As Aviation Fuel Crisis Escalates Cost of Flight Operations

aviation - July 8, 2022

Flight operations in Nigeria have become precarious as airlines face abrupt disruption of flights due to scarcity and high prices of aviation fuel, which may impair profitability, writes Chinedu Eze

After series of lamentation and protests against spiraling increase in the price of aviation fuel since February 2022, when the price of the product jumped from N180 per litre to N400 per litre till currently when it hovers around N700 per litre, Nigerian airlines have struggled to maintain flight operations despite the odds.

But theirs is a precarious existence with lurking fear that the price of the product might soar beyond their affordability, as it has been projected that without any intervention, it could rise to N1000 per liter in due time, and they would be forced to ground their operations.

The airlines have acknowledged that the current price of aviation fuel is not sustainable because airlines are not making profits in their operation, so it is just a matter of time that some of them would begin to shut down, after they have exhausted all the creative ways to maintain safe flight service.

Control

There are indications that the federal government, the Nigerian National Petroleum Corporation (NNPC) and the airlines are in a quagmire when it comes to the supply of petroleum products. Nigeria, a major oil producer is not refining crude oil, the refineries have been in comatose for years and government has woefully failed to rehabilitate them. So Nigeria, which is oil producer, is importer of refined product.

Since the war between Russia and Ukraine, the price of crude has increased due to limited supply and high demand. Nigeria could not meet its quota of supply due to the fact that it is not producing enough for the international market and in the miasma of crude supply and refined fuel import; Nigeria has lost out because it is not enjoying any advantage in the matrix of crude export and fuel import and therefore has lost the control of the price of refined product, which is now determined by international crude oil price and market demand, as the product is deregulated.

NBS Report

Recently the National Bureau of Statistics (NBS) disclosed that Nigeria spent N292.56 billion in the importation of aviation fuel in the first three months of the year – January to March 2022.

NBS in its Foreign Trade Statistics Report for First Quarter of 2022, aviation fuel, referred to as ‘kerosine type jet fuel’ accounted for 4.96 per cent of Nigeria’s total import of N5.9 trillion, with the commodity ranking the second most imported commodity in the country in the first quarter.

According to the NBS report, aviation fuel import in the first quarter of 2022 represented a significant increase of 287.29 per cent compared to the N75.54 billion spent on its import in the fourth quarter of 2021.

In the fourth quarter of 2021, the NBS disclosed that jet fuel import was the sixth most imported commodity, accounting for 1.27 per cent of the period’s total import figure of N5.94 trillion.

In the first quarter of 2021, there was no mention of jet fuel import in the foreign trade statistics of the NBS, despite the country recording total imports of N6.85 trillion for the period.

Furthermore, the NBS reported that the most notable import item in the period was Premium Motor Spirit (PMS), also known as petrol, which gulped N1.67 trillion of Nigeria’s import bill.

The first quarter 2022, fuel import figure, according to the NBS, represented an increase of 15.97 per cent and 142.73 per cent when compared to N1.44 trillion and N687.74 billion spent on the import of the same commodity in the fourth quarter of 2021 and first quarter of 2021, respectively.

The NBS said: “The value of total imports in first quarter 2022 stood at N5.90 trillion, this decreased by 0.67 per cent when compared with the value recorded in the fourth quarter of 2021 (N5.94 trillion); but increased by 21.04 per cent compared to the value recorded in the corresponding quarter of 2021, which is N4.875 trillion.

“In terms of Imports, in the first quarter of 2022, China, The Netherlands, Belgium, India and the United States were the top five countries of origin of imports to Nigeria. The values of imports from the top five countries amounted to N3.44 trillion representing a share of 58.34 per cent of the total value of imports. The commodity groups with the largest values among the top imported products were ‘Motor Spirit ordinary’ – N1.507 trillion), ‘Kerosene type jet fuel’ – N292.56 billion, and ‘Durum wheat (not in seeds)’ – N258.31 billion.”

Sustaining Operation

One of the major challenges faced by airlines is that the price of the key component of their operation, aviation fuel, is not steady, leading to increases on hourly basis, which could make the product to become scarce at any time, if not all over the country but at some airports, since the prices change from one state to another.

