Rupee impact: Is hiking airfares a feasible option for aviation companies?

With prices of ATF at an all time high, it's a necessity for ailing airlines; but low occupancy ratio amid excess capacity may not make it a prudent decision

Record high prices of Aviation Turbine Fuel (ATF) at Rs 75,000 per kilo litre (KL) are proving nightmares for India's airline companies.

As a reaction to the latest hike in prices, the fourth consecutive monthly hike since June this year, India's low cost airline company SpiceJet said that it will hike airfares by 30%.

 

If hike comes through, it may revive sentiments on the aviation counters which, for long, are hovering very close to their 52-week low. Out of the three listed firms, two are in operations currently - Jet Airways and SpiceJet.

 

Shares of Naresh Goyal - promoted Jet Airways closed on Tuesday at Rs 309.40 while those of SpiceJet remained weak at Rs 18.95.

 

 

But for them to remain flying for long is becoming difficult on the back of current all time high prices of ATF. A hike in airfares could ease the pressure a bit. But question which arises is how far will it be feasible for airline companies to play that card?

 

At a time when demand is subdued and on top of it excess capacity that the industry is sitting on, which remains under-utilised, may make it tough for them to go ahead with hikes in fares.

 

Sector officials admit this difficulty and pinpoint that fuel prices have hit a record high when demand for air travel is poor.

 

Had this been during the December or June quarter, airline companies may not have thought much to bite the bullet of raising fares. Generally, aviation sector makes money in December and June in India. However, a quarter like this (July-September), normally witness low occupancy ratios and low fares.

 

Jet fuel prices are hiked steeply by 7%. With this cost of fuel has gone over Rs 75,000 a KL. Since June, ATF prices have moved up by 20%. The latest rise follows the continuing fall of the rupee against the US Dollar, which has made the import of crude oil costlier. 

 

In Delhi ATF prices were hiked by Rs 4,827.94 per KL, or 6.87%, to Rs 75,031.09 per KL, according to Indian Oil Corporation.