Airfares must rise for domestic airlines to survive – Operators

The Chairman, United Nigeria Airlines and spokesperson for Airline Operators of Nigeria, Prof. Obiora Okonkwo, in an interview with SAMI OLATUNJI, speaks about some of the challenges encountered by domestic airline operators in Nigeria

Why has the aviation fuel crisis lingered till now? The House of Reps intervened a few weeks ago and brokered peace between local airlines and oil marketers, with the agreement that fuel should be sold for N480/litre for three months. Has this failed?

Well, we are aware that since the war between Russia and Ukraine started, the markets all over the world have had some changes, with the hike in prices of fuel, diesel, Jet-A1, PMS. For a country like Nigeria, which currently does not have internal production, this fuel is a deregulated product, and the supply comes from outside Nigeria and it is also being determined by the oil market internationally. So, oil price jumping from $60/$70 to $110/$120 expectedly should affect the price. With that, we don’t have any problem. We know it is not the making of this government. We are not holding the government accountable for anything. We know that this government has been quite cooperative and has done a lot for this industry. So, this is not the issue. We know that these prices have international influence. It is also a very transparent market, whereby you will know using Platts, which is the pricing formula based on the existing oil price internationally at that moment. However, we know if that is applied vis-a-vis the pump price of getting this Jet A1 in Nigeria, there is something wrong. That is the issue. Of course, we know that this Jet-A1 is not only affected by the international market price of oil but also the exchange rate in Nigeria. We understand that this is a deregulated product and we are not asking for subsidy. We are all private entrepreneurs, and we understand the negative impact of subsidy in our economy. We also understand the battle the government is having about subsidy in other areas. But the point we are making here is that we want transparent pricing of this product.  Also, we want to adopt a system where they could reduce middlemen who are just racketing.

Now that marketers are selling aviation fuel at over N600/litre as against N480/litre which was agreed at a meeting with the Speaker of the House of Reps about two weeks ago, what’s the reaction of local airline operators to this?

The level where we are now is that our point was well understood by the National Assembly, Presidency and GMD of the NNPC, that we should all work hard to reduce, if not totally eliminate racketeering. We are happy about that. Also, it was proposed that the NNPC should do a special intervention and make direct importation of Jet-A1, which is usually not within their own portfolio. Also, in this private intervention, all the products imported within the next three months, there should be a special allocation to marine marketers, who can take the bulk from the middle of the ocean. We were asked to nominate two marketers to be given 30 per cent of the allocation especially, and then to ensure that the pricing is transparent. The NNPC will give us the PFI, that is, the cost at which they are selling it to those marketers. And we will sit down with them, work out their own premium and logistics and agree on their usual markup. When this is done, we just want to make sure we are paying the right price for the product. So, it has nothing to do with subsidy. Also, we are expecting that if it is being imported by NNPC, the calculation should not be on a black market rate. If the calculation is based on the official rate, we will lose about 20-30 per cent of the price.

Would you be able to maintain current airfares, especially the N50,000 base fare? Recall that the base fare was N50,000 when aviation fuel went for N480/litre. From your preliminary projection, what will be local airlines’ base airfare with fuel at over N600/litre?

The truth of the matter is that this base rate is not really as base as it is. It is not really the direct cost of making an hour flight in Nigeria. If you have to apply every other cost component, there is no one-hour flight that would cost less than N100,000. Nothing less than N100,000, between N100,000 and N120,000 base price, even with Jet A1 fuel at N400–N500. That is what it is. That is the cost of the flight, not even the markup price of the airline. Look at how many litres of fuel any aircraft in Nigeria is consuming for one-hour flight and you do the mathematics by applying the pump price of the Jet A1 at N600. If you have 100 per cent percentage passenger load factor, which is usually not likely, then you may say you are okay at a certain lower price. But knowing that sometimes, you may have 60 per cent while going and 30 per cent coming back, it is unlikely you will break even. In the industry, it is expected that you will gain some here and lose some there but the biggest challenge indigenous operators are having is that the cost of everything is high. You source funds at a high rate from the commercial bank rates. You source foreign exchange from the black market. No moratorium for your loans and the banks and AMCON are quick to jump on you. I can tell you that all the airline operators have been losing money in the last three months, a huge amount of money. Too much stress on the operational fronts. For them to break even, even if aviation fuel is made available, there must be a review to reflect the minimal operational cost. We are offering a patriotic service to the nation and we understand the essential part of it. We are part of this economic development process in Nigeria but it is coming at a very huge sacrifice. We don’t have any joy in anticipating or working for the increased fare because we know that the economic sector is very volatile.

