Domestic airlines staring at headwinds over rising oil, US-Iran tensions

Domestic airlines are facing pressure with the increase in crude oil prices and soft demand which has limited price hikes to a single digit.

State oil marketing companies raised the price of jet fuel by 2.6 per cent from January 1. A kilolitre of jet fuel now costs Rs 64,423 and on a year-on-year (YoY) basis, it amounts to a 10 per cent price hike. 

Brent crude oil price surged 4 per cent on Friday, following tension between Iran and the US.

Prices are expected to stay at elevated levels due to production cuts by oil producing countries and expectation of a trade deal between China and the US.

Airlines, however, have been unable to pass on the price increase to customers due to the soft demand.

“We have seen that booked fares for travel in January 2020 are currently about 4 per cent higher on a YoY basis. 

On an average, fares during the April-December period have been eight per cent higher. We expect the January fares to move up to the same level as well, said Balu Ramachandran, senior vice-president, Cleartrip.com

Domestic air traffic rose 3.8 per cent between January and November with only November showing double digit growth on the back of lower fares. 

“Travel demand is soft at the current pricing,” Ramachandran said. 

“In my opinion, executing fare hike now will be difficult for airlines as the market is price sensitive and forward bookings for summer are weak, added Rakshit Desai, managing director of FCM Travel Solutions.

“Most airlines have engaged in predatory pricing in order to improve load factor and working capital position. 

This has drawn the entire industry into deep discounting. We expect the pressure on airfares to continue in the near term,” said Kinjal Shah, vice-president and co-head of corporate sector ratings, ICRA.

Fuel accounts for around 35-40 per cent of the operating costs for Indian carriers. Additionally, 20-30 per cent of the liabilities are dollar denominated. 

“Typically, $1 increase in crude oil prices will increase operating costs of players by 50-60 basis points. And, depreciation of every rupee will result in cost escalation of 900-100 basis points,” said Hetal Gandhi, director, CRISIL Research.