How Jet A1 Cost, Multiple Charges Are Killing Nigerian Airlines—Analytic Expose
It is no news that Nigerian airlines are in dire straits. Factors ranging from increase in Jet A1 (Aviation fuel) to its non-availability down to access to foreign exchange to do business as aviation here in Nigeria is 98% forex dependent to the multiple charges that airlines have to bear one would say it really is not looking good for the Nigerian aviation sub-sector.
When the International Air Transport Association (IATA) announced a fortnight ago that due to low prices in oil, its forecast profit was increased to about US$39.4billion it was evident that they did not take the exception rule into cognizance as the opposite is the case with Nigerian airlines.
As global aviation fuel continue to maintain a steady low, the product in Nigeria has continued to increase and worse, for an oil-producing country there are a lot of instances where the product is simply unavailable.
Now, the new reality has set in, where airlines also have to struggle to get forex to do their business in a world where every transaction made is not in local currency. Presently, Nigerian airlines carry out maintenance overseas (forex), buy or lease aircraft overseas (forex), import aircraft spare-parts from overseas (forex) but their charges are done in naira a currency currently spiraling against all other global exchange tenders.
These are some of the factors that made airlines under the aegis of Airline Operators of Nigeria (AON) to meet the Federal government to find a lasting solution for airlines so that they do not all go under like the airlines of the mid 2000s.
AON Chairman, Captain Noggie Meggison said recently, “It is no longer news that airlines in Nigeria charge very competitive fares in local currency but have to carry out numerous operational activities including maintenance and purchase of spare parts in foreign currency (Dollars) thereby adding to the already unbearable burden the airlines have to carry on a regular basis.”
“And the current forex constraint being faced by airlines has further exacerbated the situation and threatening to cripple airline operations in the country.”
Just recently, the Accident Investigation Bureau (AIB) commissioner, Dr. Felix Abali advocated for the increase of the bureau’s 3 per cent of the ticket sales charge to 10 per cent, stressing that paucity of funds had prevented the agency from carrying out its duties as a responsible accident investigator.
This call, innocent as it is, following the AIB’s perceived challenges but once it is considered, there is every possibility that there will be a canvassed increase of the total Ticket Sales Charge (TSC) and in turn the bill will be passed to the flying public who may turn to the roads denying the airline’s revenue.
When the AON met with the Minister, they put on the table a number of challenges which if taken care of will give domestic airlines a fighting chance to succeed and one of the crux of proposal was the pricing and availability of Jet A1.
Aviation fuel is supposed to be no more than 15 or 20 per cent of the total operation cost of a one hour flight and even then for airlines to make profit would be on a full load factor but right now the fuel percentage of the total operation in Nigeria has hit 30-40 per cent and the impact is far-reaching.
As of today the official Jet A1 price is between N145 and N150 but it is being sold to airlines at between N160-N170 coupled with its unavailability most times, things are really not looking bright for these airlines which also have infrastructural and other challenges to deal with.
An actual breakdown of what it cost the airlines with their various aircraft type to contend with their current reality is really not funny multiplied by the other factors that make it almost impossible to operate a daily flight.
However for this analysis we will be sticking to the proposed official rate of N145 per litre and even at that the airlines are still writhing in a lot of pain and hardship.
The most widely used aircraft types on the Nigerian domestic operation are: Boeing 737 Classics (300/400/500 series), Boeing 737 NGs (700/800 series), MD 83 and each ha a unique fuel consumption cost of its own.
According to analysis the Boeing 737 Classics with CFM56-3 series engine type which takes an average of 120 passengers in all economy has average fuel consumption 2700kg/3375 litres per hour.
In Nigeria however, actual consumption is about 25 per cent higher due to operational delays (Holding, diversions, VIP movement, Traffic congestion, weather etc), hence actual fuel consumption per hour – 3375kg/ 4219 litres.
Price of Jet A1 today is approximately N 145 per litre so fuel cost for 1 hour flight is N 145 multiplied by 4219 litres equals N611, 755.00 and revenue from ticket sales assuming it reaches 70 per cent load factor (approximately 84passengers) at N 22,000 price equals 70 per cent multiplied120 passengers multiplied by N22, 000 equals N1, 848, 000 million. So percentage cost of fuel to total revenue equals N611,755.00/N1,848,000.00 approximately 33% for Jet A1 alone and that is not all too, as from that same N22, 000 ticket there is a Value added tax of N670, Sales Tax of N670, a Government surcharge of N5, 761, Airport Service Charge of N2, 000 and Terminal charge in the case of using the MMA2 of N3000 if travelling from Lagos. Simply put, the ticket charge of an average airline is N22, 000 give or take minus the charges of N12, 101 and you get about N9,899.00 then remove 25-35% fuel cost (Between N6, 000 and N7000) then add catering and for a one way ticket, the airline makes less than N5000.
Also note that these charges for a round trip are doubled like Taxes NGN1, 340: Value Added Tax (VAT), Taxes NGN 1,340: Sales Tax; Taxes NGN 11,522: Government Surcharge and Fees NGN 4,000: Airport Service Charge.
On the more fuel-efficient Boeing 737 New Generations with CFM56-7 series engine type and carrying an average of 140 passengers has average fuel consumption per hour of 1500kg/1875 litres.
