Domestic air travel in the country may further witness a sharp price increase if airlines are to stay afloat in the coming months, a report released by Agusto & Co, foremost research agency, has sad. Already, in the last few months, air fares have jumped from N18, 000 to N30, 000 for an hour flight as a result of skyrocketing prices of aviation fuel.
According to the report, hike in aviation fuel price and exchange rate exposures would adversely affect the fortunes of airlines forcing some to hike fare or exit the industry. According to the report, some players have already begun to revise their rates upwards by as much as over 50 percent on major routes in order to safeguard their profit margins.
“In 2011, we envisage high oil prices through the year, occasioned by a prolonged civil crisis in some oil rich regions like Libya. This would translate to a hike in aviation fuel prices through import shortages and speculative hoarding. “The resultant effect would be lower margins for domestic airlines if consumers resist an increase to air fares.
The domestic aviation industry also has significant exchange rate exposure, whose adverse effects would become more evident if the Central Bank of Nigeria allows a free floating exchange rate regime. Consequently, we believe that some airlines would record losses in the short term and weaker players may exit unless domestic air fares increase significantly.”
The domestic aviation sector, according to the report, continued its five-year journey of low profit margins, which rallied at an estimated five percent. It stated: “Aviation fuel alone accounted for an estimated 40-50 percent of airlines’ operating costs in 2010. Earnings were further stunted by huge debt burdens to regulators, service providers, suppliers and financial institutions.
The largest portion of debt is passenger service charge (PSC) owed to regulators and service providers, which was restructured in 2010 to allow repayment over 3 years.” Agusto & Co added that during the year, poor infrastructure continued to be the bane of the airline industry.
“For instance, the run-down Gombe State airport was taken over by Federal Airport Authority (FAAN) in the hope of revival. The most recent short-coming is air-field lighting, which has disrupted night flights and resulted in the loss of billions of naira according to air carriers. Nevertheless, the country’s airspace was relatively safe in 2010.
According to the report, the domestic aviation industry’s performance in 2010 was characterised by competitive pricing by airlines, which was aggressive in the year, stimulating demand and leading to over-crowding at some of the nation’s few airports.
“Airlines flew new routes, increased flight frequencies, reduced catering and thus pushed feverously for profits. The nation’s airports were clad with more of the middle-class bound together by numerous sales promotions, distressingly, it appeared the airlines and support agencies were ill-prepared for the surge they had partly orchestrated, which led to increased booking errors, flight delays and cancellations.
It was in light of this that passengers sought the aid of the Consumer Protection Department (CPD) of the Nigerian Civil Aviation Authority (NCAA) in the period under review. In 2010, the CPD received over 47,000 complaints including grievances on delays and cancellations.”
Agusto & Co advised that the NCAA should vigorously pursue the enactment of its consumer protection law, which should come into effect in the short term. The agency said it expects that the law would not only penalise airlines for undue delays and cancellations but also offer compensation to affected passengers.“In our opinion, this would serve to improve efficiency in the industry particularly for airlines with aggressive cost management strategies,” it said.