Airlines hit hardest by Nepal’s fuel hike

Nepal Oil Corporation’s announcement on Sunday of an across the board increase in fuel prices is expected to have a knock-on effect on inflation, aviation and tourism and on prospects of an economic rebound post-pandemic.

NOC brought the price of petrol to just below the Rs200 per litre threshold, and increased the already high price of aviation turbine fuel (ATF) by $100, taking the cost per kilo litre in Kathmandu to $1,645 -- the most expensive by far in the region.

Bus companies immediately announced hikes in fares for urban and inter-city transport by between 6-7% and domestic airlines also increased their fuel surcharge, which on some routes is now greater than the actual fare.

NOC increased the price of ATF by Rs19 per litre to Rs185. The one-way fare for the shortest destination line Kathmandu-Simara has increased by Rs170 to Rs4,195 which includes the fuel surcharge. Kathmandu-Dhangadi will now cost Rs840 more to Rs16,805 (see table below).

The increases were announced just when the price of Brent crude dropped to $113 a barrel on Monday morning, down from $120 last week. NOC had reduced the price of petrol by Rs10 per litre two weeks ago, but has now jacked it up by Rs40 just when world prices were going down.

Nepal’s domestic airlines and international carriers serving Nepal, which had started seeing high load factors for the first time after the pandemic, say they have no option but to pass the added cost of ATF to passengers.

There is a fear that some international airlines operating long-haul routes that need to refuel at Kathmandu airport may have to make fuel stops, or close down operations altogether.

Read also: Sky high fuel price hits Nepal’s tourism, airlines, Nepali Times

That possibility is sending Nepal’s tourism sector into panic mode because of what it may mean for their bookings for the autumn season for tourism and trekking, which showed signs of a rebound this spring.

“We understand that the increase in petroleum fuel prices is a worldwide phenomenon after Russia’s invasion of Ukraine, but such a high increase for aviation fuel will be counterproductive for Nepal’s economy because of the impact on tourism,” one worried airline executive who did not want to be identified told Nepali Times.

An official at NOC justified the increase, saying that it needed to make up for its subsidies on diesel and petrol and LPG with higher profit margins for ATF. Prices for fuel in Nepal are higher because of government tax as well as the cost of transporting it in tankers from Indian refineries, he added.

In addition, petrol prices must also be higher in Nepal than India to stop smuggling of fuel across the open border. Indian vehicles refueling on cheaper fuel in Nepal and driving back had increased Nepal’s import of fuel, but with Sunday’s increase the price of petrol in Bihar is now slightly lower than in Nepal at Rs172/l (INR 107/l).

However, there is criticism of NOC for disproportionately punishing airlines with such sky high prices, and earning a hefty profit on refueling planes at Kathmandu and other domestic airports. NOC’s fortnightly profit/loss figures show that it still Rs13.58 for every litre of petrol or diesel at the pumps, but it still has a profit margin of Rs56.67 per litre of ATF – up from only Rs22 profit per litre in January 2022.

“The mindset that flying is a luxury must change, aviation is a public service especially during the monsoon when highways are blocked by landslides,” says the manager of a private carrier.

Indeed, the $1,645/kL of aviation turbine fuel at Kathmandu airport is nearly double of the price in Delhi ($875) and Bangkok ($855). Even at Colombo airport, despite Sri Lanka’s economic crisis, the cost of refueling planes is only $965/kL. Dhaka whad the highest fuel cost in the region, but it still much lower than Kathmandu at $1,100/kL.

Read also: Ukraine crisis hits Nepal economy hard, Ramesh Kumar

Airports in Europe like London, Amsterdam and Frankfurt have been in chaos all week because of crew and staff shortages. More than 10,000 flights were cancelled all over the United States this weekend because airlines could not cope with post-Covid surge in holiday traffic.

When the airline industry is in such a crisis, carriers will scrap sectors running at a loss, and some international airlines may be forced to stop operations to Kathmandu because of high fuel and handling costs. Lufthansa, which used to have Kathmandu-Frankfurt flights till the late 1990s, stopped operating because of high local costs.

Tourism operators and hoteliers say flight cancellations could affect their booking for the autumn season, which are looking healthy. Overseas Nepalis returning home for Dasain holidays could also be hit by flight shortages and high prices.

A fully-loaded Airbus 330 on a 7-hour flight from Kathmandu to Incheon burns 40 tonnes of fuel which now costs $80,000, whereas a similar flight from Delhi would cost nearly half that amount.

International carriers serving Kathmandu have put on hold plans to add flights for the autumn season, and some have even reduced frequency to Kathmandu blaming high refueling costs here.

Nepal’s tourism industry directly employs at least 1 million people and it is the third largest source of income for the country have remittances and exports. This is revenue that Nepal needs to import petroleum which now makes up 20% of the total import bill.

Read also: How Nepal can avert an economic crunch, Kalpana Khanal