Obiora Okonkwo explains economics of flying in Nigeria

…says no cartel fixing air fares

By Dickson Omobola

One of the major taking points in the country’s air transport sector is domestic air fares. Consistently, domestic travellers have complained about it and called for relief. To this end, Spokesperson for the Airline Operators of Nigeria, AON, Professor Obiora Okonkwo, at a Webinar themed: ‘AVIATION TOWN HALL: High Air Fares – Are Airlines Really the Problem?,’ organised by Avaero Capital Partners and aviation expert, Alex Nwuba, Thursday, addressed the issue and other misconceptions.

Obiora, who is the Chairman of United Nigeria Airlines, at the virtual meeting, discussed reasons air fares are increasing despite access to dry-lease aircraft and why it is difficult for passengers to make long-term bookings, among other issues. Excerpts:

What contributes to the cost of air fares in Nigeria?

The cost of operation that applies in Nigeria is similar to the cost of operation that applies in other parts of the world, which include jet fuel and maintenance, among others. If you have your aircraft maintained as per cycles and calendar, these are strictly OEM-driven.

There is no maintenance system designed specifically for Nigerian operators. These things remain constant and are very expensive. We still maintain that fares in Nigeria are largely due to the cost of operation, including multiple charges and high interest rates. Airfares cannot be adjusted simply because of citizens’ low income. I have come across arguments that some citizens earn below N100,000 per month and that for such people, it would take them the rest of their lives to save and buy an air ticket.

While it is really unfortunate, we cannot do anything about salaries. We would wish that fares would drop lower because that individual cost you pay for your ticket is not what I see in my own inventory as an operator. At the end of the day, we use yield management, where you also factor in the cost of empty seats, which is a disposable kind of product in aviation. If you do not work it out properly, then you are not doing your mathematics and economics properly.

As long as operational costs remain high and interest rates remain high, air fares in Nigeria will continue to be high. However, comparatively, we fly as much as many people do in most parts of the world. I still think that, even with what we go through, and because we are very sensitive to the cost of living in Nigeria, we do as much as possible to reduce costs and not go overboard with fares. We just pray there will be no additional factor that would cause a spike.

It is expensive to procure equipment. If you go to a bank to borrow about N100 billion at a favourable interest rate of 30 per cent, it could even be more. We are talking about flat interest; interest on N100 billion is a minimum of N30 billion. When you spread N30 billion per year, it is about N2.5 billion per month. These things add up, and you have to bring them into the cost of operation. The good thing that has happened to the aviation industry is that it is deregulated. So you have to choose your costs based on your operational expenses and then leave the choice to the traveller to buy or not to buy.

Why are fares still increasing despite some of the progress made in the sector, particularly in acquiring dry-lease aircraft?

We appreciate what government is doing and we do not take it for granted. However, there are a few facts to be clarified here. There has been a lot of work to remove obstacles for operators to access dry leases. While we appreciate the minister, let us have it on record that so far, we only have one single aircraft on dry lease, which has been with Air Peace. That aircraft was dry-leased about a month or two ago. Therefore, that would not have had the expected effect. We are expecting that more dry-leased aircraft will come because it takes time. When these obstacles are removed, we still have to wait in a queue for lessors to release aircraft to us. When they eventually arrive, they will obviously reduce our operational costs and travellers will definitely enjoy the benefits.

On Christmas fares

We dwell so much on Christmas. In every part of the world, there are seasonal fares. These seasonal fares are not only in aviation, but also in hotels. It might interest passengers to know that when that season comes, some people operate only seasonally. If you go to some holiday resorts, the restaurants are open in summer, and in summer they make the money to pay their rent in winter because in winter they are closed.

However, for operators and air tickets in December, you have talked about the regular season fare of N150,000. The average cost of the fares we are talking about is about N300,000 in December. When you fly a 180-capacity aircraft to Enugu or Anambra and you return with two passengers on that 180-capacity aircraft, and you have to spread the cost per seat, you are actually still at less than N150,000 on the return ticket, if we agree that airfares are calculated by available seats. I don’t think any airline averages a yield of more than N150,000, no matter how much you sell your individual ticket.

The issue of operational costs existed before Christmas. Our interest in taxes and levies has been there for the past two to three years; it goes beyond the Christmas season. From December 1 to December 31, United Nigeria was billed N1.5 billion by the Nigerian Civil Aviation Authority, NCAA, alone. How much do I retain in my coffers? That is NCAA alone.

