ATF has been going up steadily and has shot up by a whopping 26% in the past three months. How will it impact the aviation sector?
The festive season is almost here, and many of us are excited to visit our families and close friends. If you are considering taking a flight to see your loved ones, this article is essential because ticket prices have risen!
To give you some perspective, even though Diwali is more than two months away, the prices for flights on specific routes during that festive week have already gone way up. For instance, as per a report published in The Times of India on 1st September 2023, the cheapest round-trip ticket from Mumbai to places like Srinagar, Bagdogra, and Patna on non-stop flights during Diwali week cost Rs 35,000 or even more.
Now, why are these airfares rising? Well, there are a few reasons for this. Let’s take a closer look.
In the first half of 2023, something exciting happened in the Indian aviation industry. The number of people flying by planes increased by more than 33% compared to the previous year. That is 76 million passengers!
Both passengers and airlines were happy about this. Why? Well, there is one big reason: cheaper flights.
And what’s making flights cheaper? It is the cost of fuel that planes need to fly, called Aviation Turbine Fuel (ATF).
Here is the simple equation:
- When fuel prices are low, airline companies make more money.
- When fuel prices are high, airline companies make less money.
So, in the first half of 2023, because the price of ATF was low, the airline industry made a lot of money and had great profits.
But, in the second half of 2023, things are getting tough for the industry. And yes, you are right; it is because crude oil prices and ATF are increasing. That is one reason. The other reason is that fewer people are flying, so there are fewer passengers.
Now, let us dig into these two challenges a bit more.
Rising Aviation Turbine Fuel (ATF) Prices
The aviation sector is facing a major issue, and it is all about the cost of aviation turbine fuel (ATF). In the past three months, the price of ATF has been going up steadily, and it has shot up by a whopping 26%, including the 14% hike done on September 1st, 2023. According to CNBC TV18, the cost of ATF is now the highest it has been since December 2022.
So, what is causing this increase in ATF prices? Well, there are two main reasons. First, the prices of crude oil around the world have been going up, and they have gone up by more than 17% in just the past two months, from July 7th to September 8th, 2023. Second, the Indian rupee has been getting weaker compared to the US dollar, and that’s also making ATF more expensive.
Now, why is this a big deal? As reported by Mint, jet fuel is a big part of what it costs to run an airline in India, almost 30-40% of the total cost. So, when the price of ATF goes up, it directly hits the profitability of airline companies.
The chart shows that the price of ATF has increased from Rs 1.08 lakh per kilolitre in January 2023 to Rs 1.12 lakh per kilolitre in September 2023.
Low Passenger Traffic
Another significant challenge for the aviation industry is the slow growth in passenger numbers. It is a common trend that the second quarter of the year, from July to September, is typically not the most profitable time for airline companies, and this year is no different.
When we look at international travel, Indian airlines had a slight dip in passenger numbers in July 2023, with a small 2% decrease compared to the previous month. However, there is some good news. According to the Economic Times, there was a strong recovery in August 2023, a positive sign for the industry.
The chart shows decreasing air passenger traffic from April 2023 to July 2023 and a sudden spike in August 2023.
For ATF prices to go down, crude oil prices need to drop. However, that might not happen soon because OPEC+ is still cutting down on its oil production. So, what can be done to help the situation?
There are two possible solutions. First, if more and more people start flying, and we see a big increase in air passenger traffic, it could help. Airlines make more money when more passengers are flying, which can offset the high ATF costs.
The second solution is for airlines to be smart about where they fly. They can adjust their flight plans to focus on routes that make them the most money. Doing this can boost their overall profits, even when ATF prices are high.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.