Flight Path

Costly jet fuel may drive up airfares briefly, but lack of competition is the real long-term risk to Indian aviation

India pulled its airfare cap yesterday, without a price surge. Big question now is, what happens next month, when jet fuel prices are revised. If US and Iran achieve “total resolution of hostilities”, as Trump has hinted, price pain might not arise. Crude slid below $100 within minutes of Trump’s announcement yesterday, and if peace prevails, and Hormuz Strait reopens, it will trend back to its pre-war level. But if fighting resumes, all bets are off.

That’s a problem for aviation, because jet fuel isn’t seen as a “need” like diesel, or cooking gas. There’s no strong political compulsion to cushion its price. Already, Singapore benchmark for jet fuel has touched $225 once – about $50 more than its peak at the start of Ukraine war. Although India is a major producer and exporter of jet fuel, that won’t shield Indian airlines from fuel inflation. And since fuel is 40% of operating costs, no airline can absorb its impact for long.

In the worst case, then, flyers would pay a lot more everywhere – not just in India. But India’s duopoly market – the Big Two hold over 90% share – is especially suited to price gouging. So, govt must watch airfares. It can also offer some respite by slashing taxes on jet fuel until war ends. More important, it must create conditions for at least one more strong airline to emerge. By govt’s own admission, 11 airlines have folded up in the past 10 years. That suggests systemic issues. China’s top three airlines together have less than 60% market share. In US, no airline has even 25% share. As the fastest growing aviation market, India should plug this gap. Jet fuel price is a short-term irritant, lack of competition is the real concern. 

Read more: https://www.iea.org/reports/energy-efficiency-2020/long-distance-transport

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