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Airlines Hike Fares on Operational Challenges and FX Scarcity

Nov 30, 2020   •   by   •   Source: Proshare   •   eye-icon 1289 views

Monday, November 30, 2020 / 02:37 PM / by CSL Research / Header Image Credit: National Daily Newspaper

 

Accordingto local print media source, Punch, the cost of air tickets along major routesacross the country have more than doubled based on recent survey carried out bythe media outlet. Prior to the recent hikes, a one-way ticket for a flight toAbuja from Lagos on economy package would range between N20,000 and N25,000depending on the airline. However, according to Punch's report, the same routefare was priced at N80,000. Based on our findings via bookings on Max Air, weobserved a one-way ticket for a trip on the Lagos - Abuja route would costbetween N82,500 - N97,500 for a Tuesday flight (possibly influenced by strongdemand). However, we note that for subsequent days, the prices dropsignificantly to between N39,300 - N42,250. That said, another airlineoperator, Arik air offers the same ticket at a price of N35,855. Thus, while itcan be confirmed that most airlines have raised prices, the increment variesand also reflects huge demand relative to supply depending on airlines. Basedon our own survey (across several airlines), prices have increased by c.40%.

 

Theincrease in air ticket fares have been linked to a number of factors. Accordingto the Managing Director of Aero Contractors, many airlines have had to resortto sourcing FX from the parallel market (previously sourced at the I&Ewindow) at an average rate of N480/US$ compared N360/US$. This expensive FXrate 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 importspare parts has led to limited number of planes available to fly thuscontributing to shrinking supply amidst recovering demand. Lastly, he notedthat the Federal Airport Authority of Nigeria recently increased its fees whilethe VAT increase to 7.5% is also taking its toll on business. In addition, we thinkmany airlines who have struggled during the pandemic are having to raise pricesto stimulate quicker recovery in absolute revenue terms.

 

The aviation sector was oneof the worst hit sectors by the pandemic derailing the interesting prospectsposed by the sector. In 2019, the sector was the fastest growing sector in thecountry, 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 thesector also dipped by 57.4% in Q2 2020. Surprisingly, monetary and fiscalpolicy makers appear not to be overly concerned with the struggles of thesector 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 atthe beginning of November 2020.

 

In our opinion, while theaviation sector does not contribute a huge percentage to overall GDP, we notethat it has systemic importance for the conduct of trade and other economicactivities in the country. Thus, we think the FG may need to support the sectormore as it gets out of the deep recession. That said, we think growth in thesector may remain depressed in the short to medium term as passengers remaintravel averse in light of the still rampaging pandemic while holiday trips alsoremain limited given many restrictions in major holiday hubs across the globe.

 


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 Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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