Aviation Stocks In Focus: IndiGo & SpiceJet Share Price Jump Following ATF Price Cut; Should You Buy?

The shares of airline operators InterGlobe Aviation (IndiGo) and SpiceJet soared in early trading on October 1, following a reduction in aviation turbine fuel (ATF) prices by the Indian government. This welcomed move provided a much-needed boost to the aviation sector, pushing the shares of these carriers upwards by more than 5%.

The latest notification from the Centre revealed a 6% reduction in jet fuel prices, marking a notable dip for airline operators. In Delhi, ATF prices were slashed from Rs 93,480 per kiloliter to Rs 87,597 per kiloliter. This cut brings jet fuel prices to their lowest levels since April 2024.

The reduction in jet fuel prices is expected to have a ripple effect across the aviation industry, as ATF constitutes nearly 40% of the total expenses for domestic airlines. Consequently, this move is anticipated to ease the financial burden on airlines, which could potentially lead to more competitive ticket pricing.

Following the announcement of the ATF price reduction, both InterGlobe Aviation (IndiGo's parent company) and SpiceJet witnessed a surge in their share prices. As of 12:50 pm on October 1, InterGlobe Aviation shares were trading at Rs 4,905 on the NSE, up by nearly 2.5%. Meanwhile, SpiceJet shares experienced an even more substantial jump, soaring over 5% to trade at Rs 67 apiece.

This latest cut in jet fuel prices is part of a fluctuating trend observed over the past few months. In September, ATF prices in Delhi were reduced by 4.6%, bringing the cost down to Rs 93,480.22 per kiloliter. This came after two consecutive price hikes in August, following a more significant 6.5% drop in June.

The volatility in ATF prices can be attributed to various factors, including fluctuations in global oil prices and domestic taxation policies. The aviation industry, heavily reliant on jet fuel, has been advocating for more stability and predictability in pricing to manage its expenses better.

Currently, ATF is not included under the Goods and Services Tax (GST) framework. Instead, it is taxed at the state level, with excise duty and Value Added Tax (VAT) varying across states. In some states, VAT on ATF can be as high as 30%, which adds to the operational costs for airlines.

In the lead-up to Budget 2024, domestic airlines had urged the government to bring ATF under the GST ambit. This inclusion would allow airlines to claim input tax credits, potentially reducing their overall expenses and improving profitability. A standardized tax rate on ATF under GST would also help level the playing field for airlines operating across different states.

Aviation consultancy CAPA India has been vocal about the need for a new policy framework for the aviation sector, especially in light of the rapid changes the industry has experienced post the COVID-19 pandemic. According to CAPA India, a policy that addresses fuel pricing, taxation, and other operational challenges could improve the competitiveness of India's aviation sector.

The reduction in ATF prices is not just good news for airlines but also for passengers. As fuel costs constitute a major portion of an airline's operating expenses, any reduction in ATF prices can translate into lower airfares. This could make air travel more affordable, especially for domestic routes.