December 29, 2023/Coronation Research
The national accounts for Q3 ‘23 show that air transport grew by 4.37% y/y and accounted for 13.8% of total transport GDP. Over the past eight quarters, the segment grew by an average of 24.6%. This was the slowest growing segment within transportation in Q3 ’23, following rail (18.2% y/y) and water (7.27% y/y).
The persisting challenges faced by airline operators have been exacerbated in recent times. Especially given recent fx depreciations as airlines often need to pay for international expenses in USD. Exchange rate fluctuations affect profitability. Additionally, there are limits to the cost that can be passed on to consumers, given that inflationary pressure continuously weighs heavy on consumer pockets.
Jet A1 fuel is one of the most significant operating expenses for airlines. The price of Jet A1 (aviation fuel) is largely dependent on movements in global oil prices. In Q3, average oil price remained above USD80/b, mainly due to the extension of production cuts by OPEC + members till end-2023. However, we note that in December, oil prices moderated to USD79/b. Although the price of Jet A1 has recorded a decline from c.N700/L in 2022 to c.N653.5/L (as at 22 December ’23). To offset the increased fuel costs, airlines have been forced to increase ticket prices.
Based on data from the NBS “Transport Fare Watch” series, the average airfare for select routes (one-way) increased by 7.62% y/y to N78,778 in October ’23. On a zonal basis, South-South recorded the highest average airfare (N81,500) for select routes (one-way) in October ‘23, followed by North-East (N81,300), North-West (N79,557), South-West (N79,006), South-East (N78,350), and North- Central (N73,564).
In recent weeks, our channel checks show that domestic air tickets have generally risen by over 100% for select routes. Major domestic airlines have pegged their minimum base fare at N120,000 (one-way ticket) and for some routes, at N300,000 (return ticket). In response to the soaring airfares, anecdotal evidence suggests that Nigerians are increasingly turning to alternative transport modes such as road travel or even reconsidering the timing of their trips to take advantage of lower-priced tickets during off-peak periods. Road travel, in particular, has gained favor due to its relatively lower cost and flexibility.
The current surge in ticket prices coincides with the festive season when many Nigerians typically travel. The price hikes have prompted travelers to reassess their holiday plans and seek alternative ways to celebrate without breaking the bank.
The issues surrounding currency depreciation, fx sourcing constraints, and delayed fund repatriation have collectively driven foreign airline carriers to reconsider their presence in the Nigerian market. The potential resumption of operations by Emirates, currently under discussion with the FGN, serves as a beacon of hope and underscores the importance of constructive dialogue and collaborative efforts in resolving these pressing issues within the aviation sector.
As at December ’23, the International Air Transport Association (IATA) listed Nigeria in the top four markets with foreign airlines’ blocked funds. Nigeria owes c.USD792m; Egypt – USD348m; Algeria – USD199m and Ethiopia- USD128m. Africa remains the largest market for passenger flows to and from Nigeria (73.3% of the total), followed by Europe (10.7%) and the Middle East (6.7%).
From our vantage point, improving the country’s aviation sector requires deliberate efforts. Some recommendations include initiatives to regulate ticket
prices and reduce travel costs are essential. This will make air travel more accessible to a broader segment of the population, boosting domestic tourism and business travel. Ensuring stringent safety standards and effective maintenance procedures is paramount. The FGN should focus on maintaining a fleet of well-maintained aircraft to improve safety records and rebuild passenger trust.
To position Nigeria as a regional aviation hub, strategies such as offering incentives to international airlines to operate routes through Nigerian airports
should be considered. This can stimulate competition and drive down fares. These incentives may include reduced landing fees, tax breaks, or marketing support. Furthermore, streamlining regulatory processes and reducing bureaucracy will attract foreign carriers and encourage domestic airlines to expand their regional networks. Additionally, modernizing air traffic control systems and navigation infrastructure is crucial. This will enhance safety, reduce flight delays, and increase the overall efficiency of international travel.
Indeed, establishing a robust national carrier with a global reach is essential. Such an airline can represent Nigeria internationally and bolster the country’s reputation in the global aviation community. The national carrier (Nigeria Air) was initially scheduled to commence operations on May 29, 2023. However, this was delayed due to challenges in obtaining the Air Operator’s Certificate.
In August 2023, Ethiopian Airlines, the parent company of Nigeria Air, announced a revised plan for operations to begin in October 2023, Nevertheless, the current status of the project remains uncertain. The House of Representatives recently revealed plans to conduct a forensic audit of the national carrier project.
The steady price spikes in airline tickets pose challenges for frequent fliers, impacting their travel frequency and loyalty to airlines. To address these challenges, airlines should enhance loyalty programs, improve fare transparency, and explore innovative pricing models. Government interventions may also be necessary. For instance, regulating ticket pricing, especially for essential routes. Price caps or subsidies on certain routes can ensure that air travel remains affordable.
Airlines should consider introducing subscription-based models, similar to Netflix or Amazon Prime, this can provide frequent fliers with more predictable and cost-effective travel options. Subscribers could receive a certain number of flights per month or year at a fixed rate.
The ticket price fluctuations have broader implications, contributing to inflation, influencing consumer patterns and behavior, and affecting the sustainability of Nigeria’s aviation industry. It is imperative for stakeholders, including airlines, regulators, and policymakers, to work collaboratively to find balanced solutions that support the aviation sector’s growth while ensuring affordable and accessible air travel for all.
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