BusinessDay
NigeriaDecides2023

Explainer: How naira depreciation is slashing airlines’ profits

Airlines in Nigeria are grappling with several challenges, including sky-high fuel prices and shortage of foreign exchange, which they need to buy fuel and spare parts, maintain their aircraft and sometimes pay for overseas training, among others.

BusinessDay’s findings show that when airlines apply for dollars at the Investors & Exporters forex window, it takes them between six to 10 weeks to get dollars, forcing some of them to buy at the parallel market or ground their aircraft pending when they are able to buy at N440 to a dollar.

Airlines are often then forced to buy dollars at N770 to a dollar in the parallel market, just to ensure they do not have aircraft on the ground.

For airlines that cannot afford the black-market rate, they ground their aircraft over costs of maintenance or unavailable spare parts. With fewer aircraft to carry out their operations, airlines can only operate fewer routes and limited turnaround operations.

Airline operators say this takes a toll on their operations and profit margins, which are determined by the number of flights they operate.

“For the airline business, the more planes, the merrier for them. When there are no planes on the ground to meet surplus demand, the airline will be losing. No airline wants their aircraft on the ground. It will impact their profit margins because as long as the business is running, there are bills to pay to service providers, whether or not the plane is operating,” Olumide Ohunayo, an aviation analyst, told BusinessDay.

Ohunayo said while the airlines are seeking forex, fuel prices have continued to increase uncontrollably, impacting their profit margins.

Ohunayo said at this time, the funds for foreign airlines are not being remitted, putting pressure on the naira tickets on the international route.

He stressed the need for the government to address the forex crisis in the country and mitigate the continued rise in fuel prices.

Obi Mbanuzuo, chief commercial officer of Green Africa, told BusinessDay that while 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, an airline will be running at a loss if most of its planes are grounded because of forex shortage.

Mbanuzuo said if airlines have to pay more for maintenance and spare parts as a result of the naira depreciation, it also means their profit margins would be affected.

BusinessDay’s findings show that aviation fuel currently accounts for about 45 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, 2 percent; food and beverage, 1.5 percent; maintenance materials, 13 percent, and transport related, 1.5 percent.

It was also gathered that over 50 percent of these running costs are incurred in dollars.

Ibrahim Mshelia, owner of West Link Airlines Nigeria and Mish Aviation Flying School, said the fall in the naira affects the amount airlines buy dollars to meet their obligations, and ticket prices have to be adjusted upwards.

“Aircraft lease rate is usually one percent of the sale value of the aircraft. This is usually standard. So the rates are basically within the same range. Our problem here is not really an increase in lease rentals but difficulty being experienced by the falling naira and scarcity of the forex,” Mshelia said.

He said the scarcity of the forex is a serious problem for the industry as everything airlines use to operate, from the aircraft to crew training and retraining, is all dollar-based because they are imported.

“So the high naira exchange value to the dollar and scarcity is a real issue. Parts and maintenance definitely have a share of the problems,” he said.

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BusinessDay’s findings show that airlines pay between $800,000 and $1m for scheduled aircraft maintenance outside Nigeria every 18 months.

While maintenance costs have not increased, airlines have seen the naira-to-dollar exchange rate move from N280 per dollar two years ago to over N750/$1. This implies that airlines would be paying almost triple what they paid for aircraft maintenance two years ago as a result of the exchange rate. This also affects aircraft leasing and rentals.

It cost about $3,000 to operate a B737 aircraft on a one-hour flight when aviation fuel was less than N100 per litre about three years ago. When the aviation fuel increased to N200 per litre, airlines operated a B737 aircraft at a cost of about $6,000.

BusinessDay’s calculations show that with the current exchange rate and increase in aviation fuel which currently costs about N800 per litre, airlines operate a B737 aircraft for over triple that amount.

The average fuel consumption on a Lagos-Abuja flight takes at least 8,000 litres, and at N800/litre, airlines would be paying N6.4 million for fuel alone, apart from taxes, staff payment, and service charges, among others.

This means that for airlines to realise the cost of operations on a B737 aircraft carrying an average of N200 passengers, the airline would have to charge an average of N60,000 for each passenger on a one-way flight.

For airlines that charge above N60,000 on tickets, some of the profits realised are often converted to dollars and used for other operating expenses.

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