Capt Daniel Omale

20 May 2011

In January this year, the price of Jet A1, the dominant jet fuel used for most of the aircraft operating in Nigeria was N109 per litre in Abuja. By the first week of March, the price had risen to N146 per litre. On the May 18 - two days ago, the major oil marketers in the country informed airline operators that price of the same product was climbing in excess of N250 per litre. Therefore, in just over two months, the cost of buying Jet A1 increased by over 100 per cent without any sign of abatement.

It is interesting to note that jet fuel gulps about 40 per cent of an airline's revenue in a normal market where carriers can adjust ticket prices to balance their income. In Nigeria, where ticket price is controlled by the government as opposed to market forces, it is highly unlikely that the few surviving airlines can cope with the trend of fuel prices. I predict that by the end of the first half of this year, the price of Jet A1 will reach or surpass N450 per litre in the same location. Therefore, air fare from Abuja to Lagos must be priced beyond N40,000 before any airline can comfortably operate to recover marginal profit. While air passengers may initially resist the increase, there is no other safer and faster option of travelling within this country.

The two factors responsible for the constant increase in fuel prices are: the unrest in the Middle East and the fact that Nigeria does not refine aviation fuel. While we have little control over the crisis in the Arab world, it is interesting to note that in Benghazi, Libya, with all the fighting in that country, Jet A1 still sells for less that N65 per litre. It is equally cheaper in neighbouring Benin Republic (at about 130 per litre) than in the 'Giant of Africa' and the sixth largest oil producer in the world.

The major oil marketers in Nigeria have formed a cartel, since the price of aviation fuel is uncontrolled by the government. Marketers make twice the profit on petrol without any binding regulation. Unfortunately, the burden is on the travelling public.

Since our government is finding it hard to establish new refineries and keep the existing ones functional, it will be irrational on my part to advocate for the establishment of modern refineries capable of producing Jet A1 for the country.

There are, therefore, two ways for the government to lower the cost of acquiring this scare commodity: government can equally subsidise imported Jet A1 like, it does for petrol. The second option is to initiate the production of Jet A1. In my opinion, it is easier to do the first and graduate into the second, which holds a more lasting solution.

If neither of the above is acceptable to the authorities, the easiest way to alleviate the financial burden of the airlines is to completely deregulate the market for each carrier to charge any fare of their choice.

The amount of fuel burnt by an aircraft as it flies from one airport to another is dependent on several factors; the age, model and version of the aircraft all play an important role. Every new version of aircraft produced by manufacturers is more fuel-efficient than its predecessor due to improvements in aircraft systems technology and engine performance.

In the United States, all of the major airlines, excluding US Airways, have a sophisticated fuel hedging programme that no human being can really understand. To keep it simple, "hedging" is like insurance against sudden price increases. Most of the airlines pay upfront or commit cash to purchase fuel into the future at a more or less defined price. Keeping in mind these hedging programmes are always changing. Most airlines currently have 30-50 per cent of their next six months' fuel hedged at an agreed rate per barrel of crude.

30-50 per cent of anticipated fuel usage may not sound like a lot. But the reality is that the airlines can end up losing billions of dollars if they hedge in the wrong direction. They can equally save billions if their hedges work out. It's important to note that hedging is very expensive and ties up a lot of cash. US Airways has not hedged over the last couple of years and has generally maintained a net fuel cost advantage over their competitors.

According to the latest statistics from the General Aviation Bureau, due to the fuel price surge, the cost of fuel has amounted to 31 per cent of the cost of the major business of airline companies in the first half of this year; up from 22 per cent. The whole airline industry has afforded additional cost expenditure of $1.27 billion.

The airlines are in perilous financial conditions. Two major airlines, representing more than twenty per cent of the industry, are in bankruptcy. Passenger carriers reported over $10 billion in 2002 net losses. Industry debt now exceeds $100 billion, while the industry's $15 billion total market capitalisation continues to decline. Our ability to borrow to support continuing losses is evaporating. The few airlines that have been able to record profit are doing so under tremendous adversity. And with the prospect of war on the horizon, the overall picture is bleak.

Unfortunately, Nigerian airlines are severely affected by two major factors: cost of borrowing and the constant depreciation of the Naira. While the rest of the world's currencies enjoy exchange advantage over the U.S. dollar these days, the Naira keeps depreciating on a daily basis. The downward trend of our currency can never support airline business and operators are virtually at the mercy of the almighty dollar. For a country that depends on imported goods to keep the economy balanced, common sense will loudly echo adverse naira-to-dollar exchange disparities all the time.

