Rising cost of aviation fuel threatens air operations
By Funsho Balogun
One day very soon, air passengers in Nigeria will arrive the airports to be asked to pay as high as N50,000 for an hour’s flight. Perspectively, passengers on the Lagos-Abuja route may soon be forking out about 300 per cent more than what they presently pay to fly on the handful of airlines that will still be lucky to be operating.
Fiction? No. The reality on the ground is that the seamless rise in price of Jet A1, the aviation version of petrol, is compelling airline operators to increase fares. Within four months, the price has gone from N95 per litre to N150. If global price of crude continues to soar (as it is expected to), the cost of Jet A1 is expected to hit N200 before the year runs out. Oil prices hit an average of $140 per barrel last month and there is speculation it could climb up to an unprecendent $250 per barrel in the next one year.
So jittery are airlines by the sharp rise that on 12 June, they, under their business umbrella, the Airline Operators of Nigeria, AON, cried out to the federal government to wade in and curb the skyrocket. The association feared that without an intervention, the price surge could well substantially erode the aviation business in Nigeria. Dr. Christian Folly-Kossi, Secretary-General of the African Airlines Association, AFRAA, at a recent meeting with the AON in Lagos, lamented how the global aviation fuel price phenomenon has drastically affected the industry. Conrad Clifford of Virgin Nigeria confirmed that “local airlines are operating under critical conditions”.Of course, the development is not without its toll. North American Airline, an American carrier active on the Nigerian international route under the Open Skies agreement signed by both countries, bid goodbye to Nigerian skies, with its last flight departing the Murtala Muhammed International Airport, Lagos, on 18 May 2008. North American also shut its offices in Ghana. Henry Seymour, its Manager in charge of African operations, attributed the quit decision to record-high fuel prices. North American was unfortunate to have commenced operations in Africa in the heat of global crude price upheaval. The airline’s Director of Operations in Africa, Obed Owussi-Kissi, disclosed that fuel costs have spiralled by 60 per cent since it flagged off operations in the continent. Gone with the airline’s exit are numerous jobs of the locals.
To remain in business, indigenous operators are being forced to cut routes. Those licensed to fly international routes are being hamstrung in taking up the challenge. This is a big blow as such routes command dollar charges, are more profitable and assist to ease settlement of debts accrued on newly ordered aircraft. Aviation fuel price hike is also posing a stiff challenge to the emergence of new low-cost airlines in Africa. Such type of airlines thrive in developed countries. Low-cost carriers, as the tag connotes, are designed to cost air travellers less and ply destinations that the more solid and established airlines with bigger jets shy away from. In Nigeria, Associated Airlines flies the Lagos-Benin City route while Overland goes to Ilorin. The fear is rife in some aviation quarters that considering the current trend of escalating fuel prices and its effects on air charges, operating low-cost carriers will be quite a feat, as ticket prices are likely to climb beyond the affordability of already limited number of passengers. A new airline poised to launch itself into Nigerian skies, DANA, is eyeing some neglected routes. Pundits share the opinion that aviation fuel price and the heavy burden of other operating costs may stifle the effort of the aspiring player to take off on a healthy note.
AON’s plea to government for intervention got a backing from Giovanni Bisignani, Director-General and Chief Executive Officer of International Air Transport Association, IATA. Bisignani admitted that most airlines are struggling for survival and require a lifeline through massive changes. “Government must stop crazy taxation, change the rules of the game and fix infrastructure,” he advocated. In addition to continuous fuel price hike, airlines also grapple with other bloated running costs that include parking and landing fees, ticket sales tax, passenger service charge, aviation handling charges, ground rent, insurance, salaries, office rent, overflying charges and catering costs. Consequently, they factor the burden of high operational costs into ticket prices, which are constantly on the upward trend. Only within the last month, airlines have reviewed upwardly their charges on one-hour trips to N18,000. It was N16,000 last month and N14,000 last year. Ibrahim Adamu, Chanchangi Airlines’ spokesperson, described the increases as inevitable, considering the alarming rise of price of Jet A1.
Rising rates of air fares is not alien to Nigeria. Globally, carriers are generally passing on the rise in costs to customers in form of higher ticket charges and baggage fees. Australia’s airline, Virgin Blue, is set to jack up ticket prices by $4.70 (or £2.40) on average and hopes to cut operational and overhead costs by $50 million this year, while United Airlines and United States Airways intend to impose a new $15 fee for first bags checked in. Finnair is cutting off 500 jobs due to the menace of high fuel costs and a plunge in patronage.
Folly-Kossi, the AFRAA Secretary General, advised African airlines to take full advantage of the Cape Town Convention terms to renew the aircraft in their fleet as new aircraft are known to be safer and more fuel efficient. The experience of the North American Airlines is a study in how not to rely on old aircraft. With 35 per cent of its fleet over 25 years old and consuming so much fuel, it is seriously feeling the impact of high fuel prices. Last year, IATA predicted that North American carriers would record decline in profits from $2.7 billion in 2007 to $2.2 billion in 2008. IATA also forecast that the African airline industry would record a loss of $100 million this year, as it did last year. It also expected European and Asian carriers to experience drops of $2.0 billion and $600 million respectively in profits of $100 million. Latin America is the only region IATA expected to see profits improve by $100 million this year.
The overall trend appears to be an increased turnover by airlines, but with an ever thinning profit margin. Over the last 60 years, the industry made $11.5 trillion in revenues, managing a mere $32 billion in profits. Average margin for the entire industry has been put at a measly 0.3 per cent, while it has a $190 billion accrued debt to service. IATA records reveal that although fuel efficiency improved by 19 per cent with non-fuel unit costs dropping by 18 per cent since 2001, the skyrocketing price of oil has eaten away these gains, leaving the industry in the red.
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