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Friday, March 24, 2023

Nigerian Airlines Could Hedge Against Fuel Costs as Savings Measure

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Kenya Airways’ latest moves to hedge against fuel prices as part of measures to reduce operating costs is some model Nigerian airlines can tap into.

This is because airlines in Africa’s largest economy have hiked fares and even threatened to halt operations over skyrocketing aviation fuel prices.

Kenya Airways announced last week that the board of directors of have approved a plan aimed at hedging prices for 35% of the airline’s fuel needs. This is with the view of making sure that the company which has been recording losses since 2013 reverts to profitability and starts paying dividend to its owners.

It must be noted that deprecation and fuel costs make up over 50 percent of the total operating costs of an airline.

A few weeks ago, the Nigerian Civil Aviation Authority said it might be forced to ground some airplanes over the inability of local airlines to maintain them due to the rising cost of JetA1, also called aviation fuel.

The price of aviation fuel increased from N190 to N670 per litre, according to local airlines under the aegis of Airline operators of Nigeria.

A cursory look at the 2019 audited financial statement of the only listed airline in Nigeria (Med-View Airline) will give insight into what the books of operators look like.

Med-view has negative retained earnings of N7.55 billion as at December 2019 that means it has been recording losses rather than profit throughout its existence. It is technically insolvent because its total liabilities of N19.68 billion exceeds total assets of N17.02 billion, resulting in negative shareholders’ funds of N2.67 billion.

It is noteworthy that Med-view has liquidity challenges and it is struggling to meet its short-term obligations to suppliers as total current liabilities exceed total current assets, and that led to negative net working capital of N16.62 billion as at December 2019.

It owes suppliers N17.02 billion while obligations more than one year stood at N1.80 billion.

The beleaguered airlines took their case to the National Assembly two weeks ago as they demanded operational licenses from the federal government to begin importation of fuel or Airlines in Nigeria shut down, following the recent fuel scarcity across the country.

Airpeace Chairman, Allen Onyema, warned that Airlines in the country would shut down operations over the non-availability of Aviation fuel to run their operations.

‘We have only three more days, all airlines in Nigeria will shut down. We are not threatening this country, it is a fact,” Onyema said.

“I have the mandate of all airlines to demand that Airlines begin importation of fuel, if we can buy planes worth millions of dollars, we can also import fuel ourselves. Let NNPC give Airlines licenses, we want to import ourselves,” Onyema insisted.

Airline operators in Nigeria recently alleged hijacking of the aviation fuel supply chain , thereby driving up the price through artificial scarcity.

The operators also expressed worry over the safety of airlines in Nigeria, adding that they were disturbed in the face of continuous hike in the price of aviation fuel.

The operators said this during a hearing by the House of Representatives ad hoc committee investigating the scarcity of aviation fuel.

However, the airlines may also not be totally above board in their dealings as they want the public to believe.

Nigeria’s Competition agency recently came out to accuse domestic airlines of collusion to hike prices.

The Federal Competition and Consumer Protection Commission (Commission) said it became aware that domestic airlines purportedly under the aegis of the Airline Operators of Nigeria (AON) (a trade association for domestic airlines under the Federal Competition and Consumer Protection Act, 2018 (FCCPA)) after a series of meetings decided to coordinate their conduct resulting in setting of air fares.

It said Air Peace, Azman Air and United Nigeria Airlines immediately proceeded with the increase and Arik followed suit. Aero Contractors then informed its trade partners (travel agents) and its commercial executive team by email that ticket fares were reviewed effective February 18, 2022 with the least fare being N50,000 across all routes, according to the FCCPC.

Within days, Max Air also increased fares to the same minimum N50,000. Ibom Air and Dana approximately 48 hours after what appears to be the initial coordinated conduct, also increased fares although not to the purported N50,000 minimum.

Green Africa Airlines maintained its existing fares between N33,000 and N38,650 but has progressively increased its fares rising to approximately N47,000 on its Lagos-Abuja route on Wednesday, February 23, 2022, the FCCPC said.

If the allegations by the FCCPC are true it would be disheartening for an industry that has received billions of naira in bailout funds from the Central Bank of Nigeria to collude against Nigerians.

Nigerian Airlines need to embrace global best practices and think outside the box if they want to survive.

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