As competition intensifies in Nigeria’s domestic aviation industry, some airlines are left with little or no choice to survive by charging below their operating cost, as they focus on retaining or gaining better market share.
Nigeria’s aviation industry has been experiencing a flurry of activities, with new airlines coming up, and 25 prospective operators in the process of marking their presence in the skies.
New entrants are adopting strategies such as low fares, comfort and timeliness to attract the market, as operating cost become secondary, at least at these early stages.
For instance, Green Africa, a prospective airline, announced fares between N16,500 and N23,000, which is about a 50 to 70 percent slash in fares charged by other airlines.
Experts say these prices are below operating cost, considering the high exchange rate, depleting fleet size, high cost of aviation fuel, labour cost and multiple taxations airlines have to pay.
BusinessDay’s checks show that before the current challenge of depleting aircraft fleet and high foreign exchange rate, airlines charged between N23,000 and N30,000 for a one-way trip from Lagos to Abuja, Lagos to Port Harcourt or Lagos to Owerri.
Experts say at these rates, airlines are not realising their operating costs.
For instance, it cost about $3,000 to operate a Boeing 737 aircraft on a one hour flight when aviation fuel was less than N100 per litre.
Further checks show that with the current exchange rate and increase in aviation fuel, which currently cost about N220 per litre, airlines operate a B737 aircraft at a cost of about $6,000.
Average fuel consumption on a Lagos to Abuja flight takes nothing less than 8,000 litres and at N220/litre, airlines would be paying N1.76 million for fuel alone; that is if the airline does not have to divert flight for weather or technical reasons.
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With the current exchange rate of N500 to a dollar, it would cost airlines N3 million to operate a B737 aircraft. This means, for airlines to realise cost of operations on a B737 aircraft carrying an average of 100 passengers, the airline would have to charge an average of N30,000 for each passenger on a one-way flight.
If airlines hope to make some profit from their operations, then a one-way ticket on an hour flight should cost between N35,000 and N45,000.
Daniel Young, an aviation analyst, told BusinessDay that disruptive market entry could work in other sectors, not aviation except there were under-the-table funding of the airline business.
Considering the Revenue Passenger Miles (RPM) based on cost of Available Seat Miles (ASM) against current Cost per Available Seat Mile (CASM), this ticket pricing by Green Africa is a mathematical impossibility, Young said.
Even if the airline does not make profit, it should at least be able to cover operating expenses, he noted.
According to Young, as new airlines spring up and they introduce promotional fares, cutting cost might help stimulate demand but may likely generate an elastic demand for seats way beyond the capacity and capabilities of the new airline; leading to service failures and disappointments.
The checks show further that aviation fuel takes 32 percent of operating cost, labour 17 percent, aircraft rent and ownership 8.5 percent, non-aircraft rents and ownership 7 percent, professional services 4.5 percent, landing fees 3 percent, food and beverage 1.5 percent, maintenance materials 13 percent, transport-related 1.5 percent, and others 12 percent.
Obi Mbanuzuo, chief operating officer/accountable manager at Dana Air, told BusinessDay that airlines fix prices of tickets after considering variables such as cost of operation, level of competition, each individual airline’s strategy and how much the market can pay.
For cost of operations, he said airlines fix prices with considerations on whether the aircraft is wet or dry leased, or owned by the operating airline.
“Each aircraft model has differing maintenance costs based on manufacturers’ intervals for heavy or C/D checks. Newer aircraft are more reliable and break down less often than older ones, and also have longer maintenance intervals (up to 48 months for B737 Max compared to 18 months for older B737s ) so the maintenance cost is usually lower,” Mbanuzuo said.
John Ojikutu, aviation security consultant and secretary general of the Aviation Safety Round Table Initiative (ASRTI), told BusinessDay that operational cost determines ticketing price.
The operational cost components, he said, include fuel consumption for the duration of the flight, which in itself depends on the engine type or numbers of (one or multiple) propellers, turbo or jet; air navigation and control en-route, terminal services like toilet and other airport convenient and safety services such as the runway landings, lightings and approach aids services; ground handling services, catering services, etc.
“First, operating B737, a medium-range aircraft with less than 70 percent load capacity for mostly short-range flights or distances of Lagos/Abuja, Lagos/PH, Lagos/Enugu, etc, makes no economic sense.
“Nigeria Airways in its days would fly F27/F28. That is why it makes sense seeing some of the airlines reverting to aircraft like Embraers now. The air navigation services charges vary with flight conditions (VFR or IFR) and the navigational support,” Ojikutu explained.
He said ground services charges too depend on aircraft type or size, as operators cannot operate an Embraer at the same cost as they would a B737.
Airfare is a product, but it has far more pricing variables than most. Airline ticket prices can and sometimes change every day.
For Tolu Odutola, a pilot and aviation expert, factors that influence pricing of airfare include aviation fuel, flight distance, competition, timing of purchase, timing of flight, passenger appetite and empty middle seat.
On competition, Odutola said the more airlines, the merrier for passengers. “Fierce competition means lower ticket prices,” he said
