Rising oil prices could hurt airlines as ATF demand picks up
NEW DELHI/MUMBAI : An increase in domestic air travel has boosted the demand for aviation turbine fuel (ATF), though rising oil prices could hurt airlines’ bottomline in the future.
The demand for ATF or jet fuel fell sharply during 2020 and 2021 due to the coronavirus pandemic, which saw airlines cut capacity and flights amid a steep decline in air passenger traffic.
However, ATF sales in India are expected to see a recovery with the government allowing airlines to operate at 85% of their pre-covid capacity and expected to gradually relax capacity caps by the year-end.
The demand for aviation turbine fuel from airlines currently stands at 60% of pre-covid levels, said a senior official from a state-owned oil marketing company.
“We see the demand going up to 85% by December and touch 100% by March 2022," the official said, while requesting anonymity.
“Recovery in ATF to pre-covid levels, however, is dependent on international travel, which we expect to pick up in coming months," the official added.
The price of jet fuel has, however, risen sharply from about ?42,000 per kilolitre last year to its current price ?68,609.22 per kilolitre at New Delhi, according to data from Indian Oil Corporation Limited (IOCL).
“The rising ATF price is a huge hindrance to the revival of the sector. Airlines will have no options but to pass the costs to the passengers," said a senior airline official, who spoke under the condition of anonymity.
“Ideally we can manage if crude oil is about $60-$65 a barrel. However, the current situation is not ideal," the official added. Crude oil prices globally have risen from $40 a barrel to about $70 a barrel in the last one year.
Analysts estimate Indian airlines to remain largely loss-making during the coming quarters.
“With daily traffic at about 250,000 levels, crude at $75 per barrel, no major supply cuts by any airline and a long road to recovery for the international segment, profits remain distant," said ICICI Securities in a report on Monday.
“However, higher flying capacity and seasonally strong Q3 (October-December 2021 period) should help limit losses," it added.
Aviation turbine fuel makes up about 30-40% of the total costs of airlines. Fuel bills accounted for 38% of IndiGo’s total expense during the June quarter, up from 30% sequentially and likely to rise further in the coming quarters.
Interestingly, airlines were operating at a much lower capacity during the June quarter, hit by the second wave of the coronavirus pandemic, as compared to the March quarter.
Similarly, SpiceJet’s fuel bill stood at 37% of its total expenses during the June quarter, up from 33% in the March quarter.