Airlines Hike Fares on Operational Challenges and FX Scarcity

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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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