Analysis: Jet Fuel Prices Hiked, Airfares To Go Up Again This Festive Season

The triple whammy of increasing jet fuel prices, Go First filing for insolvency and the seat capacity of airlines remaining low is all set to hurt the wallets of flyers again this festival season.

The government increased jet fuel prices by 14% on September 1 and the cost has surged 26% in the past three months. Airlines ascribe 40% of their operating expenses to jet fuel and, experts say, the hike will play a role in pushing up airfares during the Navratri and Diwali season this year.

Covid Losses

According to a study conducted by Airports Council International, India has witnessed the biggest jump in airfares in Asia Pacific between the fourth quarter of 2019 and the fourth quarter of 2022. India saw the highest increase of 41%, followed by the UAE at 34%, Singapore at 30% and Australia at 23%.

Last August, the government lifted the cap on domestic airfare prices that it had imposed during two years of Covid. This gave airlines the freedom to set their own fares, and the need to make up for the loss incurred during the pandemic has ensured that passengers have had to pay more to fly.

Seat Capacity Low

India's domestic air passenger traffic volume went up by 25% year-on-year to 1.21 crore passengers in July 2023, as per data released by the Directorate General of Civil Aviation (DGCA) recently.

Travel demand has gone up but the seat capacity is still down. Airlines submit their flight plans (number of seats and sectors they will operate) to the DGCA every year, which gives its approval accordingly. The carriers have not, however, been able to operate the number of flights that they promised in their plans submitted to the regulator.

"Why does the DGCA allow airlines to decide how many flights they will operate? The airlines must be obligated to operate the number of flights that they promise in the flight plan to the DGCA. If the demand is more, the number of seats available is less, the fares go up and the passengers suffer on two counts," said Jitender Bhargava, former executive director, Air India.

"Firstly, demand is more, capacity is less and the airlines record 90%-plus load factor. So, the occupancy of a flight is far more than usual. Secondly, the higher the load factor, the higher the fare is," he added.

Insolvency

Ticket prices have soared during the May-July summer travel season this year and the situation has worsened after Go First's bankruptcy and subsequent suspension of its flights. The gap of 300 flights left by Go First hasn't been filled by the other players, resulting in passengers paying a premium for tickets.

After fliers complained on social media about this, the government took note and asked the airlines to 'self-monitor' and devise a mechanism to ensure reasonable pricing.

"The surging price during the holidays is a common phenomenon globally. The whole pricing factor revolves around demand and supply. Such trends can also be seen in the hospitality industry. We live in a free economy and prices are bound to go up when demand increases. This is the reality of life which we all need to accept. During the non-peak times, airlines offer huge discounts to attract customers," said Richard Rekhy, former CEO, KPMG India.

"One needs to plan their holidays better to reduce the impact. Last-minute booking is going to be expensive. The number of Indian fliers has increased and will continue to go up. There will always be a demand-and-supply mismatch. I have never heard an argument around airlines facing a revenue crunch during the non-peak times. Airlines are running a business and they will need to balance their revenue by smart pricing. In my view, there are enough airlines operating in the country," he added.

Industry troubles

The aviation industry has been hit hard by oil prices soaring after Russia's invasion of Ukraine. Experts point to increased labour costs and constrained capacity due to a dearth of spare parts preventing airlines from operating their full fleets.

Aircraft fitted with Pratt & Whitney engines, which were operated by Indigo, Go First and SpiceJet, were grounded because of faulty engines. Go First, which was the worst sufferer, filed for insolvency as it defaulted on payments to vendors and creditors.

Experts said running an airline is a tough business. Controllables are few as they have no influence over factors like airport charges, leasing cost and oil tariff. On top of that, airline ticket pricing models are complex - much to the detriment of consumers.

"The airline industry follows a revenue business model which has multiple buckets. So, the moment you cross the 80% threshold, seat fares go up tremendously. When the last 15-20 seats are left, the fares are high. This can only be negated by ensuring that the capacity deployment in the market is in tune with the demand. Now, the airlines have an incentive in ensuring that the demand and capacity gap is minimal so that they can command higher fares and earn big money," says Mr Bhargava.

Regulator's role

But it's fair play as the conditions are the same for all players. Airlines that use their yield management effectively improve their bottom line. Agile managements can also enter into a deal with domestic oil companies for price stability over a long-term partnership.

The rules of the game, experts say, are the same as in any other sector - manage cost well. control finances effectively and run operations efficiently.

The DGCA, as a regulatory agency, and the Ministry of Civil Aviation have to ensure that the capacity deployment is commensurate with the increase in demand and at least meets what the airlines have committed while getting the flight schedule approved. This will go a long way in keeping airfares from soaring to unreasonable levels. Affordability will, moreover, have a multiplier effect in boosting our economy.

(Bharti Mishra Nath is a senior journalist)

Disclaimer: These are the personal opinions of the author.