Head of Communication of Dana Air, Kingsley Ezenwa, told THISDAY that airlines are facing a serious challenge in their efforts to sustain their flight service and meet the demand of their customers and at the same time ensure they operate safely in tandem with international standard and recommended practices.

Ezenwa said the unpredictability of the price of aviation fuel, which could change at any time, makes it impossible for airlines to plan long-term. In order to cut cost, airlines have to review the profitability of the routes they operate, the load factor and the cost of operating to that destination. So airlines are in constant review of their schedule to ensure that every opportunity is maximised.

THISDAY also learnt that airlines have to do away with operating routes that cannot guarantee high load factor; so flights are stopped to certain destinations and airlines have to shrink their services to reduce their cost of operation.

“So what airlines are doing is that any route that is not yielding the expected result in terms of profitability they don’t fly. So airlines have to do their analysis well. The days that they don’t have good load they don’t operate on those days.

“Every week we do analysis and work at the possibilities. You look at the routes that can guarantee you high passenger load. But for us, our load factor has been good. We have built goodwill and consistency that make us a very reliable airline. We plan well so we have not had the cause to readjust our flight schedule,” Ezenwa said.

He however lamented that whatever the airline earns, high cost of fuel takes it away and you can’t make projection for tomorrow because you cannot tell what the cost would be. The price of aviation fuel can increase at any time.

“There is no reason for planning; there is no stability, so you plan with what you see on daily basis. You can’t really plan well under this system. But as it is now we are still hoping that government would step in and save the airlines; because if things continue like this some airlines will be forced to close shop. You look at your business model and review your operations. There is a limit airlines can endure. It is true that airlines don’t want to downsize, but if things continue to be difficult, downsizing will become inevitable,” he said.

Reviewing Cost

The Managing Director of Flights and Logistics Solutions Limited, Amos Akpan, told THISDAY that aviation fuel has become the highest component cost of flight operation and airlines wont have any other choice than to pass the high cost to the consumers.

He said that the consequence would be that people would travel only when they must and there would be more virtual engagements than physical meetings in the business circles, as virtual interface continues to increase since after the COVID-19 lockdown.

“You can only travel when you have to, when it is compulsory. So the high cost of aviation fuel has reduced the number of people that travel by air and has increased virtual meetings. The most reliable fight is first flight of any airline. Airlines don’t have a choice but to keep their aircraft in the air. Aircraft is serviceable equipment; so you have to find a way to use it and in terms of cost, airlines are not making profit now. They are just keeping afloat. What is good for Air Peace is that it is operating international destinations. Regional destination is not profitable. It is costlier for Nigerian airline to operate regional than to operate domestic service,” Akpan said.

He added that in order to adjust to the new reality of cost of operation, airlines have to do a lot to sustain their service and this include to reduce the number of flights; that is, their capacity they are offering to travellers, reducing services on board like offering refreshments, noting that some airlines have stopped offering that. The final action, he said, would be retrenchment.

“Staff retrenchment is always the last because the danger of reducing staff is because airline business is a technical job that deals with skilled personnel, marshallers, engineers, pilots; except the service you are rendering gets so lean you trim the personnel to fit the service. But all these will happen if the price of aviation fuel continues to increase. But after cutting staff, you should be ready for extinction,” he said.

Price Determinants

THISDAY spoke to the Managing Director of CleanServe Energy Limited, Chris Ndulue, who expressed the fear that the price of the product would continue to soar, as long as there is increase in the price of crude in the international market and Nigeria is still importing the product.

“Marketers are spending more money importing refined fuel products and as long as there is demand of aviation fuel, they will continue to import but the price may rise to N1000 per litre or even more. This is affecting airlines but as long as airlines are operating there will be demand of the product but what the airlines will do is to scale down their operations and, of course, they will pass the prices to their customers,” Ndulue who is former Managing Director of Arik Air, said.

He explained that the solution to the high price of aviation fuel would be local refining, which would take time before it would be realised, noting that the price of crude is high, the exchange rate is high in addition to other logistics, including shipping cost and disruptions.

“Those importing these products are not making huge profits. The prices are high and they continue to change. The landing cost presently is over N600 per litre. The price may eventually rice to N1000; but if landing cost could be lower; if the importer could get dollars at official CBN rate, the cost could come down,” Ndulue told THISDAY.

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