Aviation turbine fuel: Impact on domestic air fares still not clear

New Delhi, September 29, 2018: Clarity on the impact the imposition of 5 per cent customs duty on Aviation Turbine Fuel (ATF) will have on domestic air fares is likely in the next few days.

Delhi-based low-cost airline IndiGo, the domestic market leader, could feel the effect of the higher duty as it directly imports a portion of the ATF that it uses. However, the company declined to get into specifics on volume of imports, impact on operating costs and whether it will hike fares or surcharge.

For the moment most domestic airlines feel they will not be impacted by the Government’s decision as they do not import ATF directly.

Late on Wednesday night the government announced the duty hike on 19 items including ATF.

Effectively, a domestic airline fuelling up in Delhi will have to pay 78,250 per kilolitre against 75,000 earlier, an increase of 3.25 per litre. Given the high- cost operating environment in India, expensive fuel, depreciating rupee and the low margins that most domestic airlines work with, any increase in input costs will affect the domestic sector according to thehindubusinessline.com.

Demand impact

But the problem the domestic aviation industry is facing is that almost every time air fares are increased there is a dip in passenger demand. What might make it tougher for the domestic aviation industry to increase fares is that in end-May IndiGo added 200 to the fare on routes under 1,000 km and 400 on longer distances.

IndiGowhich has a over 40 per cent share of the domestic market, attributed the hike to increase in ATF prices. However, some analysts are downplaying the hike. An analyst note to investors, viewed by BusinessLine, points out that in fiscal 2018 the total import of ATF was $180 million so a 5 per cent increase in duty will increase the fuel bill by around $9 million or 63 crore.

“Comparing this with a 30 per cent cost increase due to rising crude prices/depreciating rupee this impact does not really change the economics for the industry. Symbolically though this move comes as a surprise since the industry reeling under high ATF prices was looking for some relief in the form of inclusion in GST,” the note says.

Another analyst said that the Government’s decision will see the costs of domestic airlines go up by about 2 per cent. But the analyst declined to say whether the industry will be able to pass on the increase or will have to absorb it.

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