Indian airline companies may hike fares due to rising global crude oil prices

Rising global crude oil prices make air travel in India costlier.

21 April, 2008:

The rising global crude oil price is making air travel a costly affair in India. Most of the airlines in the country are contemplating a hike in air fares to stay afloat, but the cut throat competition in the market is a detractor.

In the developed markets, the airline industry has witnessed many by bankruptcies and lay offs due to high crude oil price. It is said that such eventualities would happen in the Indian airline industry soon.

World oil prices have settled at more than $110 a barrel. In 2004, cost of crude oil was $15 per barrel, but today it is more than $100 per barrel. According to the annual Airline Quality Rating survey, 2007 was the worst year yet for airline companies around the world.

Poor overall operational performance and delayed flights, haphazard baggage handling, overbooking and cramped seating have been remarked as the major problems for the Indian airline industry. The service shortfalls are driven in good part by high fuel prices. Flying in a harsh cost environment has reduced the operational efficiency of many companies. Oil companies have recently announced a huge hike in aviation turbine fuel (ATF) as prices are not government regulated. It is expected that the ATF price hike would impose 10-20 per cent increase in fares on major domestic routes. The oil companies hiked ATF prices by 14 per cent as a result of global rise in crude oil prices in end 2007 - 2008. In a bid to escape from the impact of price hikes, companies are said to be contemplating surcharge on fares.

The Indian aviation sector is expecting a 10 percent growth rate during the next five years. If the crude prices sustained at the high level, it could be difficult to attain this target. The ATF prices have already reduced the margins of the airlines to a large extent.

As there is now no sign of downward movement in price, the Indian airline industry is now thinking of innovative methods to increase their profitability. Some of the airlines have started selling consumer products in the flights. They are also trying to cut costs as far as possible. It is expected that consolidation would be intensified in the airline industry in the coming months of 2008. In 2008, India had witnessed many large takeovers and acquisitions.