Domestic air fares hike, and ...

A recent dip in the value of the naira (which fell to an all time low of N520 to $1dollar) as well as the rise in cost of aviation fuel from N240 per litre to N260 per litre is creating fresh wave of turbulence in the country’s troubled aviation industry.

“The depreciating naira is creating great source of worry in the aviation industry,” said aviation analysts, Mr. Olu Ohunayo. In an interview with Daily Sun yesterday, Ohunayo who manages Zenith Travels Limited, said the spiral effect of the continuous depreciation of the naira has hurt the revenues of Nigerian airports. “Airport terminals and aircrafts are practically empty after the first or early morning flights,” he said. “But my worry is that the airlines whose operational expenses are dollar dominated will be further hit by this rate irrespective of the special window provided by the CBN. We have failed woefully in economic regulations and that must be addressed,” he added.

Indeed, in the last two years, the fortunes of the local airline industry has continued to decline owing to a lot of factors which had also plunged airlines into huge debts. It was such debt crisis that forced the Asset Management Corporation of Nigeria (AMCON) to intervene by taking over the management of two of the country’s leading airlines – Aero Contractors and Arik Air – in a bid to recover over N400 billion owed by the two airlines. But as AMCON struggles to achieve its new targets, indications are that free fall of the naira to N520 – $1 with no signs of a rebound, more airlines could run into the same murky waters that saw AMCON take over the debt-ridden Aero and Arik.

Daily Sun learnt that at the root of the Arik Aiir debts to international creditors is the depreciating naira. For instance, in mid-2016 when the naira started plunging in value, the amount of naira required by the airline to service its debts in dollars also doubled.

It was this sort of developments that prompted the airline management to instruct one of its local bankers to set aside some of the revenue it earned to service the debts, but when the value of naira further fell, that money set aside could not offset the required payments to US Exim Bank, lessors and others.

Most airlines calculated or made their projections and funding on N165 per dollar but sadly from the middle of last year, the naira went down to N305 per dollar at official window.

This made it herculean task for airlines to keep pace with the servicing of their debt. This year, analysts say the situation for highly leveraged airlines could get worse, especially with the increase in the price of both forex and aviation fuel, which stretched the finances of the airlines the more.

In fact, one airline operator told Daily Sun that most investors in the local airline industry were already mulling the idea of a 100 per cent hike in air fares as one possible survival strategy for the industry.

“There is no way the price of fuel and forex will be going up at the rate we are currently witnessing in the country and we don’t increase air fares to match these realities and people expect that we can survive and be accountable to shareholders as businesses,” an airline CEO told Daily Sun. 

“Air fares have to go up; that’s the way out. It doesn’t add up in situations where airlines in a bid to woo passengers will have to charge airfares in naira that are as low as N16, 000 to N20, 000 on routes where you fly for almost 45-50minites. That’s already like running at a loss. In the United States, I am yet to see an airline that will do a 50 -60minutes flight and be charging $50 (about N25,000) which is what we are doing right now in Nigeria,” said a leading airline official who preferred to speak on the condition of anonymity. 

A source told Daily Sun that “maintenance cost on checks on aircraft usually done overseas and paid for in foreign exchange has also skyrocketed.”

A typical case is that of C-check on a Boeing B737, which is the most common of the aircraft used on domestic routes in Nigeria. Such regular c-checks used to cost about $500,000 (about N75 million previously), but if operators don’t have access to forex at official rate and have to buy at over N500 for such checks, then they might end up spending about N250 million.

Fearing a public backlash should they come out openly to announce increases in air fares, most airlines have opted to such subtle measures as raising fares on competitive routes (like the Lagos, Port Harcourt and Abuja) or those routes that they enjoy a sort of monopoly, while lowering fares on those with fewer number of passengers. 

But a spokesman for one of the local airlines who wouldn’t want to be named said the solution lies in a collective decision of the airline industry to raise fares by more than 100 per cent.

