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Monday, November 30, 2020 / 02:37 PM / by CSL Research / Header Image Credit: National Daily Newspaper
According
to local print media source, Punch, the cost of air tickets along major routes
across the country have more than doubled based on recent survey carried out by
the media outlet. Prior to the recent hikes, a one-way ticket for a flight to
Abuja from Lagos on economy package would range between N20,000 and N25,000
depending on the airline. However, according to Punch's report, the same route
fare was priced at N80,000. Based on our findings via bookings on Max Air, we
observed a one-way ticket for a trip on the Lagos - Abuja route would cost
between N82,500 - N97,500 for a Tuesday flight (possibly influenced by strong
demand). However, we note that for subsequent days, the prices drop
significantly to between N39,300 - N42,250. That said, another airline
operator, Arik air offers the same ticket at a price of N35,855. Thus, while it
can be confirmed that most airlines have raised prices, the increment varies
and also reflects huge demand relative to supply depending on airlines. Based
on our own survey (across several airlines), prices have increased by c.40%.
The
increase in air ticket fares have been linked to a number of factors. According
to the Managing Director of Aero Contractors, many airlines have had to resort
to sourcing FX from the parallel market (previously sourced at the I&E
window) at an average rate of N480/US$ compared N360/US$. This expensive FX
rate feeds into many of their operating costs such as spare parts purchase,
repairs and jet fuel purchase. He also stated that the lack of FX to import
spare parts has led to limited number of planes available to fly thus
contributing to shrinking supply amidst recovering demand. Lastly, he noted
that the Federal Airport Authority of Nigeria recently increased its fees while
the VAT increase to 7.5% is also taking its toll on business. In addition, we think
many airlines who have struggled during the pandemic are having to raise prices
to stimulate quicker recovery in absolute revenue terms.
The aviation sector was one
of the worst hit sectors by the pandemic derailing the interesting prospects
posed by the sector. In 2019, the sector was the fastest growing sector in the
country, surging higher by 13.2% y/y. However, in the last Q3 2020 GDP report,
the sector contracted by a staggering 38.9%. Noteworthy to mention that the
sector also dipped by 57.4% in Q2 2020. Surprisingly, monetary and fiscal
policy makers appear not to be overly concerned with the struggles of the
sector despite its systemic importance to economic activities in the country.
However, following pressures from stakeholders as well as the legislative arm,
the Federal Government finally approved a N4.0bn bail-out fund for airlines at
the beginning of November 2020.
In our opinion, while the
aviation sector does not contribute a huge percentage to overall GDP, we note
that it has systemic importance for the conduct of trade and other economic
activities in the country. Thus, we think the FG may need to support the sector
more as it gets out of the deep recession. That said, we think growth in the
sector may remain depressed in the short to medium term as passengers remain
travel averse in light of the still rampaging pandemic while holiday trips also
remain limited given many restrictions in major holiday hubs across the globe.
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