HEADLINES:
September 22 2019
Airline stocks slip on ATF duty
28 September 2018

Airlines can’t pass on higher costs to customers due to cut-throat competition

Stocks of listed airline companies on Thursday came under intense selling pressure and closed at losses as the government imposed 5% import duty on Aviation Turbine Fuel (ATF) as part of its plans to tackle the rising current account deficit (CAD).

Analysts viewed the development as negative for the aviation sector which has been reeling under high cost structure and mounting debt due to high oil prices and a depreciating rupee. Jet Airways stock closed at ₹182.65, or down 4.82%, while SpiceJet and Inter Globe Aviation (IndiGo) stocks closed at a loss of 1.95% and 1.61% respectively on the BSE. All these stocks, which slumped 5% intraday, had hit their 52-week lows.

The analysts said among all Indian carriers, two low-cost airlines would be impacted the most as they imported ATF to meet a part of their requirement.

At least 10% of their requirement is met through imports which are currently cheaper than the fuel sold by the oil marketing companies, they said.

IndiGo, in a statement, said “any increase in ATF (prices) will put additional burden on airlines. Furthermore, the depreciating Indian rupee is an additional cost on the Indian carriers.”

“SpiceJet does not import ATF,” a SpiceJet spokesperson said. Jet Airways declined to comment. Vistara and GoAir did not comment.

Excess capacity

According to people familiar with the development, airlines would find it difficult to pass on the extra burden on passengers due to excess capacity in the market and the resultant intense competition.

“Though the increase in ATF prices is a pass through, we are not able to pass it on to passengers due to cut throat competition and indiscriminate pricing,” an Air India official said.

Air India is not importing ATF due to logistics problems.

An empowered Group of Ministers had, in February, allowed Indian carriers to import ATF as some low cost airlines had approached the government to go for cheaper imports. Now, that lifeline had been snapped with the imposition of import duty.

Kapil Kaul, CEO, South Asia, Centre for Asia Pacific Aviation (CAPA) said, “Airlines import insignificant amount of ATF, hence there will be no impact.”

“The import duty hike will not make much difference as India produces excess ATF and nearly 50% is exported. India’s ATF production is estimated at 14.5 million tons and local use is 7.5 million tons and so India exports about 7 million tons,” said an analyst of a leading management consulting firm.

Care Ratings in a report said, “The imposition of duty on imported ATF is likely to lower the quantity imported as users would switch to domestic produced fuel.”

India imports 4-5% of its ATF requirements. Prior to FY15, ATF imports were nil. Imports of ATF have increased at a CAGR of 27.6% in the past four years i.e. during FY15-18. In the current fiscal year, FY19 (April-August), even though there has been a 4.6% decline in quantity of imports, value wise, there has been a 26.7% rise. India has imported ATF valued at $76 million during FY19 (April-August) as compared with imports being valued at $60 million during the corresponding period in the previous financial year. ATF constitutes only 0.13% of the total oil and oil product bill in the current financial year,” Care Rating added.

 

 

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