As Airlines Grapple with Economic Downturn

More foreign airlines are contemplating leaving Nigeria because the economic meltdown is affecting their operations. Chinedu Eze looks at the dilemma of these airlines and how Nigerian travellers are being ripped off under the prevailing climate

The first time international airlines got wind of what the future held for them in Nigeria was when they were unable to repatriate their funds in late 2015. A major European carrier country manager miffed about the situation, which had not happened in Nigeria for so many years, hinted that the airline might stop its service to Nigeria.

That was the first impulsive action aimed at arm twisting government to release the funds; but many of them knew that Nigeria, over the years had remained their most lucrative route in Africa and whatever economic challenges they are facing now is transient.

But airlines live on their daily revenues. As the money is generated, they pay for fuel, renew their leases, pay their crew and their charges. So every route that does not justify the service in terms of revenues might be closed. But many of the airlines knew that Nigeria has a peculiar case.

In 2014, during Air Finance Conference in Johannesburg, many of the European major carriers that attended the event confirmed that their operations in Nigeria were the most profitable; from British Airways to KLM, Lufthansa to Air France and that remains a motivating factor why the aforementioned airlines are still operating the popular Lagos and Abuja routes to their hubs in Asia, Europe, US and other destinations.

Trapped Funds

The low price of crude oil in the international market lowered the income of most countries that depend on the commodity as major source of foreign exchange. This also affected Nigeria, as her case has been exacerbated by the destruction of its oil pipelines by militants, a development that has lowered its daily production from 2.2 million barrels per day (mbpd) to about 1.4mbpd.

Not being able to earn enough dollars to exchange for the revenues earned in Nigeria by the airlines, the Nigerian government had to keep the money put at $600 million as at early June and which has risen to $800 by end of July.

The airlines’ inability to repatriate their funds injured their finances and it was on the strength of this gloomy picture that prompted Iberia to leave Nigeria. The Spanish national carrier wound down its operations on May 12, 2016. The airline explained that it pulled out of Nigeria following protracted passenger drought since late last year. Also in May, 2016, the US United Airlines also left Nigeria.

Load Factor

Yes, industry experts project the passenger traffic for international destinations to be down by about 40 percent occasioned by the slowing economy, but Nigerians still travel and despite the reduction in passenger traffic, foreign airlines are still recording high load factor and generating huge revenue from Nigeria.

Now, the foreign airlines have increased their fares to offset the shortfall incurred in the trapped fund and it is predicted that by the end of this year, an Economy Class ticket for six hours ticket might cost as high as N800, 000. 00. These exorbitant fares, experts believe would further reduce the passenger traffic but airlines would maximise gains from the few that travel.

Travel expert, Ikechi Uko explained how the economic downturn is eroding air transport market and consequently shrinking the nation’s economy further.

“Actually the economy grows by the velocity of the distribution of money, goods, services and things like that. So a robust economy depends on these distributions. So when distribution is stopped it actually shrinks the economy. The biggest things the Romans did were actually to create trade routes. Every time you are conquered or occupied, the occupier or the conqueror is actually opening up a new market for his goods. So movement, transportation, travel have always been the means of growth for an economy. So for those of us in the travel business, this is bad because the less people travel a lot of businesses won’t grow,” Ikechi said.

THISDAY investigations also revealed that foreign airlines officially would say they accept Naira for payment for tickets, but they actually insist that passengers buy ticket in foreign currencies in order to avert their revenues being trapped again. For example, there was a report recently by a passenger who bought ticket on the US carrier but the ticket was later returned because it was paid for in Naira, but when accosted the airline denied it and said it sells tickets in the local currency. The act prompted the Nigeria Civil Aviation Authority (NCAA) to issue a statement directing foreign airlines to accept payment in the local currency.

So far, it is domestic carriers that operate international routes, Arik Air and Medview that collect payment for tickets in the local currency.

Foreign Carriers Rip-off

Industry observers say that Nigerians are at the mercy of foreign airlines because indigenous carriers don’t have capacity so they can’t resist the high fares until Nigerian airlines are able to compete effectively. They noted that government must have to take that up as a challenge to build national airlines that would be able to grow and effectively compete with foreign airlines.

