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Underpricing: A Growing Threat To Airlines

Underpricing: A Growing Threat To AirlinesCurrent underpricing of fares could make local routes some of the cheapest in the world with the affected airlines having one of the least chances of survival.

Recent investigation revealed that at an average cost of N30,000 per flight, it is almost impossible for commercial airlines to cover the cost of operations, run efficient services and make profits despite huge capital investments.

While the airlines are not unaware of their comparative low-income earnings, some operators and experts have drawn attention to perennial disharmony, unhealthy rivalry and even predatory marketing in the sector.

Since the ministry of transportation dollarized the aviation sector in 1985, the industry has been susceptible to the vagaries of foreign exchange. With over 100 per cent spike in the naira to dollar rate in the last two years, the cost of aviation fuel, aircraft maintenance and spare parts among others have more than doubled.

Although the Nigerian Civil Aviation Regulations (Nig. CARs) empowered airlines to initiate ticket prices, the operators have maintained the same price range till date.

A Lagos-Abuja flight, for instance, retains the average price of N25,000 at N360/$1 today – the same price it was when the exchange was N160/$1 in 2015.

The implication is: an average cost of N30,000 per economy class ticket, multiplied by 120 passengers on a B737 aircraft, fetches aboutN3.6 million per flight. But at least N800,000 to N1 million of that sum goes into fuelling the plane while another N1 million plus takes care of sundry charges and taxes.

The airline is therefore left with about N1 million for maintenance and personnel expenses among other obligations.

“With that estimate, there is nothing left for profit. By the way, the load factor around here is less than 100 per cent. On a high traffic route like Lagos-Abuja, it is about 90 per cent.

So, the base fare is less than N10,000, which is not profitable for an airline that has borrowed millions to buy an aircraft.

“It is then impossible for such airlines to do any sort of promo or low-cost operations. Those that do promos are looking for all means to demarket others and draw traffic to themselves. But you wonder, what business sense does it make overall, because the loss is actually mutual,” a chief operating officer said.

A popular example of demarketing is between major carriers and small competitors on the Benin route: a small airline with a turboprop airplane charges N16,000 per seat. A big airline deploying a jet charges N25,000 to N32,000, but suddenly crashes the price to N12,000.

After six weeks of severe bleeding, the small competitor withdraws, while the major airline returns the price to N35,000. But ironically, even the big airline is eventually forced to quit. The Guardian learnt that a similar game is currently playing out between two airlines on the Akure route.

A former Managing Director of the Nigeria Airspace Management Agency (NAMA), Capt. Roland Iyayi, described the situation as “predatory pricing,” a scenario “where an airline reduces its fare on a particular route just because it wants to take out a competitor.”

Iyayi said predatory pricing is prevalent in the market because rather than airlines targeting profitability, they focus on market share. “You reduce your fare to increase demand. The increase in demand does not necessarily mean that you are profitable. So, the issue is how do you balance your cost with the market share, if your yield is low?

Apparently in agreement, the Managing Director of Overland Airways, Capt. Edward Boyo, had recently noted that it might be impossible for the sector to get it right, service-wise, unless tickets sell at $100 (N36,000).

Boyo said the public must give credit to operators for doing their best possible to keep running in an environment that gives them little chance of survival.

According to the Chief executive officer of Ropeways Transport Limited, Capt. Dapo Olumide (rtd), it is still a miracle that some airlines continue to function while operating the wrong business model and offering “ridiculous promos to customers.”

The question then is, where is the NCAA’s economic regulations in all these? Why, in spite of all these financial concessions, do Nigerian airlines still have active lifespan of about five years before they start getting stressed and finally go around?

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