Air Turbine Fuel (ATF) prices in the domestic market

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Then there are other benefits on the cost side. As per sources at Air Deccan, Air Turbine Fuel (ATF) prices in the domestic market are valued at 170% of international standards. That basically means that operations on international routes would guarantee cheaper ATF prices, thereby lowering the costs for the airlines. Aniket Mhatre, Aviation Expert, PLIndia convincingly states, “The costs for international operations are lower as ATF outside India is at Rs.32/litre as against Rs.49/litre in India. As ATF contributes to about 40-45% of airlines costs, costs for flying international are lower (as you can refuel overseas, as Air India does). Hence, international yield per seat is higher.” Agrees Rajeev Batra, Executive Director, KPMG, “ATF is a controlled commodity in India. It is not so abroad, instead being freely tradeable. Naturally, players flying abroad will stand to gain from this.”

The fact bears significance considering that Indian carriers have had a poor record where operating statistics are concerned (refer Figure 4) with most reporting higher operating expenses than revenues. Then there is also the attractiveness of price restrictions, which apply on international routes that are more regulated and therefore create a scenario where loss-making can be avoided by careful pricing method. As Craig Jenks, President, Airline Projects Inc. asserts, “Globally, international traffic grows faster than domestic traffic and so it is an interesting opportunity. In India, domestic market has been growing faster, resulting in excessively low fares. International routes are more attractive since they are restricted by the government.” What this implies is that restricted access to these routes means lower levels of dog-fights for the operating airliners – some relief for domestic carriers, which have been bearing the brunt of predatory pricing for years now! “Long-haul operations are always more profitable since they lower the operations cost. Bigger planes will offer you three times bigger capacity than small ones in domestic routes. Margins for international carriers are always more than that of domestic depending upon sectors…” is how Jet officials put it.

But do these opportunities come sans challenges? “International operations provide a greater diversification of revenues, generate greater feed for domestic operations and may suit the strategic objectives of an airline, but the challenges should not be underestimated. International flights test you on both the quantity and quality factors,” says Somaia. With Air India having under-exploited international opportunities for years now, it’s time for private carriers to show that they have stronger wings to fly greater distances. That was the quantity challenge. There is another challenge factor though – that of quality. Can Indian operators provide long-distance, international flight travellers with that kind of top notch services, which maybe a BA or a Lufthansa can offer? “Yes, why not? Indian carriers can compete effectively with their global counterparts on the service parameters. We can capture up to 50% of the international traffic in India in the mid-term,” snaps back a Jet official.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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