BEVERLY HILLS, May 23, (THEWILL) – Nigeria’s aviation sector is writhing in pains at the moment due to high operating costs occasioned by the lingering foreign exchange scarcity experienced by airlines in the country. The situation is worsened by the continued depreciation of the naira, which is currently fuelling inflation and thereby shooting up the cost of operations.
Although there are moves by the government to support the sector with policies that mitigate the debilitating impact, there seems to be little effect as the nflation rate keeps rising.
Four years ago, the Central Bank of Nigeria approved a Special Secondary Market Intervention Retail Sales in the foreign exchange market for airlines operating in the country. The intervention, brokered by then Minister of State for Aviation, Senator Hadi Sirika, on behalf of the airlines, was a one-off exercise dedicated to the clearance of the backlog of matured forex obligations.
Since then, the resolution by the apex bank to intervene in the interbank foreign exchange market through forward settlement raised operators’ optimism. It was expected to engender market confidence and ultimately rub off on the aviation sector. Ironically, four years after, domestic airlines in the country are still finding it difficult to operate smoothly due to the paucity of forex, especially the US dollar.
Despite several interventions by the Federal Government, more than eight carriers operating locally seem to be groaning because they could not easily access the dollar. It becomes even more difficult, since virtually all operations, spare parts, aviation fuel known as Jet A1, are all procured in the foreign currency.
The difficulties associated with the operators’ activities are further worsened as all aircraft parts and even aviation fuel are now imported as against the local availability that used to obtain in the past.
In addition, the exchange rate has continued to increase, thus creating uncertainties while high operating costs persist. The World Bank and the International Monetary Fund have urged the Federal Government to discontinue with hedging the naira and allowing it to operate in its real value. They also advised against Nigeria’s multiple exchange rates regime, which creates room for arbitrage and other inauspicious acts.
While the government has “officially” rejected the option of floating the naira, the CBN has gradually applied a “soft” measure that points towards unifying the exchange rate windows. At present, there is the official, AFEX, SME, Wholesale, Investors and Exporters, Bureau De Change and the (blacklisted) Black market rates. The high exchange rate has forced airline operators to increase their fairs and other tariffs by over 50 percent.
Besides, operators in the industry have decried the approach adopted by the CBN in disbursing forex to beneficiary airlines. THEWILL gathered that the disbursement is done through a bidding process based on the airlines’ forex applications. Airlines that did not succeed are meant to wait for the next two weeks before the window can be opened for them again since the bidding is only done bi-weekly.
The forex scarcity has forced local airlines to resort to the parallel (black) market for Dollar, usually at a high rate, for them to continue with their businesses. As at May 20, 2021 the naira exchanged N412/US$1 on the FMDQ Securities Exchange platform where the local currency is exchanged for the I&E window, used as the real official exchange. The naira exchanged N480/US$1 in the parallel market while the rate at Bureau De Change was N482/US$1.
With the high operating costs, the airlines are forced to unilaterally increase their fares through adjustment in ticket prices. Although most stakeholders believe that the increase in fares and other tariffs has to do with the Economic principle of demand and supply, cost remains a major factor. Nonetheless, forex scarcity has equally caused most of the airlines to operate below capacity, thereby creating a huge gap in the system.
Despite the hike in ticket costs, airlines in the country have continued to struggle to remain in business, owing service providers and regulatory agencies the deductions of five percent Ticket Sales Charge (TSC) and Passenger Services Charge (PSC), just to stay afloat becomes something in vogue.
THEWILL gathered that Sirika has been in talks with the CBN over the lingering forex scarcity plaguing the airline operators, the government has not been able to satisfy all parties since it also has its own policy on prioritisation.
Apart from the bi-weekly forex allocation, the Federal Government recently disbursed the sum of N4 billion to airline operators and N1 billion to regulators and service providers to enable them subsidise the huge losses encountered on account of the COVID-19 lockdown. The “largesse” has not impacted sufficiently positively on the players with the result that passengers and other consumers of the airlines’ services are subjected to high tariffs.
Speaking on the government’s effort to ameliorate the situation, the Director-General of the Nigerian Civil Aviation Authority, Capt Musa Nuhu, said, “The minister has been fighting for the airlines since the time I worked in his office. To be honest, I can make a strong case to consider these people but we can help ourselves by supporting the MROs that the government is trying to do. That will significantly reduce the amount of forex airlines would need. If we can produce those things in Nigeria, it will reduce capital flight as well as create employment for our people. It is a double win for the country”.
Confirming the challenges facing airline operators, the Chairman of United Nigeria Airlines, Chief Obiora Okonkwo, identified scarcity of forex as a major challenge confronting Nigerian airlines. Chief Okonkwo disclosed that the CBN could not approve most of the airlines’ application for forex in the first quarter because of the scarcity.
He said, “In two weeks, CBN had not given dollars to airlines since February 2021 owing to scarcity of forex. Aircraft business is very capital intensive. The solution to the survival of airlines is access to spare parts. Aircraft spare parts are not sold here in Nigeria, they are available overseas. The aviation industry should be given all the necessary support to ensure the survival of airlines”.
Okonkwo attributed the increase in air fares to the high cost of aviation fuel. He also noted that demand for air services has increased as Nigerians opt for air transportation amid security challenges that road commuters face on the country’s highway. According to him, within two months, Jet A1 price had risen from N160 per litre to N260 per litre; a situation that operators said would definitely lead to a hike in airfares by 50 per cent.
Although the Federal Government seems to be making efforts to see that airlines have access to forex, operators still believe that more needs to be done. To that end, they have continuously canvassed for a special forex window for airline operators for easy accessing of forex.