken out of operations.