Uko also observed: “You can’t eat your cake and have it. You can’t make an omelet without breaking an egg. So we have to decide what is strategically important for us. If it is about money, a private airline will take a decision that suits it best not basically what is good for the passenger, the passenger is not its issue. For example, why is United pulling out of Nigeria? Why is Emirates pulling out one flight? Simple logic, the Nigerian government “stole” money from them, I am putting the stole in quote. You trapped their money, $600m (now $800 million) for six months; at the end of the six months you devalue the money by 40 percent and give it back to them, so they have actually lost $240 million worth of money. So what did they do?

“They have to get the money back because it is money they legitimately earned. So you have actually robbed them of 40 percent of their income. So what did the banks do? The banks will sack staff and cut cost, airline will not sack staff, what the airline will do is reducing its cost and it increases its income. So what did Emirates do, remove one flight and increase the price of ticket on the other one to pay for the $240 million they have lost. So who pays it? The Nigerian government actually took the money from the Nigerian public because the Nigerian public is going to refund that money to the foreign airlines. So now the government is rich, they have $240m worth of naira they have taken from the airlines. The airlines are going to get the money back from the public. So in such a situation how do you now want private Nigerian carriers to make money even when foreign airlines that are big are taking such economic decisions?

“The private Nigerian carriers will only pull out their aircraft, keep it somewhere, they can’t afford to play the same games. So if the government is interested in helping its people do trade and do tourism, the government has to intervene one way or another. But now we don’t have a national carrier so what are you going to do? If Arik pulls out of Accra, Aero stops flying, Medview stops flying only AWA will fly. Is it in the interest of Nigeria that only foreign airlines serve us? So government cannot say it will not show interest in aviation,” Ikechi said.

Profitability

Foreign airlines operating in Nigerian have always maintained airfares that are higher than any other country in West and Central Africa. They make sure that Nigerian pay higher for their tickets and many of them record high load factor from season to season.

Before the economic downturn concerned Nigerians had condemned the attitude of foreign airlines to make sure that the fares they charge Nigerians are higher than any other country in the region and the fares are even higher in the business and economy class, where they make the kill from Nigerians who have a predilection for business class, not only for necessary comfort but for show of class. Except perhaps South Africa, foreign airlines record the highest load factor in their business class from the Nigerian routes in Africa.

The National Association of Nigeria Travel Agencies (NANTA) recently condemned the attitude of international airlines to charge higher fares in Nigeria when compared to other countries in Africa and said it did not understand the great disparity in fares between what the airlines offer to the Nigerian market and what they offer elsewhere in the world.

“The disparity in fares is alarming and we wonder why Nigeria should be singled out for this rip-off. We see no reason why a flight ticket from Accra, Ghana to Europe or USA on some airlines would be cheaper than from Lagos to the same destinations on the same airline. For instance, a first class ticket to Las Vegas from Lagos is N1.8 million more than a first class ticket to the same destination from Accra! Nigerian travellers are now developing Ghanaian economy. These travel agencies are making huge sales from the Nigerian travellers while most of our Nigerian agencies are folding up,” NANTA said.

Hope Rising for Nigerian Carriers

Since the slowing of Nigerian economy, which triggered off other negative indices, Nigerian carriers that operate international destinations have increased their passenger traffic.

Arik Air for example, has increased its load factor in the Lagos-New York route. An insider told THISDAY that since United Airlines exited from Nigeria the absence of about 1750 seats a weak left by United is being shared by Arik, Delta, European and Middle East carriers to the US. The Arik source said since United left its flights have been on conservatively 90 percent load factor to New York

Medview on Monday issued a statement and said that it recorded over 95 percent load factor on its Lagos-London flight with its leased Boeing 747-400 and recorded about 400 passengers on a Lagos to London flight.

Industry observers are of the view that if government could empower Nigerian carrier to build capacity and they effectively compete with foreign airlines, the high fares charged on international routes would have come down. They recalled that during the time of the defunct Nigeria Airways, it was the national carrier that was setting the fares to London and New York before it stopped flying to New York and that it was Nigeria Airways that drove out the then American airliner, Pan Am out of Lagos with competitive fares.

Such could be enacted again if the Nigerian government chose to end the exploitation of Nigerians by foreign carriers. It could empower local carriers, build capacity, create jobs and expand associated business. That is what Nigeria needs at this time.