Delta Airline Exit From Abuja –The Business Implications

The suspension of direct flight operation to the John F. Kennedy International Airport (JFK) in New York, from the Nnamdi Azikwe International Airport (NAIA) in Abuja, by Delta Airlines, is reminiscence of the loss in economic competitiveness; a result of the dismal business environment in Nigeria.

The last eastbound (New York-Abuja route) service of the airline was on August 27, 2012, the day the suspension was announced; while last westbound (Abuja-New York route) service was on August 28, 2012. A check on the airline’s website suggests that all Delta Airlines passengers, who had booked beyond the suspension date, were given the option of being re-accommodated on Delta’s nonstop service from Lagos to the United States of America, or on flights operated by Delta’s joint venture partner, Air France, who operates daily service between Abuja and the USA via Paris.

Delta Airlines, an Atlanta US based international airline, has been operating direct flights to the New York JFK Airport from the NAIA in Abuja for about two years. The carrier, which commenced operation in Nigeria with the Lagos-Atlanta operations in December 2006, said it would continue to operate its daily nonstop Lagos-Atlanta route.

Harsh Working Environment
The media consultant in charge of Tourism Promotions and Communications at Delta Airlines Nigeria, Temitope Ogbeni-Awe, in a statement, said that the company suspended its service between Abuja and New York because of the persistent hike in jet fuel prices and fluctuations in passenger demand.

However, media reports had suggested that the increasing security threats and attacks in the northern region of the country could have led to the suspension, as other airlines, including KLM Royal Dutch Airline, are planning to take such decision. It has also been suggested that Delta Airlines may be heeding to the directives from the US Department of States advising the suspension of further flights into Abuja following the surging activities of the Islamist sect.

Indeed, the problem of astronomical and incessant rise in the price of aviation fuel, known as Jet A1, in addition to the persistent scarcity of the product are parts of the major challenges bedevilling the aviation sector in Nigeria.

International Fuel Prices
A review of Jet A1 prices globally, which also reflect the International Air Transport Association (IATA) Jet Fuel Price Monitor, suggests that aviation fuel in Nigeria is more expensive than any other oil producing nation, and perhaps anywhere else in the world. See table 1 and 2 below. In Abuja, the situation is particularly dire as airlines have consistently had to pay substantial premium of up to ₦20/litre above the price in Lagos, while some flights have had to be grounded for days for fuel scarcity.

Until recently, Nigeria was one of the preferred destinations for refuelling because of the competitive price of aviation fuel. According to the General Secretary of Airline Operators of Nigeria (AON), Captain Mohammed Joji, the price of Jet A1 rose from 31 kobo per litre in the 1990s to the current ₦195 per litre. Nigeria probably has the highest rate of Jet-A1 price increase when compared with other regions globally.



The Business Logic Of Flying
Industry analysts estimated that aviation fuel accounts for 25% to 40% of airlines operational cost per flight, and in situations where this variable becomes unstable and volatile in any country, the business logic of flying such route becomes unattractive.

It has been estimated that for a Boeing 737 aircraft, with capacity to carry 242,000 litres of fuel, has an average fuel consumption of 4,219 litres per hour in flight. In other words, a 20 hour Abuja-Atlanta flight would require about 84,380 litres of fuel, amounting to ₦16.5 million ($102,838). When this is compared with the average revenue of $588,891, fuel cost would account for 17% of total revenue at ₦195 per litre. With Abuja premium, this could be as high as ₦18.14 million ($113,386) and 19% of the total revenue.

A comparative aviation report commissioned by the authorities of Nigeria’s Murtala Muhammed International Airport (MMIA) also confirmed that it is cheaper to purchase aviation fuel in Accra, Ghana, by about ₦30 per litre than Lagos with the lowest aviation fuel price in Nigeria.

It was recently reported that international airlines now make a stopover in Ghana to refuel, incurring airport parking fee before proceeding to Nigeria. As a result of this, among other issues, Nigeria loses the charges that it would have collected from the airlines and the opportunity of having the operational hub status in the sub-region, as well as revenue to hotels, which it would have earned from crew lodging. Ironically, it is the Nigerian passengers that are targeted even in Ghana.

Systemic Airport Failures
Two key issues are involved in the expensive and volatile aviation fuel price in Nigeria. These are:

  • The costly systemic inefficiency as a result of infrastructural deficit at the airports.
  • Sharp practice.