The cost of buying economical, fuel-saving modern aircraft is so high that borrowing from Nigerian banks for that purpose makes no sense. Arik Air that operates new generation jets can testify to the absolved debt burden on its balance sheet. The airline has since been caught between the proverbial Devil and the Deep Blue Sea.

Right now, the only way out of this dilemma is for government to salvage the situation by either subsidising all imported aviation fuels or allow the airlines to double the current air fare. The cost of mismanaging our economy will always splash on all of us at one point or another. With more functional refineries, we may save our children's future.

http://allafrica.com/stories/201105200071.html

LMFAO@ our clueless government.We are in a deep ish.

E go better, i had no shoe go fix am or we should all pray the prices should come down by fire by thunder.

Jonathan and the 40 Cabals . . . .

There are, therefore, two ways for the government to lower the cost of acquiring this scare commodity: government can equally subsidise imported Jet A1 like, it does for petrol. The second option is to initiate the production of Jet A1. In my opinion, it is easier to do the first and graduate into the second, which holds a more lasting solution.

If neither of the above is acceptable to the authorities, the easiest way to alleviate the financial burden of the airlines is to completely deregulate the market for each carrier to charge any fare of their choice.

who is this dude? Easier to spend our foreign reserve subsiding a product that isn't necessarily serving the majority which will most likely end in the pocket of the another cabal knowing how inefficient the system is

Does the current refinery require extra technology to produce A1? I thought these are by-products of crude oil, with all the Turn Around Maintenance of the Refineries when will they ever function at above average capacity?

If the airlines charge anyhow i will invest in ABC transport sharpish!

I just want everything deregulated.

Government stop with price controls, and stop with all these import restrictions on cement, diesel, etc.

Let anyone who wants to import cement, diesel, rice, petrol do it. Just charge heavy import duties.

Why should anyone need a licence to import these things?

ekt_bear:

In January this year, the price of Jet A1, the dominant jet fuel used for most of the aircraft operating in Nigeria was N109 per litre in Abuja. By the first week of March, the price had risen to N146 per litre. On the May 18 - two days ago, the major oil marketers in the country informed airline operators that price of the same product was climbing in excess of N250 per litre. Therefore, in just over two months, the cost of buying Jet A1 increased by over 100 per cent without any sign of abatement.

. . . . . .

The two factors responsible for the constant increase in fuel prices are: the unrest in the Middle East and the fact that Nigeria does not refine aviation fuel. While we have little control over the crisis in the Arab world, it is interesting to note that in Benghazi, Libya, with all the fighting in that country, Jet A1 still sells for less that N65 per litre. It is equally cheaper in neighbouring Benin Republic (at about 130 per litre) than in the 'Giant of Africa' and the sixth largest oil producer in the world.

What the frell has the unrest in the Arab world to do with the cost of Fuel in Nigeria?? ROFLMAO!!!!

It is even cheaper right in the middle of the chaos than it is in Nigeria, itself removed from all the chaos and quagmire.

Imagine that, a 150% jump in price in less than 6 months and some wonder why people need to be helped. ROFLMAO!!

ekt_bear:

I just want everything deregulated.

Government stop with price controls, and stop with all these import restrictions on cement, diesel, etc.

Let anyone who wants to import cement, diesel, rice, petrol do it. Just charge heavy import duties.

Why should anyone need a licence to import these things?

This is where all PDP supporters got it wrong.There is selective de-regulation aimed at granting the favored PDP warlords a monopoly to fix prices at will.I dont know if anyone still remembers OBJs refinery permit to foreign investors for construction of new refineries.How far?

Nigerians remain the biggest mumu to keep on believing thesame thing even in the face of the obvious.

What next? Excuse for the increment of the price of ammunitions just cos of the death of Osama Bin Laden. Nigeria is really so much of a nonsensical country.

Kind of related:

http://www.vanguardngr.com/2011/05/crashing-kerosene-price-genuine-concern-or-playing-politics/

The govt should order fuel importers to reduce prices immediatyely as they did the cement manufacturers. Learnt one of our refineries (Warri or KD not sure) could produce jet A1 but one of the military govts(IBB i think) ordered that it be closd as not many airlines were flying in the country then)