(Bloomberg) — Nigeria will become the first nation to ground flights on Monday as surging prices for aviation fuel make business unprofitable.
Airline operators “will discontinue operations nationwide” until further notice, their union said in a statement. It’s the latest sign of the widespread impact that Russia’s invasion of Ukraine is having, although one carrier, Ibom Airlines Ltd., opted out of the cessation, citing obligations to customers.
The war has caused massive disruption to energy markets with Russian feedstocks used to produce jet fuel and diesel becoming untouchable for many parts of the world. China has also cut its oil product export quota, limiting supplies. The loss of 3.2 million barrels a day of refining capacity in the pandemic years also doesn’t help.
Nigeria’s 23 airlines say they have been “subsidizing” flights for the past four months and can no longer absorb the costs after the price of aviation fuel more than tripled to 700 naira ($1.68) per liter.
Jet fuel makes up a significant proportion of input costs for airlines. Any change in expenses can drive up ticket prices that could put travelers off, especially in price-sensitive markets.
“Many of the airlines are running at a loss already,” said Victor Enwezor, vice president operations at Lagos-based tour operator Leisure Afrique “Any further price hike will kill their business,” he said by phone.
This summer, global jet fuel demand is set to rise by more than a third as air-travel ramps up, surpassing six million barrels a day, according to the latest forecast from BloombergNEF.
Grounding flights may hurt Africa’s biggest economy, where the International Monetary Fund already forecasts growth will slow this year and next.
It’s not clear what the solution is. In March, following meetings with the government, the Nigerian National Petroleum Co. agreed to grant licenses to airlines to import fuel to boost supply and possibly bring down costs.
That hasn’t changed the situation. High Jet-A1 prices have pushed up the unit cost per seat for a one-hour flight in the West African nation to an average of 120,000 naira, 71% higher than the cheapest option, the union said. Many operators are caught in a bind: increasing prices too much will cut customer numbers and still won’t cover costs.
“Cost of aviation fuel has continued to rise unabated, thereby creating huge pressure on the sustainability of operations and financial viability of the airlines,” the union said. “The airlines can no longer absorb the pressure.”
In a statement, Ibom said that having been paid by customers in advance for flight bookings “we are bound by contract to deliver the services already paid for, to avoid exposing the airline to the risk of avoidable litigation.”
Nigeria’s aviation ministry is engaging stakeholders “in positions to provide succor to the airlines,” to find ways to ameliorate the situation, Minister of Aviation Hadi Sirika said in a statement on the ministry’s Facebook page.
“We wish to appeal to the airline operators, even in the difficult situation, to consider the multiplier effect of shutting down operations, on Nigerians and global travelers,” Sirika said. “We are greatly concerned about the difficulties being faced by the airline operators.”
©2022 Bloomberg L.P.
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