Huge cost profile makes Nigerian airlines high risk business

 

 By  John Osadolor (BusinessDay Newspaper)

A cocktail of high costs and charges is making airline operations in Nigeria a risky business and there appears to be no hope of a reprieve in sight, a recent review of the industry by Accenture, seen by BusinessDay shows.

The exorbitant cost of aviation fuel and  airport charges, as well as  lack of maintenance facilities, are listed by the global consulting firm, as causing the poor performance of airlines operating in the Nigerian aviation sector.The review brings into relief a sector in long term coma, with airlines nearly permanently in debt, with depleting fleets and unable to meet the high expectations of travellers, due to low or zero  profitability and debilitating funding regime.

Intervention funds by the Central Bank of Nigeria (CBN) have only helped to reduce a huge debt overhang by some of the airlines and government continues to mull plans to buy 30 new aircraft for the airlines in a rescue operation.

A copy of a review of airlines and aviation in Nigeria conducted by Accenture, indicates that aviation fuel accounts for 40 percent of the cost of operations of local airlines, while the global average is 29 percent.

The report also indicated that “within a 12-month period (from September 2010 to September 2011) aviation fuel prices rose by over 88 percent (from N80 per litre to over N150 per litre). Compared to other countries, aviation fuel is almost exclusively imported in Nigeria”.

In 2000, the report said, aviation fuel accounted for 15 percent of airlines’ costs.

It noted that maintenance, repairs and overhaul (MRO) services accounted for between 18 and 22 percent of airlines’ costs in Nigeria, compared with the global average of 12 percent. Due to this development, domestic airlines spend over $1.2 billion annually on overseas checks, as Nigeria does not have any major maintenance facility.

“Major airline operational hubs in the world have well developed airports; they have well developed maintenance, repair and overhaul facilities and the technical expertise to carry out major checks on aircraft. In most cases, MRO facility is a key requirement for having a successful hub. In Africa, countries like South Africa, Egypt, Morocco and Ethiopia have successful MRO facilities, as well as airports that operate as hubs”, Accenture said in the review.

According to the report, airport charges in Nigeria are 35 – 40 percent higher than average airport charges in other African countries, and these high charges are mainly due to absence of other revenue streams and high dependence on airside and passenger charges.

An aviation analyst told BusinessDay that these high costs could rob Nigeria of becoming a hub in West Africa, as it is cheaper to do airline business in Ghana.

Airline operators and other stakeholders have over time complained about the high cost of operations, singling out aviation fuel, airport charges, and maintenance, as major cost centres.

In a recent interview, some aircraft maintenance engineers, claimed that lack of MRO facilities had cost the operators and the government over $150 billion since the national  hangar project  was muted about  two decades ago.

According to aviation experts, a Comprehensive (C) Check on B737 Classic in Europe, the United States or in Cairo, Egypt; Addis Ababa, Ethiopia costs $1 million. Next Generation aircraft such as the B737-700/800, attract as much as $2 million for maintenance.

While alluding to the huge sums spent by airlines on fuel,  Arik Air chairman, Joseph Arumemi-Johnson Ikhide,   speaking during  a recent visit of General Electric officials to his company, disclosed that with 126 flights daily, the airline needs about 500, 000 litres of aviation fuel a day to power its flights.

“Unfortunately, some marketers even deny us fuel. They can’t even supply us what we want and we have to adjust our flights. For instance, we need 500,000 litres a-day but the marketers can’t supply that because it is scarce, we need about 3.5 million litres in a week”, he said.

“I am not blaming or absolving the marketers, but the Nigerian situation has made airline operations in the country a difficult and expensive one. If action is not taken by necessary government or private quarters, we may soon be left with one domestic airline”, said a concerned stakeholder.

Airline operators, under the aegis of the Airline Operators of Nigeria (AON) recently said the only condition for them to reduce  air fares would be regular supply and reduction in the price of aviation fuel, also known as JET A1.