These are the things we are talking about: less going to the operators and more going to the government. The statistics about airlines contributing less than N2 billion to the Gross Domestic Product, GDP, are correct, but other sectors that contribute more to the GDP are enabled by airline operations. Aviation remains a catalyst. Without airline operations, the oil sector, which contributes over 80 to 90 per cent, will not function. The body I represent covers not only passenger operators but also helicopter services that support the oil industry. So if we are talking about attention and dedication to this sector, it can never be enough.

Its importance has not been properly realised. By and large, I still maintain that the airfare we charge are among the cheapest in the world, despite the fact that our operational costs, levies and taxes are among the highest in the world. This is simply because we are very sensitive to purchasing power. We agree that commercial benefit depends on how many tickets are sold, the passenger load. We think that if prices are reasonable, we will be able to achieve better yields.

Long-term ticket purchase

We have long-term ticket purchases. In the same aircraft during Christmas, there were people whose fares were only about 20 per cent of the maximum ticket price. Note that we also have progressive pricing, which is system-controlled and computer-generated. There are people who bought their tickets earlier, maybe when capacity was around 10 to 15 per cent.

They paid N100,000 or N150,000. Then it progressed to N200,000 and N250,000. For the record, this inventory is permanent on the airline operator’s system. We have this inventory from January to December, and the NCAA can attest to that.

Before you charge, you must file your inventory with the NCAA. I know for United Nigeria, we have not filed new inventory for the last six or seven months. But if in March or February we are able to reach 100 per cent capacity, you will see tickets also at N400,000 or N250,000. Why it becomes so rampant during Christmas is that some destinations reach 100 per cent capacity. When it gets to that level, you only have about 10 to 15 per cent of the highest-priced tickets left. Today, we are talking about Christmas and February.

Most people may not know that from February, we practically fly empty because the market is low. The other option is that we fly at a loss. I have checked my capacity today; some routes are averaging below 50 per cent. As experts in the industry, we know that even with 75 to 80 per cent passenger load, we are still losing money. So we go on to lose money for the next one month. In other parts of the world, airlines ground their aircraft and only those that have the financial muscle to bleed and sustain the loss continue to fly. My economy for March and February must be factored into my annual calculation. You have financial obligations to banks, and you must present business plans and financial projections before borrowing money. So we need more understanding of how this works. We do not even have the opportunity to form a cartel and fix prices.

Nigerians have options. They can travel by road or decide not to travel at all. Some people cannot even afford to travel. I know relatives who did not come home for Christmas because they could not afford road transport. I think that if roads improve, it will affect passenger load. But America has the largest aviation market in the world, contributing about $1.3 trillion to GDP, yet it also has the best road network and alternative transport systems.

Despite that, America still has the highest domestic aviation activity. The biggest American airlines are domestic carriers. By and large, these things are not rocket science. There will always be people who prefer to travel by road and others who prefer to fly. We are offering a service. We are not against government or travellers. We also make a lot of sacrifices.

Why can passengers not buy tickets early?

Airlines may not open their portals early, not because they do not want to, but because of regulatory requirements. By rule, you cannot offer inventory for aircraft that is not in your possession. For instance, if United Nigeria is waiting for an Aircraft, Crew, Maintenance and Insurance, ACMI, aircraft to operate routes in December, and that aircraft arrives in Nigeria in mid-November, until it is inspected and approved by the NCAA, we cannot sell tickets for it.

That is the reason. Unlike in some countries, we do not have the luxury of keeping aircraft all year round. We bring in ACMI aircraft for specific seasons and return them at the end of March. Most operators do this. You cannot offer what you do not have, otherwise you violate NCAA rules. People sometimes sit back and design business models for airlines without understanding these realities. If United Nigeria does not have a flight on a certain day, and Air Peace is operating, they may be using an E2 aircraft with 100 seats, while I have an A320 with 70 seats.

The combined demand may already exceed capacity. There are many factors involved, and more education will help people understand them. Because people do not know these things, they blame the airlines. It is not fair to say airlines block portals to make money. Airlines are free to offer tickets and passengers are free to buy them. Prices are progressive.

If you buy at 10 to 15 per cent capacity, you get lower fares. At 80 to 90 per cent capacity, you get higher fares. Sometimes you check in March for December and see only the maximum fare. You do not see the backend. It may be that others already bought up to 90 per cent of the inventory. At that point, you are left with the highest-priced tickets.

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