Airlines face headwinds on higher ATF prices

For India’s airline operators such as IndiGo, SpiceJet, Go Air, others the year 2020 will throw a challenge of balancing between rising cost of operations amid contraction in Air passengers.

Aviation companies task has become difficult after Indian Oil Company (IOC) decided to hike price of aviation turbine fuel (ATF) or jet fuel.

The state-run refiner, which provides fuel to around 1,750 flights daily, has raised the ATF price by 11.1% compared to last year to Rs 66,266 per Kilo liter for the month of January 2020.

This is the first hike in last 8 months and the biggest on year hike in last 13 months.

Fuel comprises the bulk of airlines’ costs and high fuel prices may exacerbate their poor financials by eroding profits.

The Indian aviation sector has been going through a rough patch with Jet Airways being grounded, flight cancellations by IndiGo (InterGlobe Aviation) over reasons such as pilot shortage, issues with airport infrastructure, and Air India’s privatization plan still to take off.

Any spike in international crude oil prices will impact Indian aviation against the backdrop of factors such as the Organization of the Petroleum Exporting Countries (Opec) and Russia cutting supplies, the US imposing sanctions on Venezuelan state-owned oil company Petróleos de Venezuela SA.

Aviation company hope that Finance Minister Nirmala Sitharaman will signal the inclusion of jet fuel and natural gas under the ambit of GST to reduce multiplicity of taxes and improve the business climate.
Including ATF and natural gas will not just help companies set off tax that they paid on input but will also bring about uniformity in taxation on the fuels in the country.

Net net we understand that rising fuel prices will hurt margins for most of the airline players in the near term but we believe that with passenger traffic increasing steadily only those players which keep a strict control on there cost metrics will do s log better than there peers in this segment

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