Brent crude prices are hovering around $100 per barrel. This will lead to a rise in Aviation Turbine Fuel (ATF) prices, which is a major concern for airlines as the fuel accounts for a major part of the operating expenses of the airlines.
Gross spreads are expected to come under pressure as the full hike in fuel prices may not be passed on to the end customer. The spread is calculated as RASK (Revenue Per Available Seat Kilometer) minus CASK (Cost Per Available Seat Kilometer). RASK and CASK are unit measures for both airlines.
Historically, rising fuel prices have adversely affected the profitability of airlines. For example, fuel prices remained high during FY11-FY14. “The clear conclusion is that the gross spread was significantly higher for all airlines during periods of low fuel prices as compared to high fuel prices,” analysts at ICICI Securities said in a report.
“In FY12, crude oil prices rose 31% year-on-year (YoY), resulting in sharp cuts in passenger RASK from Rs 1.85 to Rs 1.49 for IndiGo, Rs 1.58 to Rs 1.27 for SpiceJet and Rs 2.35 in FY12. Hui. 2.01 for Jet Airways. The average gross spread for Indigo/SpiceJet/Jet was Rs 1.77/1.55/2.4 between FY 2012-14, while it was Rs 2.74/2.7/3.0 between FY16-19.
Similarly, passenger load factor (PLF) has an inverse relationship with fuel prices. For example, crude oil prices grew at a 7% CAGR between FY11-14 when the PLF for IndiGo declined from 85% to 77% and for SpiceJet from 83% to 72%. In comparison, IndiGo/SpiceJet’s PLF averaged 85.6/92% between FY16-19,” ICICI Securities analysts said. CAGR is the annual growth rate.
As such, the big question is whether supply-demand balance is a bigger trigger for airlines than fuel in terms of profitability. “The ability to pass the increase in fuel prices will also depend on the aggregate supply demand. The current fare level (Q3FY22 IndiGo passenger RASK of Rs 3.51) is higher than in the past (passenger RASK was Rs 2.5/2.7 in FY 2010/11 when crude was in the range of US$ 100-120),” the report said. Unless there is an improvement in supply in the system, the scope for increase in fares may be limited.
It’s also worth noting that these incidents come at a time when Omicron hurt January passenger traffic numbers, although February’s numbers seem to be improving. A sharper-than-expected recovery in domestic traffic may ease some of the burden of higher oil prices.
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