With the existing issues, what has been the demand rate for flight tickets? Is there a drastic decline?

There has been a drastic fall, which is a reflection of the general, slow activities in the economy. However, we are going into a period that is likely going to see some increase because, during the summer, people move around. That brings us again to why we are against multiple rides for foreign airlines. If you have all foreign airlines going into all the nooks and crannies of Nigeria, then people would not fly local airlines anymore.

There are plans to allow airlines to import aviation fuel, is this gaining traction or are there forces frustrating this plan? Do you think domestic airlines can engage in fuel importation effectively since it is not part of their core business?

Part of the agreement is that the necessary agency of the NNPC should be able to give special consideration for the airline operators to have direct importation of fuel. The idea is that when that is done, you can control your price. But obviously, it comes with its own challenges. The challenge is that one, you have to meet the conditions. But we have been promised that there should be a waiver in some areas that do not affect safety and security. Another challenge has to do with sourcing foreign exchange because these things are not bought in small quantities. Those things have been discussed and it is an option we are looking at. We are hoping also that we may have to partner with all those who are already in the industry. One thing is to pay for the vessel, another is to have the facility to de-bulk and transport it. We are purely operators and this is not our line of business. But we are giving it positive consideration. We hope that if that becomes our last option, we will surely be happy with it to clear off the racketeering issue.

There have been unconfirmed rumours that truck drivers and marketers are hoarding fuel, can you confirm this?

It is racketeering. We think there are some people going in between to factor in their own interests. We are not against anybody making money but it is not in the interest of the industry. It is killing the industry. When this industry collapses, it is not good for the economy and it is a huge burden on the travelling populace

How is the lack of adequate forex affecting local airlines?

It is a big problem because 95 per cent of the funds we need are sourced from the parallel market, which makes things very expensive. Sometimes, it is not even available. It is affecting our credibility with our international partners. The aviation industry is a credit base industry worldwide. If you have some commitments to your suppliers and the funding is not available and you don’t meet your payment term, it affects your credit record and reputation. It may even lead to the cutting off of your credit privilege, and you see yourself looking for cash at every point in time. This cash, even when you have naira, is not available in US dollars, and then it affects your delivery time, further increases your aircraft-on-ground period and reduces your operational efficiency. So, it is really a huge issue. During our discussions with the National Assembly, the CBN governor was invited to see if he could have a way to do with this, but we did not get anything positive from that. The straight answer was no, that there was nothing they could do. So, we are left on our own to source foreign exchange.

There is the issue of oil pipelines, especially around Wasimi and other parts of the country. Are there plans to revive these pipelines to ensure a smooth supply of oil across the country?

There is no doubt that if the transportation of the oil products is done through pipelines, it would reduce the logistics markup. For instance, the price of oil from the high sea and delivered in Lagos should not be the same as the truck delivers in Maiduguri. So, the cost of road transportation is huge compared to when it is done by pipes. Surely, if those infrastructures will be invested on and well secured, it would surely reduce some high cost of this product in some places farther from the port. But the bottom line is that if there are internal refineries where this product is made available from the oil pipelines made in Nigeria, it would save a lot of costs. The logistics cost is huge at the moment. So, if we get the oil refined in Nigeria, we can get about 40 per cent reduction in the price. So, we are very hopeful that with Dangote refinery coming up, it may reduce the cost of logistics.

Are local airlines considering mergers and acquisitions to achieve economies of scale?

Well, it should not be ruled out but the first step has been taken in forming what we call Spring Alliance. This Spring Alliance has to do with some airlines coming together in dealing with the reality of the situation of merging of passengers. For instance, if you have scheduled a 180-passenger capacity aircraft to go from Abuja to Enugu and because of some reasons, you only have 20 passengers; and you have another aircraft, which has 30. So, instead of flying 20 passengers, you can move them to another airline, which is a member of the alliance. Also, if you have a fault, instead of waiting for a very long time for it to be cleared and then keeping the passenger waiting or cancelling the flight, you can easily move them to another airline; so, they keep on going while you sort out your thing. Then you clear the tickets later. I think it is a good step in the right direction.  With the way things are going, we may see mergers coming up in the near future.

How soon should Nigerians expect the aviation fuel crisis to be resolved?

Well, things happen so fast and unexpectedly around Nigeria, and we are not insulated. We don’t know when the next issue will arise. But we the local operators are resolute to ensure that we are ready to do everything possible even at the point of losing revenue to keep the passengers flying. We are only appealing to them to understand that this is a private sector industry, and if we die, we don’t wake up again. It pays them and us for us to be up and running, so we need their cooperation.

Article first published on the Punch Website