Domestic fuel supply unlikely to tame rising airfares

There are indications that the expected supply of aviation fuel from refineries in Nigeria may not halt the rising prices of airfares.

Analysts interviewed by BusinessDay said the various factors that played significant roles in the rise of flight ticket prices in 2022 and 2023 will remain influential this year.

They expressed divergent views on what to expect for the domestic aviation industry, pointing to a range of factors that would likely push the prices of flight tickets beyond the reach of many more Nigerians.

The Dangote Group announced last month that its 650,000-barrels-per-day refinery had begun the production of aviation fuel and diesel, which are expected to hit the markets soon. The government-owned refineries in Port Harcourt, Kaduna and Warri are being repaired.

A report from the National Bureau of Statistics (NBS) revealed that Nigeria spent N292.56 billion in the first quarter of 2022 to import aviation fuel. Then, the naira was trading at 423.9 per dollar at the official market.

But since the apex bank collapsed all the FX exchange windows into the Nigerian Autonomous Foreign Exchange Market (NAFEM), the naira has slumped to an all-time low of nearly 1,500/$.

During the first quarter of 2022, the NBS reported that airfare rose by 34.06 percent from N55,906.86 to N74,947.30, and a significant contributory factor was the cost of aviation fuel.

John Ojikutu, managing director of Centurion Security and Safety Consults, said the possibility of a fall in airfare was heavily dependent on eliminating the influence of racketeers who benefitted heavily from oil subsidy fraud.

He warned that leakages, such as fuel diversion to neighbouring countries, to make a bigger profit, must be closed if airlines in particular and Nigerians in general are to benefit.

Ojikutu said: “Airfares could come down if the criminals among the Nigerian importers who are already losing on the subsidies would not begin taking it across the border to sell and create scarcity.

“Secondly, we need to remove the tankers from the bridging of the supply from the sea depot with the repairs of the pipelines. Without attending to these two major issues, there can be no significant changes in the prices of the Jet-A1 and the air fares.”

Sindy Foster, an aviation analyst with over a decade of experience in the industry, ruled out the possibility of a drop in domestic airfare once Dangote refinery starts supplying airline operators with aviation fuel.

She said domestic airfares will depend largely on foreign exchange, not domestic aviation fuel supply. “The biggest impact on fare and every other cost concerning aviation is forex.”

She, however, said flight ticket prices will be difficult to predict because Dangote refinery had not set a selling price for its aviation fuel.

“We don’t yet know what price they will be supplying Jet A1 at; so it is impossible to say. It’s unlikely that they will supply at a lower cost than the available supply.”

Titus Olowokere, an engineer and the president of the US-Africa Trade Commission, expressed optimism regarding the potential influence of aviation fuel from Dangote’s refinery on flight ticket prices.

“Yes, without a doubt, the availability of Jet A1 fuel from the Dangote Refinery will have a positive impact on domestic air fares in Nigeria,” he said when asked about the potential impact on ticket prices.

Olowokere based his argument on the easy access to this product that the Dangote refinery offers, especially as it won’t cost as much as it does to import it currently.

He said, “Currently, airlines in Nigeria rely on imported jet fuel, which is expensive due to transportation costs, import duties, and other operational coordination.

“With the Dangote refinery producing Jet A1 fuel locally, airlines will have access to a more affordable and hopefully steady source of fuel. It’s a chain reaction; it would potentially lead to a decrease in the cost of jet fuel for airlines, resulting in lower operating costs.

“As fuel costs are a significant expense for airlines, any reduction in these costs could translate into lower airfare prices for domestic flights.

“Also, not to forget the element of competition. The local supply of Jet A1 fuel could also lead to increased price competition among airlines. Lower fuel costs would enable airlines to reduce their operating expenses, allowing them to offer more competitive prices to attract passengers.

“This competition could result in a downward pressure on airfare prices, making domestic air travel more affordable for Nigerian consumers.”

He said the availability of aviation fuel isn’t the only factor likely to force down the price of a flight ticket, adding that other components such as airport fees, taxes, and regulatory policies would all play a significant role in determining this in 2024.

“However, while the availability of locally produced Jet A1 fuel could contribute to lower fuel costs for airlines, other factors such as airport fees, taxes, and regulatory policies also play a significant role in determining airfare prices. So, it’s not an absolute impact,” Olowokere said.

Ojikutu advocated for additional changes and reforms within the Nigerian aviation sector.

He said as long as there are increases in service charges, especially in fuel costs, airfares will not decrease. He suggested restricting foreign and international flights to specific airports, leaving domestic routes for domestic airlines.

He recommended upgrading and pricing airports, with Lagos and Abuja being classified as Category A with higher charges.

“FAAN should begin the grading and pricing of its airports. Lagos and Abuja can be classified as A with a maximum price, followed by airports in category B, 75 percent of A, PH, Kano, and Enugu, Cat C, Owerri, Benin, Kaduna Benin, etc., 50 percent of A, Cat D, 50 percent of A, and Cat E, 25 percent of A charges,” he said.

Ojikutu further pleaded with the government to adhere strictly to the Concession, Commercialisation, and Privatisation Act of 2000, warning that any deviation from this act would be not only self-serving but also harmful to the aviation industry.

He pointed out the success of Murtala Muhammed International Airport Terminal 2 (MM2) compared to other domestic terminals, suggesting that private development should play a more significant role in commercial services and businesses within the aviation sector.

Meanwhile, Olumide Odunayo, an industry analyst and director of research at Zenith Travels, voiced his concern about the future of air travel within the country.

Expressing his views over the phone, Ohunayo proposed that the existing ticket prices in the aviation sector, especially for domestic flights, pose difficulties for leisure travellers.

According to the industry analyst, the impact is expected to affect public, tourist, and leisure travellers due to the high fares, ranging from N90,000 to N95,000.

As a result, essential and business trips may persist, but in general, the overall number of air travellers is expected to decline due to economic factors like inflation and exchange rates.

He said, “Public fares, tourist passengers, and leisure passengers would be affected; essential travel and business travel would still take place; but overall, the number of passengers that would be travelling will not be as high as it used to be before due to the exchange rate, and the prevailing economic situation in the country that has brought about inflationary trends would reduce the number of passengers that would be flying.”

Odunayo also pointed out that airlines, constrained by their refusal to lease additional aircraft, may struggle to meet the demand. To address this, he suggested exploring leasing options and extending operating hours to increase frequencies.