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Higher ATF prices will not affect airlines

BANGALORE: A recent report by KPMG, a global consulting company, discounts fears that the sharp and sustained increase in the price of aviation turbine fuel (ATF) will run the Indian aviation industry aground. The study, “Indian aviation: flying through turbulence,” points out that ATF costs account for just 30 per cent of the “direct” operating costs in the aviation industry.

The study observes that the financial performance of entities in the industry depends on how efficient they are, in particular how they adopt “an intuitive approach to route planning in order to maximise revenues.”

Mark Martin, Senior Advisor, KPMG, told The Hindu that other aspects of costs were of far greater significance when compared to the cost of ATF.

In particular, he emphasised on costs associated with lease rentals of aircraft. “The rising cost of leasing aircraft is one of the biggest concerns of airline companies,” he said. Rising LIBOR rates and the depreciation of the rupee vis-À-vis the dollar and the rising cost of hiring foreign pilots count for much more, when compared to the escalating cost of ATF.

The increasing cost of fuel has meant that fuel expenses have increased from about 15 per cent of operating expenses in 2003 to about 25 per cent in 2006. KPMG estimates that they at present account for about 30 per cent of the cost of operating a new aircraft (about 35 per cent of the cost in the case of older aircraft). Mr. Martin pointed out that airline companies such as Indian had established special purpose vehicles in offshore locations such as the Cayman Islands to lower lease rentals of aircraft. “Indian (earlier Indian Airlines) has lowered corporate tax liability by doing this,” he said.

The study observes that the Indian airline industry is influenced by economic growth. It points out that passenger traffic has increased from 48 million in 2003-04 to 116 million in 2007-08.

Mr. Martin said that it is “illogical” to focus on short-term profitability in the aviation sector. He pointed out that it takes 5-7 years for airline companies to breakeven. “Many of the Indian airline companies commenced operations in 2005 and 2006. How can we expect them to make profits so soon?” he asked. “The low-cost carriers in India are really low-fare carriers.” They do not have alternative airports or other means by which they can actually lower costs, which can translate into lower fares, he added. “The current situation is tougher for these carriers,” he said.

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