Airfare hike, FX erode VAT removal gains

One year after the Federal Government exempted commercial flight tickets from Value-Added Tax (VAT), passengers do not feel the impact as they now pay 100 percent higher for air tickets.

Before the VAT removal, VAT was charged as 5 percent on every flight ticket sold by airlines and was remitted to the Federal Government.

The exemption of commercial flight tickets from VAT, which is included in the 2020 Finance Act, was expected to reduce flight tickets and improve margins for airlines but the reverse has since been the case as airlines keep pushing increasing operational costs to passengers.

One year ago, the economic base fare for tickets were between N25,000 and N30,000 but airline operators recently increased economy tickets to N50,000 and N60,000, showing a 100 percent increase.

At a meeting held in Lagos on Tuesday last week, the airline operators cited the high cost of jet A1 fuel, forex scarcity, inflation, high ground handling charges, and cost of importation of spare parts among others, as reasons for the increase.

Alexander Nwuba, managing director, Smile Air Ghana and former MD, Associated Airlines and WestAir Benin, told BusinessDay that the VAT removal may not mean anything to air passengers because air fares have been increasing even after the VAT removal as market forces have continued to determine prices of tickets.

“Prices are rising. Carriers are passing on costs to passengers. The naira has gone from N300 to N577 and the Central Bank of Nigeria, (CBN) says it will soon stop providing dollars to commercial banks. This means airlines will have to source foreign exchange from the parallel market. This means prices will keep rising,” Nwuba said.

He said he was of the opinion that airlines should fix prices based on their own situation but was against airlines forming a cartel and fixing prices for the market.

The Airline Operators of Nigeria (AON) has continued to lament over the tough operating environment, making it difficult for them to operate efficiently.

“Jet A1 today costs above N410 in Lagos, N422 in Abuja and Port Harcourt, and N429 in Kano per litre and has continued to rise fast and steadily. On top of the continuous rise in the fuel price, fuel supply is at best epileptic at several airports thereby causing delays. Supply nationally is at best unpredictable and several times a day, airlines are standing, waiting for fuel to be supplied at airports across the country,” the airline operators had explained in a statement recently.

Another challenge of airlines is the unavailability of forex for spare parts and maintenance.

Read also: Airfare hike: Why we did not increase fares – Green Africa

According to them, airlines carry out most of their activities in dollars, which today sells for between N580 and N600 and is in short supply.

“Nigeria’s domestic airlines are in a ‘life and death’ struggle to secure the forex they need to acquire their spare parts to maintain their aircraft. This is a major influence on how quickly a grounded aircraft can be fixed and restored to its flight schedule, which in turn has a huge impact on the schedule reliability of the domestic airlines,” they stated.

To cushion the effect of these challenges, airlines have resorted to fare increments.

John Ojikutu, aviation security consultant and secretary general of the Aviation Safety Round Table Initiative (ASRTI), said the VAT removed cannot pay Ticket Sales Charge (TSC) and still be made to pay VAT on the ticket, both are statutory charges.

“TSC consists of 5 percent of all the tariff charges on the passengers’ ticket, which include the fare price, fuel, VAT, among others, paid to the Nigeria Civil Aviation Authority (NCAA) and the airline VAT is the corporate charges on the annual reporting earnings paid to the FIRS,” Ojikutu said.

He explained that airfare before the increase made no economic sense at N25,000/N30,000 or $50 today for a flight of about an hour, especially now when aviation fuel is being imported at a very high cost.

He predicted that baseline airfares will rise above N50,000 in a few months as cost of operations keep rising.

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