Explainer: How Naira Depreciation Cuts Airlines Profits

Airlines in Nigeria are struggling with a number of challenges, including high fuel prices and a lack of foreign exchange, to buy fuel and spare parts, maintain their planes and sometimes pay for training abroad.

BusinessDay’s findings show that when airlines apply for dollars at the Investors & Exporters forex window, it takes them 6-10 weeks to get dollars, forcing some of them to buy on the parallel market or ground their planes when they can. . at N440 per dollar.

Airlines are often forced to buy a dollar at N770 to a dollar on the parallel market to ensure they don’t have planes on the ground.

For airlines that cannot afford the black market rate, they ground their aircraft due to maintenance costs or non-availability of spare parts. With fewer aircraft to carry out their operations, airlines can only operate fewer routes and limited return operations.

Airline operators say this is hurting their operations and profit margins, which are determined by the number of flights they operate.

“The more planes there are for the airline business, the merrier it is for them. If there are no more planes on the ground to meet demand, the airline will lose. No airline wants its aircraft on the ground. This will affect their profit margins because as long as the business is operating, there are bills to be paid to service providers regardless of whether the aircraft is operating,” aviation analyst Olumide Ohunayo told BusinessDay.

Ohunayo said fuel prices continue to rise uncontrollably as airlines seek forex, affecting their profit margins.

Ohunayo said funds are currently not remitted for foreign airlines, putting pressure on naira tickets on the international route.

He stressed the importance of the government solving the forex crisis in the country and mitigating the continuous increase in fuel prices.

Green Africa chief commercial officer Obi Mbanuzuo told BusinessDay that while airlines set ticket prices taking into account variables such as operating cost, level of competition, each airline’s strategy and what the market can afford, an airline will operate its own flight. loss if most of its planes are grounded due to lack of forex.

Mbanuzuo said if airlines had to pay more for maintenance and spare parts as a result of the naira depreciation, it would also affect their profit margins.

BusinessDay’s findings show that aviation fuel currently accounts for about 45 percent of operating costs; labor, 17 percent; aircraft leasing and ownership, 8.5 percent; non-aircraft leasing and ownership, 7 percent; professional services, 4.5 percent; landing fee, 2 percent; food and beverage, 1.5 percent; repair materials, 13 percent, transportation, 1.5 percent.

It was also gathered that more than 50 percent of these current expenses are incurred in dollars.

Ibrahim Mshelia, owner of West Link Airlines Nigeria and Mish Aviation Flight School, said the fall of the naira has affected the amount airlines receive in dollars to meet their obligations and ticket prices should be adjusted upwards.

“Aircraft leases are usually a percentage of the aircraft’s sale price. This is usually the default. So the rates are basically in the same range. Our problem here is not really the increase in rental rents, but the falling naira and the difficulty of dealing with the scarcity of forex,” said Mshelia.

According to him, the shortage of forex is a serious problem for the industry because everything used by airlines, from flights to crew training and retraining, is dollar-based because they are imported.

“So the high naira to dollar exchange rate and scarcity is a real problem. Parts and maintenance definitely have their share of problems.”

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BusinessDay’s findings show that airlines pay $800,000 to $1 million every 18 months for scheduled aircraft maintenance outside Nigeria.

Although maintenance costs have not increased, the airlines have seen the naira-dollar exchange rate appreciate to N750/$1 from N280 to the dollar two years ago. This means airlines will pay nearly three times what they paid for aircraft maintenance two years ago as a result of the exchange rate. It also affects the leasing and leasing of aircraft.

About three years ago, when aviation fuel was less than N100 per litre, it cost about $3,000 to operate a B737 for an hour’s flight. When jet fuel rose to N200 per litre, airlines used a B737 aircraft costing about $6,000.

BusinessDay calculations show that with the current exchange rate and increase in aviation fuel, which currently costs about N800 per litre, airlines are using the B737 at more than three times that amount.

An average fuel consumption on a Lagos-Abuja flight requires at least 8,000 liters and at N800/litre, airlines will pay N6.4 million for fuel alone, excluding taxes, staff remuneration and service charges.

This means that the airline would have to pay an average of N60,000 per passenger on a one-way flight for the airlines to realize the cost of operations on the B737, which carries an average of N200 passengers.

For airlines that charge tickets above N60,000, part of the profit is often converted into dollars and used for other operational expenses.