Airline industry bruised by fx challenges

According to the World Bank, Africa accounts for 12% of the global population but contributes less than 1% to the global air service market. Given Nigeria’s current macro challenges, air passenger traffic has suffered. The national accounts provided by the National Bureau of Statistics (NBS) show that air transport contributed 8% to transportation in Q1 and grew by only 2.2% y/y in the same quarter. This compares with a growth of 6.2% y/y in Q1 2015. The general moderation in traffic is a reflection of the slowdown in consumers’ purchasing power and therefore the broader economy.
In addition to the squeezed pockets of consumers, fx challenges are weighing on the sector as the importation of aviation fuel has slowed down. The fx available is channelled towards importing PMS (gasoline) which is regarded as priority.

Our channel checks reveal that aviation fuel is sold at as high as N280 per litre (compared with N165 per litre a year ago). In order to maintain profit margins, marketers sell it at a higher price to airlines.

This has led to delays and in some cases cancellation of domestic flights, putting a strain on corporate Nigeria as many businesses require frequent air travel, particularly on the Lagos-Abuja as well Lagos-Port Harcourt routes.

Scarcity of aviation fuel is not the only challenge created by fx sourcing issues. The inability of airlines to repatriate their funds has also plagued the sector.
Anecdotal evidence show that foreign airlines have increased their fares to make up for their trapped funds. Industry sources predict that by December, an Economy Class ticket for a six-hour trip could cost as high as N800, 000 (US$2,500).

The International Air Transport Association (IATA) estimated a few months ago that no less than US$600m belonging to foreign airlines was trapped in Nigeria.

However, following the announcement of the new fx regime, the CBN made forward sales of about US$4.0bn to clear the backlog accumulated of which airline operators were included.

The economy is yet to respond to any of the fiscal stimulus. In the meantime, households will continue to revise their spending patterns to reflect the new realities. Expenses will be geared towards ‘priority’ items; as such demand for international travel in particular is likely to continue to soften.

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