Aviation
Forex crisis worsens airlines’ woes
Foreign exchange volatility is conspiring with escalating cost of aviation fuel to take disturbing toll on the profitability of airlines operating in Africa’s largest economy.
This is posing a serious threat to continued existence of many firms operating in the highly capital intensive aviation sector, with thousands of jobs now at stake.
While the situation is forcing the airline operators to consider further upward review of fares as the only way to remain in business, eroding purchasing power of potential air travelers is suggesting otherwise.
The airlines are lamenting that the volatility in foreign exchange rates and the soaring cost of aviation fuel now at N1,300 per litre had disrupted operational planning and stability within the aviation sector.
The Central Bank of Nigeria (CBN) on June 14, 2023, unified the different segments of the forex market, causing the naira to depreciate significantly at both the official and the autonomous markets.
The naira depreciated considerably against the U.S dollar at the close of work on Friday, as FX supply turnover dropped by 74 percent to $84.10 million, despite the CBN’s recent interventions.
Data from FMDQ showed that the national currency depreciated to N1,537.96 per dollar on Friday, a N39.71 or a 2.6 percent loss compared to N1,498.25 recorded at the close of trading on Thursday. At the parallel market, naira dropped to N1,590 per Dollar on Friday from N1,575.00 on Thursday.
The depreciation recorded at both FX markets came amid CBN’s introduction of new guidelines on Wednesday, stopping the payout of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) in cash. Similarly, the apex bank stopped International Oil Companies (IOCs) operating in Nigeria from repatriating 100 percent of their forex revenue.
Lingering dollar scarcity due to reduced oil production, which brings in over 90 percent of the country’s dollars, has made it difficult for local carriers to raise enough foreign exchange to run checks and conduct comprehensive maintenance of their fleet overseas.
Last week, the spokesman of local airlines, Obiora Okonkwo, who called for immediate government intervention to prevent the collapse of local airlines, explained that the unforeseen increase in aviation fuel prices from N700 per litre and the rise in the exchange rate to 1,400/$ had resulted in significant losses for airlines.
His statement read in part: “Passengers, who purchased tickets well in advance under previous rates were being airlifted at the current higher costs, further impacting the airlines’ loss in the revenue stream.
“We are making losses on factors that are beyond our control. We are not only faced with the problem of scarcity of dollars; even the aviation ecosystem is feeling the heat. Handling companies have increased the cost of their services, airports have increased their charges and those that service the aircraft have also increased the cost of their services. The monies for these payments are coming from the passengers, who are already exhausted financially.”
Okonkwo noted that numerous businesses in Nigeria were experiencing low returns, leading to a decline in the number of essential passengers travelling during both peak and off-peak seasons. He stated that as a result, the airlines were struggling to maintain adequate load factors to support their operations during the current low season, as there were fewer travellers for tourism and social engagements.
“Passenger traffic has shrunk because even those on social engagement like weddings, burials, and other ceremonies may not be inclined to spend money on flight tickets; they would rather send credit alerts to those hosting the events, who would appreciate such gestures. So, they pay instead of appearing in person.
“Air travel is a catalyst to economic development. There should have been government engagement with airlines at different levels. Airlines do not have special forex allocation; so, they buy at the same place traders, who trade in Brazilian hair, textiles and others buy.
“Our passion to remain in this business is being eroded. We are at the point of oxygen supply. Some airlines are going into a coma. Our equipment is diminishing. The minimal revenues we earn to keep the airlines flying, we convert to pay our lessors,” he noted.
Beyond the shores
Even the international airlines are not faring any better. Last week, the International Air Transport Association (IATA) expressed fears that foreign airlines operating in Nigeria, may lose about $200m to exchange rate depreciation.
According to IATA Regional Vice-President for Africa and the Middle East, Kamil Al Awadhi, who spoke in an interview with CNBC, the issue of trapped funds was being exacerbated by the depreciation of the naira. Al Awadhi spoke against the backdrop of the over $700m foreign airlines’ ticket revenue reportedly still trapped in Nigeria.
The CBN had claimed it had paid all verified debts owed foreign airlines, a claim IATA swiftly refuted, insisting that foreign carriers operating in the country still had over $700m trapped in Nigeria.
Speaking to CNBC, AlAwadhi said, “You also have to take into consideration the blocked funds and the fair value of the blocked funds. If you have $720m blocked and then you devalue the naira by 30 per cent, you have wiped out over $200m of airlines’ money, and they have to compensate that. Airlines have lost a lot of money operating in and out of Nigeria and it continues to be so under the current environment.”
In the last six months, the nation witnessed a consistent hike in the prices of air tickets. For instance, according to data obtained from the National Bureau of Statistics (NBS), Transport Fare Watch, the costs of air travel surged by 11.01 percent to N81,334.05 in November 2023, compared to N73,270.27 in November 2022.
Also, the average fare of N70,000 for a one-hour (one-way) flight in early October 2023 increased between N120,500, and N270,000, depending on the airline and time of booking in December 2023.
These steady increases, as witnessed in recent years, have put air transportation beyond the reach of the average Nigerian who now resorts cheaper alternatives.
A former President of the National Association of Aircraft Pilots and Engineers, Sheri Kyari, stated that operational costs were linked to a lot of factors and the most glaring was aviation fuel.
“It will continue to be high as long as we are importing it into the country. The value is subject to the exchange rate,” Kyari said.
An aviation management consultant, Mr. Babatunde Adeniji, noted that airline business was heavily dollarized, pointing out that while the aircraft is imported in dollars, repairs and maintenance are equally done in dollars.
He said: “The cost of lease has gone up partly because of risks and they charge a risk premium. In terms of services, there are monopolists.
”Suppliers, such as the ground handling companies, the Nigerian aerospace management agencies and some of those critical suppliers all have businesses that are heavily dollarised and are vulnerable to exchange risks.”
However, last week, the acting Director-General of Nigeria Civil Aviation Authority (NCAA), Chris Najomo, reacted to the news that aviation fuel was N1,300 by setting up a committee to work on the reduction of the fares.
The regulator in a statement said, “It has come to the notice of this authority about the increase and high cost of airfare, especially on international travels.
“The NCAA in the view of trying to make sure that these airfares are brought down, have decided to set up a high-powered committee, which will look at all the variances and how we can bring these fares down.
