Jet Fuel Palaver   

Published on August 23, 2010 by TheNEWS   ·   No Comments

Constant aviation fuel price surge threatens aviation business in Nigeria

Air passengers may soon be paying more for their trips. Airlines may have no option but to resort to this inevitability with the Aviation ministry, in June 2010, jacking up the price of the liquid. Fidelia Njezie, the Aviation Minister, announced increase of the price of Jet A1, the technical name for the fuel, from N95 per litre, an amount airline operators already consider premium, to almost N120 per litre.

The Jet A1 price issue has been a major albatross in airlines’ strive to earn profits. As airline after airline dies, the Airline Operators of Nigeria, AON, attributes the high fatality turnover to key factors like high price of aviation fuel. The federal government does not seem to believe them, for rather than reduce, or peg for a long time the price, it has made it an annual ritual to increase it. Operators are panicky the latest move might just result in new casualties as they battle to meet the extra cost.

Already, Aero Contractors has introduced an aviation fuel surcharge of N500, which has not really been opposed by the Nigeria Civil Aviation Authority in real terms. And Arik may have followed suit as its fares fluctuate irregularly, with  a N500 pad. More airlines are expected to follow the initiative.

NCAA’s subtle approval of fuel surcharge on passengers is a strange departure from a similar development in Britain as handled by its aviation authorities. In 2007, the British Airways, BA, was hit by a double fine of about £300mn (pounds) by British and United States aviation authorities after it confessed to an “anti-competitive activity” involving fuel surcharges on long-haul flights. BA admitted that the fine, comprising $100mn for passenger fuel surcharges and an additional $200mn for cargo, was agreed upon as part of a plea agreement with the department. The airline could have faced a stiffer penalty as much as £350mn, if its illegal fuel surcharges had attracted full reproof.

In Nigeria, the Aviation ministry and industry regulators seem to be approving airlines’ move to pass whatever harsh decisons they (the ministry and regulators) inflict on them (airlines) on to passengers.

Dictating price of Jet AI is a one-way affair. Marketers and airlines cannot fully determine the cost of the fuel that will eventually be passed on to them on a regular basis because a lot is eventually built into the cost to ensure the imported fuel meets the standard that should go into the aircraft. For instance, as explained by an African Petroleum engineer, filtering aviation fuel that has been delivered after being on the high seas for weeks attracts a considerable sum. He told TheNEWS that changing a filter vessel could attract as much as N10mn. And that is on just one vessel out of several in a couple of weeks or months. The engineer was emphatic the situation cannot be sidestepped. “It was recommended by an airline that comes to inspect us annually, checking if what we’re doing conforms to standard, before any of the airlines will take fuel from us. There’s what they call International Fuel Quality Pool, IFQP, controlled by the International Air Transportation Association, IATA, with Lufthansa, Air France, KLM and other foreign airlines being members. One of them will come and inspect all the depots and if you are found wanting, you forfeit that year’s business”, he declared.

Apart from this top quality check, the industry remains extremely dynamic in terms of aviation fuel standards, with added specifications and regulations on constant basis. The pressure is worse after any mishap, which further makes standards more stringent globally. All these are factored into costs and invariably, price of the product. Worse still, jet fuel is not considered priority product in Nigeria. Premium Motor Spirit, (petrol), remains the priority product. And every effort by the AON to ensure that Jet A1 is ranked the same has met a brickwall.

Jet fuel can hang on the high seas for as long as 10 extra days or more, and for each of the days, fuel marketers cough up as much as $10,000 each day as demurrage charge. Until vessels loaded with PMS are offloaded, there is no chance for a Jet A1 vessel to discharge its content. A marketer told this magazine it is not unusual for a Jet A1 vessel to spend an average of seven days before receiving attention. That translates to an average of $70,000 a trip per vessel. Such additional cost simply pushes up the price. Marketers are working on the process of facilitating a submarine pipeline to connect the vessels on seas with vessels at harbour for faster delivery. But the monstrous cost such a move will gulp remains more than an enough impediment to grapple with.

The Nigerian representative of MEEGIT AVERY HARDOLL, Ibinabo Reginald Gogo-Peters who is the concessionaire for the Federal Airports Authority of Nigeria, FAAN, charged with collecting fuel surcharges, harped on why price of aviation fuel remains on the high side. “It is sad that Nigeria, an oil producing country does not refine oil. We import oil from foreign countries. Now, if you import refined aviation fuel, the prices cannot be static or controlled,” he said. Deba Uwadine, an aviation consultant, holds a similar view. To him, local refining of JET A1 remains the only solution. Since marketers are out to make profits on imports, they will always dictate fuel price unchecked.

Jet A1 price is not fixed and attracts no subsidy whatsoever, unlike petrol and kerosene. So the prices are subject to constant fluctuation, sadly always upward. Airlines in some other countries are not having it so rough because they have plants that refine jet fuel. Such countries include the United States, US, Russia, South Africa and even Ghana. And airlines operating from these countries have no hopeless story of survival to tell.

While Nigerian airlines are replete with downside tales, some foreign operators sing a different tune in terms of their balance sheets. Delta Airlines, for example, has declared that year 2010 has been its most profitable year in a decade, with its net income by the second quarter of the year (June) standing at $549mn. The airline has decided to earmark $90mn of this amount to profit sharing. This feat was achievable courtesy of Delta’s operating revenue rising to $1.2bn, a 17 per cent leap over what entered its coffers last year within a corresponding period.

Unfortunately for Nigerian airlines, fare increase is not exactly the best or easiest option anymore, due to stiff competition among the operators. Worse still, there does not seem to be working in tandem. For instance, the bailout proposal that government eventually approved was initially thumbed down by Arik Air, which preferred a more level playing ground, despite its huge debt portfolio. Of course, it is bigger than most, if not all its competitors, operates the most routes and enjoys higher passenger traffic.

—Funsho Balogun

Tags:  Aero Contractors, aviation business, Aviation Minister, Fidelia Njezie