Domestic airlines pin hopes on cheaper fuel to help them offset costs

Carriers are currently under pressure due to flight cancellations, suspensions and declining airfares. Domestic airlines pin hopes on cheaper fuel to help them offset costs

An oil tanker refuels a plane at Tribhuvan International Airport in Kathmandu. POST FILE PHOTO

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Sangam Prasain

Published at : March 11, 2020

Updated at : March 19, 2020 16:10

Kathmandu

Hard hit by plunging revenues as the Covid-19 outbreak cuts travel, domestic airlines are applauding the drop in global oil prices, but whether that will translate into cheaper aviation fuel in Nepal is uncertain.

Nepal Oil Corporation officials hinted that there might be only a marginal reduction in the price of aviation fuel, even though crude prices are down by more than 24 percent, because they say the profits are used to offset losses incurred on the sale of subsidised cooking gas.

Nepal Oil Corporation is slated to review prices next Monday, and the struggling airlines have got their hopes up that the state-owned monopoly will slash the price of jet fuel following the historic collapse in crude oil prices.

Domestic airlines said a decrease in jet fuel prices will offer some relief to carriers which are currently under pressure due to flight cancellations, suspensions and declining airfares.

With fuel making up around 30 percent of an airline's operating costs, lower prices would surely provide respite, said Yog Raj Kandel, spokesperson for the Airlines Operators Association of Nepal.

“We are meeting the commerce and supplies minister on Thursday with two demands—immediately reduce the price of aviation fuel and accept a bank guarantee instead of cash in such a volatile situation,” he said.

Many airlines are feeling the hard effects of Covid-19. A number of key airlines that the Post spoke to said they were offering tickets for one-third of the normal fare due to overheated competition among carriers to attract passengers in the face of low movement.

“Lowering fuel prices will allow airlines to manage their operating costs and bring some respite on the cost front,” said Kandel.

Indian Oil Corporation reviews export prices of petrol, diesel and kerosene every fortnight, and of other products such as aviation fuel and liquefied petroleum gas on a monthly basis. Based on the rates fixed by Indian Oil, Nepal Oil Corporation revises the prices under the auto pricing mechanism. But the auto pricing mechanism does not apply to aviation fuel and cooking gas.

An official of Nepal Oil Corporation hinted that there would be a reduction in the price of aviation fuel, but that wouldn’t be as big as airlines have been expecting.

“Brent crude oil that was at $55 per barrel last week fell to $35 this week. But this simply doesn’t mean that there is a straight $20 reduction,” said Surendra Kumar Paudel, managing director of Nepal Oil Corporation.

“There are other factors like appreciation of the US dollar that have a direct impact on fuel prices. However, if crude oil drops further, there will be a significant reduction in the coming days,” he added.

Indian Oil revises prices of cooking gas or liquefied petroleum gas on the first day of each month, but the price is primarily dependent on the international benchmark rate of liquefied petroleum gas and the exchange rate of the US dollar. The Nepali rupee weakened to nearly 120 against the US dollar on Tuesday.

“Besides, the corporation has been adopting a cross-subsidy mechanism by increasing aviation fuel prices to subsidise the price of cooking gas. Hence, Nepal Oil Corporation will be able to reduce the price of aviation fuel only when cooking gas prices fall,” said Paudel.

“We also have to make sure that the profit margin on aviation fuel will not be affected when the prices are revised.” “So, it’s too early to say how much reduction there will be.”

Currently, according to the price list of February 1, Nepal Oil Corporation is enjoying a profit of Rs10 on a litre of fuel sold to domestic airlines while selling at Rs94.50 per litre. The corporation makes a profit of Rs42 on a litre of fuel sold to international airlines.

According to the company's website, it has been incurring a loss of Rs384 per cylinder. The cross subsidy mechanism has allowed the corporation to enjoy a profit before tax of Rs335 million fortnightly.

Last week, the Airlines Operators Association issued a statement saying that in the first two months of this year, foreign tourist occupancy on domestic flights had dropped by 40 percent.

The association has asked the government to launch bailout packages like refinancing, waiver of VAT imposed on aviation fuel, 30 percent reduction in fuel prices, and cancellation of landing, parking and navigation charges for all of 2020. If things don’t improve, the association has warned that it will be forced to lay off employees.

Frequently asked questions about the coronavirus outbreak

UPDATED as of September 22, 2020

What is Covid-19?
Covid-19, short for coronavirus disease, is an illness caused by the coronavirus SARS-CoV-2, short for severe acute respiratory syndrome coronavirus 2. Common symptoms of the disease include fever, dry cough, fatigue, shortness of breath and breathing difficulties. In severe cases, the infection can cause pneumonia, severe acute respiratory syndrome, kidney failure and even death.

How contagious is Covid-19?
Covid-19 can spread easily from person to person, especially in enclosed spaces. The virus can travel through the air in respiratory droplets produced when a sick person breathes, talks, coughs or sneezes. As the virus can also survive on plastic and steel surfaces for up to 72 hours and on cardboard for up to 24 hours, any contact with such surfaces can also spread the virus. Symptoms take between two to 14 days to appear, during which time the carrier is believed to be contagious.

Where did the virus come from?
The virus was first identified in Wuhan, China in late December. The coronavirus is a large family of viruses that is responsible for everything from the common cold to Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). After an initial outbreak in Wuhan that spread across Hubei province, eventually infecting over 80,000 and killing more than 3,000, new infection rates in mainland China have dropped. However, the disease has since spread across the world at an alarming rate.

What is the current status of Covid-19?

The World Health Organisation has called the ongoing outbreak a “pandemic” and urged countries across the world to take precautionary measures. Covid-19 has spread to 213 countries and territories around the world and infected more than 31,405,983 people with 967,505 deaths and 22,990,260 recoveries. In South Asia, India has reported the highest number of infections at 5,557,573 with 88,943 deaths. While Pakistan has reported 306,304 confirmed cases with 6,420 deaths. Nepal has so far reported 65,276 cases with 427 deaths.

How dangerous is the disease?

The mortality rate for Covid-19 is estimated to be 3.6 percent, but new studies have put the rate slightly higher at 5.7 percent. Although Covid-19 is not too dangerous to young healthy people, older individuals and those with immune-compromised systems are at greater risk of death. People with chronic medical conditions like heart disease, diabetes and lung disease, or those who’ve recently undergone serious medical procedures, are also at risk.

How do I keep myself safe?
The WHO advises that the most important thing you can do is wash your hands frequently with soap and water for at least 20 seconds or use hand sanitizers with at least 60 percent alcohol content. Avoid touching your eyes, nose and mouth with unclean hands. Clean and disinfect frequently used surfaces like your computers and phones. Avoid large crowds of people. Seek medical attention if symptoms persist for longer than a few days.

Is it time to panic?

No. The government has imposed a lockdown to limit the spread of the virus. There is no need to begin stockpiling food, cooking gas or hand sanitizers. However, it is always prudent to take sensible precautions like the ones identified above.

Sangam Prasain
Sangam Prasain is Business Editor at The Kathmandu Post, covering tourism, agriculture, mountaineering, aviation, infrastructure and other economic affairs. He joined The Kathmandu Post in October 2009.