Beside the high cost of charges levied on oil marketers distributing aviation fuel at the airports by the Federal Airports Authority of Nigeria, the fuel hydrants at the Abuja airport are inconsistent and at times non-functional. This causes oil marketers to incur extra costs such as buying and maintaining fuel bowsers, and employing drivers to run fleet of bowsers to move fuel from the depot to the tarmac to feed airplanes.

Although there are over 14 oil marketers supplying aviation fuel in Nigeria, which should expectedly create competition, industry analysts are of the opinion that they operate a cartel that creates artificial scarcity of the product, with the attendant high prices. But findings suggest that only two aviation fuel marketers, namely Sahara Energy Limited and Conoil Limited, have the capacity to import aviation fuel to the country. Both companies have been the only companies importing the product in commercial quantities, while the smaller dealers buy from them to distribute to airlines.

In other words, the near monopoly at the wholesale import end of the Jet A1 value chain, the alleged high demurrage charged by the Nigerian Ports Authority, alongside the high depot cost, may have sustained the soaring wholesale price ab initio.

Causes For Passengers Low Turnout
The dwindling number of passengers travelling using Abuja for international routes is the second major issue that was canvassed by Delta Airlines for suspending the Abuja operation. As the second largest airport in Nigeria in terms of passenger traffic, the number of passengers through the NAIA, Abuja is still less than 600,000 per annum despite the surge in 2010. It peaked at 591,285 passengers in 2011. When compared with the number through the MMIA, Lagos, the logic of flying the Abuja route in the midst of competition and avoidable cost implication is defeated. The MMIA controls the largest passenger traffic in the country with an average of 2.26 million passengers per annum in the last six years.

In recent times, the heightened security challenges in the country following the Islamist sect activities perhaps reduced the incentives for many travellers within the Abuja environment. With the potent threat to public targets such as the Abuja airport, some have had to route their flights through Lagos airport.

Notwithstanding the ongoing renovation at the NAIA, the infrastructural adequacy of the airport for international travellers; bothering on safety of lives and properties, ease of access among other issues, in comparison to Lagos is also debatable.

Hindrance To Aviation Growth
The exit of Delta Airlines from Abuja is a major blow to aviation sector growth in Nigeria. The direct impact is a reduction in the number of carriers and aircraft plying the route with consequences for airport revenue. As a major hub in the Nigeria aviation golden triangle (Lagos-Abuja-Port Harcourt), the loss is expected to have consequences for domestic flights originating from Abuja into many states in the north without functional international airports. It would therefore cost travellers more for destinations outside Lagos as they are now forced to use the MMIA. For existing and potential businesses, as well as individuals in Abuja and neighbouring states, other resultant effects include:

  • Reduced access to Abuja with increased costs implications.
  • Reduction in international airline competition which would drive international airfares higher.
  • Increase in costs of doing business in Abuja and adjacent states.
  • Reduction in economic activities in Abuja as businesses will consider the increased costs and difficulties of accessing Abuja in investment/business decisions.
  • Potential investments going elsewhere within or outside Nigeria such as Ghana which is becoming increasingly competitive in all of these fronts.
  • Where the trend of international carriers withdrawing from Abuja route is sustained, connected industries such as hotels, bars & restaurants, intercity transport businesses might experience sharp decline in patronage which could threaten business feasibility.
  • Ultimately, the assets value such as real estate and other investments might decline with negative consequences on personal wealth, income, unemployment and poverty in the capital city.

Recommendations
The above scenario calls for actions on the part of the regulatory authorities and the government to stem the likely tide which may have been sparked off if Delta Airlines is not attracted back to the route. Tackling the challenges of high and persistent rise in aviation fuel requires intergovernmental collaboration. The ministry of aviation and its related agencies should reach out to the ministry of petroleum resources and its related agencies to strengthen the aviation fuel market.

Firstly, licensing more importers of aviation fuel and increasing the number of retail distributors should be of priority to the government. Increased competition would force price downward towards the international levels.

Secondly, to ensure stability, there is the need to introduce incentives that would ensure availability and buffer stock. The creation of a national reserve in aviation fuel that is large enough to meet a minimum of three month industry need in situation of scarcity can be considered. It is hoped that the ongoing reforms in the petroleum industry, based on the Petroleum Industry Bills (PIB) and associated initiatives of the government, would promote local refining of aviation fuel in the medium term. Local refining of this product among others would remove the administrative cost of importation and reduce market price.

Finally, investment in the development of appropriate infrastructure such as functional hydrants for storing aviation fuel at the airside of the airport would reduce the operational cost incurred by aviation fuel marketers.

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