Local airlines groan under low pricing regime

Delta Airlines

• Revenue dips by 50 per cent
• Delta Airline takes over U.S. route from Arik
• FirstNation scales down operations

The current low pricing strategy and the attendant low cost of local air travel in the country may be attracting new passengers to airlines, but fast lowering the chances of struggling aircraft in the face of dire financial straits.

Whereas the steady drop in the economic power of the naira to the United States dollar over the years has not helped local operators and investors, the seeming under-pricing approach now accounts for about 50 per cent fall in revenue of some airlines.

Experts have, however, blamed the development on the desperation of some stronger operators to beat co-competitors to the market. They warned that such an unhealthy competition strategy, if not checked by the Nigerian Civil Aviation Authority (NCAA), will make it more difficult for airlines to meet financial obligations, compromise safety standards and hasten the collapse of struggling airlines.

Specifically, the average cost of an economy class ticket for about an hour trip now ranges from N10,000 to N25,000 depending on the airline, time of purchase and route.

For instance, the high traffic Lagos-Abuja route costs about N25,000 across local airlines. Arik Air recently ran a promotion of N16,000 tickets on some routes. Air Peace also opened the Lagos-Akure-Lagos route at N10,000 per seat on a one-way trip.

When benchmarked in dollar – the universal currency of air travel business – the rates amount to between $33 and $82. A journey into 1994 showed that a one-way one-hour trip on Lagos-Abuja or Lagos-Kano cost N2, 200 at an exchange rate of N22, amounting to $100 per ticket.

By implication, the current low pricing has drastically reduced ticket costs when compared to the price of $100 per ticket offered some 23 years ago.

Meanwhile, the current operational costs, compared to the 90s, have been on the increase in an industry that is dollar-denominated despite selling in naira.

Except for the salaries of local personnel, taxes and charges that are paid in naira, others like expatriates, aviation fuel (40 per cent of operational cost), aircraft maintenance, debt servicing and training of personnel are all paid for in a foreign currency.

So, how are the airlines coping with the gross shortfall in revenue vis-à-vis running costs? A chief operating officer of one of the airlines confided in The Guardian that the widening margin between revenue and operational cost was a reason for airlines’ indebtedness.

He explained thus: “Ticket pricing is largely liberalised and determined by market forces. I want to increase my price to cover operational cost, other operators will say no because there is recession. Yet, it is a competitive market where you cannot afford to lose patronage. What do you do? You tag along despite having to lose between 50 and 60 per cent of operational cost at the end of the day. That is why some airlines are owing salaries, unable to keep aircraft in operation and seriously indebted.”

The Chief Executive Officer of Arik Air, Capt. Roy Ilegbodu, however, said charges of an airline were based on cost and business model, noting that several elements dictate ticket pricing. He listed them to include capacity of an airline, route, type of aircraft and number of flying hours daily among others.

To the President of Sabre Network West Africa, Gbenga Olowo, the fluctuations in exchange rate in the last 40 years had greatly affected the aviation sector.  He recalled that in the early 1970s, the exchange rate was N4 to a dollar.

According to the Chairman of Nigerian Aviation Safety Initiative (NASI), Capt. Rwang Pam, the Ministry of Aviation FMA and the NCAA must be alive to their regulatory duties and economic auditing of the airlines.

In the meantime, Delta Airlines has confirmed the takeover from Arik of the Lagos-New York route that terminates at John F. Kennedy Airport in the United States.

Consequently, the company yesterday launched thrice-weekly direct flights from Lagos to New York effective from March 25, 2018.

Delta’s Commercial Director for Africa, the Middle East and India, Jimmy Eichelgruen, expressed pleasure at the development, saying Nigeria remains the airline’s important market.

However, FirstNation yesterday scaled down its scheduled operations to charter services over low capacity.

The Guardian learnt that the airline had for over nine months run commercial operations using an aircraft, while the second remained grounded at the Murtala Muhammed Airport II (MMA II) terminal in Lagos.

In this respect, the NCAA has scaled down the company’s Certificate of Airworthiness to charter services. The development has further thinned the commercial operations sector with the attendant adverse effects on revenue and jobs.

Also, the American Federal Aviation Administration (FAA) yesterday commenced the re-assessment of the aviation industry to ascertain its level of compliance with international best practices.

The Director-General of NCAA, Capt. Muhtar Usman, told newsmen in Lagos that the new status of the airline would remain until it retools.