However, actual consumption is also about 25 per cent higher due to operational delays, hence actual fuel consumption per hour is1875kg/ 2343.8 litres and now due to same Jet A1 price hike to N145 per litre fuel cost for an hour flight is N 145 X 2343.8 = N 339, 851
Revenue from ticket sales assuming 70 per cent load factor at N 22,000 price = 70%(98 seats) multiply 145 multiply 22,000 = N 2,156,000 million and so percentage cost of fuel to total revenue = 339,851/2,156,000 =15.8% seemingly okay for just fuel consumption but only one airline in Nigeria operates next-gen equipment.
Substract the charges on the ticket excluding charges operating from the new terminal at N9101 and the airline gets approximately N12,899 this is aside catering and any other cost that may be incurred as taxes uncaptured here
For the Mc Donnel Douglas 83 aircraft with an engine type of JT8D-217 which takes an average of 140 passengers average fuel consumption per hour – 3640kg/4550 litres and with Jet A1 price at N 145 per litre fuel cost for 1 hour flight will equal N 145 multiply 3640 = N 659, 750
While revenue from ticket sales assuming 70per cent (98 passengers) load factor at N 22,000 price = 70%X145X22000 = N 2,156,000 million. This simply means that percentage cost of fuel to total revenue equals 659, 750/2,156,000 = 30 per cent fuel cost.
This alone amounts to N12, 101 and when subtracted from the Ticket of N22, 000 the airline only has N9, 899.00 as its own and this is excluding catering.
Apart from the New Generation (NG) Boeing operated by Arik Air which keeps fuel as part of operating cost within 20 per cent others shoot above it and thus even when there is availability of fuel at the current price airlines will find it difficult to operate much more make any profit.
Now apart from fuel cost and charges, there are other operational costs the airlines have to deal with including Aircraft, Crew, Maintenance & Insurance (ACMI), ground handling charges, navigational charges and landing and parking charges, administrative expenses. There are some other hidden costs that do not appear on the airline ticket that also tend to hamper growth of airlines like the charges the Nigeria Civil Aviation Authority (NCAA) charge on renewal of licenses for cockpit and cabin crew as well as for simulators training when these crew go for it. Then there is also the widely known fact that the NCAA mandates airlines to pay its officials’ ticket fare, feeding, accommodation (In fact an all expense paid trip) outside the country to supervise the checks and the airline still pays for everything that concerns the check to NCAA.
Compared to the United Kingdom CAA, the cost for everything it does for the airline is clearly stated on their website and the UK CAA does not interfere/ charge any percentage on airlines’ fares. These charges are not stated anywhere on NCAA Website or civil aviation regulation.
All these do not involve pilots and crew salaries and allowances, in truth airlines cannot continue to pay statutory charges and these hidden arbitrary charges secretly imposed or they will continue to owe agencies and eventually fold.
Therefore when airlines say they are in dire straits, they truly are and require assistance from the Government include: waiver on customs duties (Aircraft is mobile equipment), incentives for the development of in-house maintenance capabilities, incentives for the development of training facilities (Simulators) locally and an honest harmonization of charges.
All these once achieved a 100 per cent will reduce the amount these airlines spend in foreign currency which puts deep holes in their pockets as well as cut off some aspects of the capital flight in this sub-sector of the economy.
Recall that in November 2014, a Ministerial Committee on Aeronautical Charges, headed by Mr Ahonsi Unuigbe to among other terms of reference collate all Nigerian aviation industry aeronautical and non-aeronautical charges was set up.
Other terms of reference include benchmarking of these charges with global best practices, especially with those countries with similar regional conditions and to also determine of factors responsible for the disparity between the aeronautical (including passenger) charges.
The Committee identified and called for the merging and revocation of multiple and arbitrary charges respectively imposed on airlines by aviation agencies stating that they are not helpful to the airlines’ growth.
Chairman of the committee, Mr Ahonsi Inuigbe stated that the committee discovered that there are over 50 different charges imposed by the three main Aviation Ministry agencies, which in some instances, are charged by the different agencies for the same services. This, the committee agreed, is impeding the growth of the airlines and the ability to keep track of what to and what not to pay. He gave example of the imposition of both port charges, as well as cargo charges by the Federal Airports Authority of Nigeria (FAAN) on the same cargo.
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The Chairman explained that navigational related charges such as En-route Navigational Charge and Terminal Navigational Charge; collected from airlines by the Nigerian Airspace Management Agency(NAMA)should be harmonized to into a single charge to be renamed as navigational charge.
Unuigbe also stated that the committee has recommended that Violation of Airspace Fines should be merged with violation of Air Navigation Regulations.
He said that the committee recommended the scrapping of the duplication of Contractor Registration Fees by charged contractors by NAMA, as according to him, the Nigerian Civil Aviation Authority (NCAA), also charged contractors the same fees.
On passenger ticket charges, he stated the committee discovered that the basis of some of these charges, is not known and that it is quite arbitrary.
He for instance, the committee analysed the basis of computation of passenger tickets for four domestic airlines and that the analysis shows that an amount ranging from 40 per cent to 65 per cent of the airfare is hidden as fuel surcharge.
The Ministerial Committee Chairman pointed out that the computation of this fuel surcharge is unknown to both passengers and government, adding that this cost element has been omitted by the airlines in the computation of both Value Added Tax (VAT) and Ticket Sales Charge (TSA) resulting in significant loss of revenue to the Federal Government.
According to the Committee, “There is also a prevalence of inaccurate computation of statutory charges and non-remittance of the passenger charges collected by airlines to appropriate aviation authorities.
From the tickets analysed, some airline operators deliberately charge as high as 9 per cent of Base fare as Ticket Sales Charge as against the statutory 5 per cent expected to be remitted to the government through NCAA.