“We do aircraft maintenances in dollars, buy spares in dollars, pay for insurance in dollars, and even buy fuel in dollars. What the CBN supplies is still not sufficient for us. Most of us still get dollars at the parallel market. And by the time the time we are converting earnings in naira into the dollars, it becomes very obvious in simple economics that the current fares have to go up by more than 100 per cent if airlines must continue to fly and be profitable,” said the airline spokesman. “To be honest, the cheapest or most realistic fare Nigerians should be paying on any route within the country should be N40, 000,” he added. 

Operators contemplating air fare increases enjoy the backing of a key stakeholder in the industry like the Managing Director, Nigerian Aviation Handling Company (NAHCO), Mr. Nobert Bielderman, who came out openly to caution the industry against allowing airlines to continue to charge existing or current fares which everyone knew was not realistic. He warned that safety could be compromised along the line by the airlines.

“Domestic airlines would be worst hit because of current ticket prices are not in sync or responsive to current realities and this is due to unhealthy price wars and pursuit of market dominance at the domestic side of airline business,” said Bielderman. 

“Domestic air tickets are still significantly low despite increase in airport charges, taxes etc. These domestic carriers still maintain their aircraft in USDollars and aviation fuel has not significantly been reduced if at all. In our opinion, we suggest that these domestic airlines come together and agree a base rate for air tickets in order not to compromise safety and the regulator would do well to step in and analyse their current book positions and act accordingly. 

“Aviation business like any other business is set up to make profit and to create shareholder value and these negative supervening factors may lead to cost saving methods that may compromise service standards and safety. This is asides the sector’s relevance in relation to GDP Nigeria cannot afford another air mishap,” he added.

Shrinking passenger challenge 

According to the Director General of the Nigerian Civil Aviation Authority (NCAA), Capt. Muktar Usman, the forex crisis is having a dire impact on airlines operating in the country. According to the NCAA boss, while an average of 700 aircraft flew out of various airports in the country daily in 2015, the figure had reduced to 597 daily flights in 2016.

In the same vein, he disclosed that while airlines sold tickets estimated at N385billion in 2015, there was however a slide in 2016 as operators were only able to sell tickets valued at about N330billion.

Asked what was responsible for both passenger and revenue drop, Usman said it was the ongoing economic recession in the country as well as the scarcity or high cost of forex that had marred the ability of a lot of potential air travelers from buying air tickets. A growing number of Nigerians now resort to road transportation to destinations hitherto undertaken by air in a bid to save cost. Keeping fares low certainly ensures more patronage of those whose disposable incomes still allows them to fly. But increasing fares has the potentials of scaring away passengers. 

One challenge therefore that airlines planning to hike fares by 100 per cent would face is the shrinking number of passengers that now patronize airlines.

AIR PEACE

In a related development, an aircraft, which landed at the Murtala Muhammed Airport in Lagos over the week threw staff of the airline into an ecstatic mood.

The airline said the arrival of the aircraft will greatly boost its expansion drive. Air Peace it would be recalled had commenced its daily Lagos-Accra-Lagos flight operations on February 16.

Air Peace is also planning to start flight operations to Sokoto in a few days’ time.

In a statement announcing the arrival of the latest aircraft, the Chief Operating Officer of Air Peace, Mrs. Oluwatoyin Olajide said: “Our customers are our greatest asset. Their support and loyalty have ensured our rapid growth, expansion and choice as Nigeria’s preferred airline. Our banks and other creditors have also been very supportive because of our integrity.”

The airline, she added, was uncompromising in the maintenance of its aircraft to guarantee the safety of its customers.

“Two of our aircraft are also arriving from C-check. We insisted on the regulatory heavy maintenance in accordance with Boeing requirements. We insist on very high safety standards because we greatly value the lives of our esteemed customers”, Olajide said.

She enthused: “The coming of our new aircraft will infuse new energy into our expansion drive.

“On February 16, 2017 we commenced our daily Lagos-Accra-Lagos operations. Any moment from now, we intend hitting more regional and international destinations, including Abidjan, Douala, Niamey, Dakar, Johannesburg, South Africa, Dubai, Mumbai, Guangzhou-China, Atlanta and London.

“We will also be covering more local destinations in a matter of days. Already, we are set to commence flight operations into Sokoto. So we are getting more aircraft and doing heavy maintenance of our fleet to sustain the high safety standards we have been known for since we started commercial flight operations.”