By Chinelo Obogo [email protected]
Recently, the National Association of Nigeria Travel Agencies (NANTA) appealed to the Central Bank of Nigeria to release over $450million trapped funds belonging to foreign airlines operating in the country. The association’s president, Mrs. Susan Akporiaye, said that as at May, 2022, the funds are estimated at over $450 million and that this reduces investor confidence in Nigeria.
She said the current situation presents real threat to the industry and the continuity of travel business as operators are worried foreign airlines may resort to taking out lower inventory in the system which may high cost of tickets in the Nigerian market.
At the 78th Annual General Meeting (AGM) of the International Air Transport Association (IATA) and World Air Transport Summit (WATS) which took place recently in Doha, Qatar, the Director General of the aviation body, Willie Walsh, echoed the same sentiment.
In an interview with aviation reporters from Nigeria, Walsh said that so far, over $1 billion belonging to foreign airlines have been blocked by 12 African countries, warning that such deveopments have consequences to make airlines would focus on markets that show more prospects which could affect the aviation sectors of the countries.
Over $1bn blocked by 12 African countries
We are all the time looking to get these funds out because it does have impact on the recovery of the market and airlines will be reluctant to put capacity into markets where they can’t repatriate their money. These are factors I can speak from my past experience when looking at network growth or additional capacity.
If you can’t get your money out, I am sorry, but you know, it’s a simple business decision. You are not going to put additional capacity in there and given that airlines are looking to recover their networks, they are going to put their focus into markets where they have more confidence. So I think it is a significant factor and it plays against the recovery in the continent. But it also, I think, it’s unfair to consumers (passengers) because they are not going to get the choice. They are not going to get the competition. They are not going to get the availability of flights that they would have if money were being repatriated properly. So it is a big issue for African countries seeking to block foreign airlines’ funds.
All we can do is make it clear to people that such actions have consequences. The idea that an industry that was effectively heading towards bankruptcy because of closures and is still losing a huge amount of money can operate to a country and not get paid for. It is madness. It is not going to happen. If governments believe that they will continue to maintain all of these international links by carriers that can’t get their money for the work that they are doing, it is not going to happen. So you are right, not every country has responded in the same way but airlines are not rich. We don’t have a lot of cash; we are not profitable at an industry level and anything that people do to undermine the recovery in the industry is just going to have a direct impact on the services that they are contributing.
Foreign exchange rate
I will be honest, it is impossible to solve because these differences in foreign exchange rates in different countries have existed forever and they are not going to be easily aligned. So the way in which the rates are calculated is on a different basis. I don’t honestly see a simple solution to that but it would be great if we could be aligned or more closely aligned. But you are right in some cases; the difference is significant and does have a major impact. But I don’t see a simple solution to it.
Impact of cost of aviation fuel on airlines
There are two impacts. First is the price of the basic commodity oil Brent, the benchmark that we use, and that is being very much influenced by what is happening in Ukraine and the sanctions against Russian oil. So, that has driven the price of oil up significantly. The second aspect is what we call the crack spreads, a barrel of Brent and a barrel of jet. And that reflects the margins that the refiners make. There has been a lack of capacity in refining. Some of that is because there was very little demand for jet during the pandemic, obviously because the volume of activity had reduced. So refiners switched their attention away from jet into other products. And it is not easy for them to switch back. So you can’t just do it overnight. So we need to see a return to refining capacity, which will then narrow that margin, the crack spread again.
In 10 years, between 2010 and 2019, Brent averaged, $80 a barrel and the crack spread was 17 per cent on average. So, that would mean that Jet was about $93, $94 a barrel. We are now looking at the crack spread averaging about 25 per cent on the basic price of a hundred dollars on average.
Jet fuel is $125 and we have seen Brent go from $80 per barrel to a $100 and we have seen the crack spread going from $13.6, $13, $14 to $25. Both of these have increased and both of those have had an impact. Now, in the same period, fuel represented 27 per cent of the industry’s cost space. So if the oil price goes up the percentage of cost represents by fuel increases. It’s a simple math. And airlines in that 10-year period, best 10-year period in the history of the industry, the average operating margin was five and a half percent. So you can see, we don’t have big margins that can absorb this additional cost.
So ultimately it ends up being passed through to consumers in the form of higher ticket prices. I see no way of avoiding that. If your cost, particularly your single biggest cost escalates in the way it has, it leads to a higher ticket prices. I don’t see any way that the industry can alleviate that because it is not making any profit at the moment at an industry level. So it cannot absorb this. That is why you are seeing ticket prices increase. I think there is another factor with ticket prices; it is clearly and heavily influenced by supply and demand. And in some cases, the pace at which demand has recovered has been faster than the pace at which supply has been returned to the market. And that clearly leads to greater demand for a scarcer product, which will push prices up.
Choice between innovation and state bailout
I think airlines that innovate through any crisis are more sustainable in the long term. Bailouts are welcome, but the problem often that I have seen with bailouts is that they delay the restructuring or the innovation that is necessary because you get a temporary reprieve. But if you don’t take advantage of that temporary reprieve, you are just back in crisis. So the only way you can get a sustainable future is look to drive innovation and efficiency within your airline and to make it sustainable through economic cycles. On block funds, it is not just the African continent. There are other parts of the world where we have blocked funds but the African countries contribute the most significant element to the industry’s blocked funds.
All we can do is try and convince governments to base up to the responsibility that they have. We can’t advise airlines as to what they should do.
We have seen countries blocking funds where airlines have completely withdrawn from the country. Venezuela is probably the best example of that, where airlines just stopped flying there and the ones that didn’t stop flying significantly reduced their capacity into the country and also restricted the amount of sales that were going on. But that was not an IATA decision; that was a decision that each individual airline would have to take.
On concessions, airports, if they are privatised fine, but guaranteeing a return, you can’t do that because then you are just going to drive costs. You are preventing innovation; you are preventing airports from being driven to become more efficient because there’s a guaranteed return. So it doesn’t matter what they do, they are guaranteed to get a return on it so they can be inefficient. They can waste money; they get a return and that’s just one.
Benefits of Single African Air Transport Market (SAATM)
A Single African Market has to be an opportunity. All you have to do is look at what deregulation has done to benefit consumers in other markets that have been deregulated. Europe is a great example of that here. So what have you seen? You have seen massive increase in connectivity, increasing the number of flights, increasing the number of option for customers, much greater competition as a result lower fares. So the consumer wins. So if people want to benefit the African consumer, and facilitate connectivity, which has then huge benefits for other industries and the economies, it is the only way to go. A fragmented market will never be as efficient as a single open competitive market.