Flights to get more expensive: IndiGo hikes fuel surcharge, other airlines likely to follow

In the past one year, the cost of Aviation Turbine Fuel (ATF) has spiked nearly 30 per cent - and about 25 per cent in the last six months alone. Given that the jet fuel accounts for 45 per cent of an airline's cost of operation - in fact, it is the single largest item in its total expenses - it was only a matter of time before the domestic airlines were compelled to hike fares and start passing on the burden to passengers.

The country's largest airline, IndiGo, is the first to bite the bullet. Yesterday it announced that it will reintroduce a fuel surcharge of up to Rs 400 per passenger on domestic routes, effective from midnight. So any IndiGo ticket you book now will carry a fuel surcharge of Rs 200 on short flights covering a distance of under 1,000 km, while flights on longer routes above this threshold will incur an extra charge of Rs 400 per passenger.

To put that in context, a Mumbai-Goa return flight will now cost you Rs 400 extra while a Delhi-Mumbai return trip will cost Rs 800 extra. Because the fuel charge is applicable on both the onward journey and the flight back home. In addition, the airline already levies a Cute [Common Use Terminal Equipment] charge of Rs 50, RCS provision of Rs 200, Passenger Service Fee of Rs 153 over and above the "Development Fee" and taxes that are airport/state specific. All in all, these extra charges pack quite a punch.

John Nair, head, business travel, Cox & Kings, estimates that airfares have already risen by at least 15 per cent, both on the domestic and international sectors in the past six months. With the latest move by IndiGo, and the high likelihood of other airlines following suit, airfares will go up even more.

Amber Dubey, partner and India head of aerospace and defence, KPMG, told PTI last week that he expects a 10-15 per cent increase in fares to partially compensate for the near 30 per cent increase in ATF prices over the last year. According to him, the central and state governments should reduce the excise duty and VAT (value added tax) rates as soon as possible. "The Union and state governments earned a bonanza from the aviation sector, thanks to low crude oil prices. It's time to give back a bit," he said. Some state governments levy as high as 40 per cent VAT on ATF, making jet fuel in India one of the costliest in the region.

IndiGo, with a roughly 40 per cent share of domestic market and over 1,000 daily flights, was obviously taking a bigger hit than the smaller rivals, and hence is the first to reintroduce fuel surcharges. To remind you, in April 2014, the airline had announced that it would merge fuel surcharge with the base fares in order to simplify the prevailing fare structure.

Commenting on the move IndiGo chief commercial officer Sanjay Kumar said, "With ATF prices in India having risen around 25 per cent in the current month compared to the same period last year, and at the highest in last three years, the airline is compelled to pass some of the increased cost burden to customers as a fuel surcharge. In the context of the past decade, where airfares in India have reduced by nearly 50 per cent in real terms (adjusted for inflation), we are confident that this marginal increase in the form of fuel surcharge will not have any significant adverse impact on demand." He added that the depreciating Indian rupee is an additional cost burden on the Indian carriers.

According to The Times of India, the financial health of the domestic airlines is indeed a concern. The Jet Airways Group lost Rs 1,040 crore in Q4 FY18 as opposed to a profit of Rs 583 crore in corresponding period a year ago while IndiGo's net profit plunged 73 per cent from Rs 440 crore to Rs 117.6 crore in the same period. SpiceJet, too, has reportedly said its bottomline was impacted by Rs 81.4 crore in the quarter ended March 2018, due to the 12.7 per cent hike in crude oil prices.

"We are hopeful that the 1.5 lakh plus passengers flying with IndiGo each day will continue giving us support. We assure our customers that this move of reintroduction of fuel surcharges will not much impact the low fares that are being charged, and will not change IndiGo's positioning as a low cost carrier," said Kumar in a statement. Significantly, he added that the airline would review the surcharge in the light of oil prices going forward, and "endeavours to be in a position to withdraw it once oil prices have moderated".

But expect no relief in the immediate future. "We see a marginal increase in overall fares till end June but closer-to-departure fares may be higher than the overall average," said Kapil Kaul, chief executive officer and director, CAPA South Asia.

The good news is that Kaul sees no scope for a rise in airfares during the September quarter. "Fares in Q2 will see higher discounting than in the previous years, driven by large capacity inductions," he explained. The order books of the domestic carriers back him up - two months ago Airbus had disclosed that it expects to deliver one aircraft per week on an average to Indian carriers over the next 10 years.

Furthermore, with the Organization of the Petroleum Exporting Countries (OPEC) and its allies recently signalling that they are considering boosting oil supply in the second half of the year, things might indeed be turning for the better.

With PTI inputs