Business

Evaluating aviation fuel price conundrum

The aviation industry is at a crossroads. Jet A1 is steadily climbing to the chagrin of airlines. There is no known solution in sight to stem the tide. Both oil marketers and airlines are passing the buck, while air travelers groan, writes WOLE SHADARE

 

Industry on edge

The high cost of aviation fuel and the threat last week by airline operators to go on strike set the aviation industry on edge, prompting panic about what their action would do to the entire aviation value chain. Thank God, common sense prevailed.

 

The carriers made a volte-face by cancelling their planned action, making the travelling public heave a sigh of relief. But this appears to be cosmetic as the issue of skyrocketing Jet A1 may be with the sector for a long time following the interplay of market forces that have jerked up the price of the commodity to N550 per litre in Lagos and N570 in other airports like Maiduguri, Sokoto, Kano and others because of trucking issue.

 

Hues and cries

 

Beyond the hues and cries of the high cost of the commodity, there are indications that airlines have not seen an end to the galloping Jet A1.

 

Since January 2021, the price of Jet A1 has been skyrocketing to the chagrin of airline operators. At the beginning of the year, the commodity sold for between N190 and N200 per litre. A litre of aviation fuel in the domestic scene currently goes for as high as N550 and N580 per litre, depending on the airport an airline is buying from.

Many airlines have been voicing concerns about the impact of rising fuel costs – airlines’ largest operating cost item – on their financial recovery. Fourth-quarter 2021, according to the forecast, tends to be a seasonally weaker quarter for airline passenger revenue as the fuel price increase represents an unwelcomed challenge. The country now relies heavily on foreign nations for the supply of these fuels.

 

The country spends a substantial part of its foreign exchange on fuel importation. Nigeria is a petroleum-producing and exporting country.

 

But like Libya, she is dependent on foreign nations for her liquid transportation fuels (mostly gasoline and diesel) produced via petroleum refining. Nations all over the world depend largely on refined petroleum products to meet their transportation energy requirements. Gasoline, diesel and aviation kerosene are the most common fuels used in the transportation sector.

The increasing industrialisation, globalisation and motorisation of the world have led to a steep increase in the demand for fossil fuels, especially petrol. While the airlines want a drastic reduction in the price of Jet A1 in Nigeria to about N400 per litre, the major oil marketers were of the view that the sale of the product at that price or at N550 per litre was not sustainable.

 

Not a few believed that the operators were clandestinely seeking subsidy or another round of intervention, notwithstanding the effect of the hike on their operations.

They had earlier in the year raised base airfare on one hour trip to N50,000 and could go as high as N60,000 or N70,000 depending on the time of purchase. The carriers, while threatening to shut down operations, alleged that aviation fuel cost between N680 and N700 per litre, a claim major oil marketers under the aegis of the Oil Marketers Association of Nigeria (MOMAN) dismissed as untrue.

 

Reasons for the high cost of Jet A1

MOMAN said the skyrocketing price of aviation fuel, like other petroleum products, was a result of the fact that the commodity used in Nigeria is not produced in the country and is subject to international price movements, which are currently suffering the twin shock of increased post-pandemic demand and the on-going sanctions against Russia, a large producer of petroleum products. MOMAN, in a statement by its Chairman, Olumide Adeosun, said the shocks had seen international trading premiums, costs of vessel freight and other transport costs skyrocket to worrying levels.

 

He, however, noted that separately, international traders were exploiting the situation by selling only to the highest bidders. Adeosun noted that with respect to aviation fuel, verifiable prices in West Africa ranged from $1.25 per litre in Ghana to as high as $1.51 per litre in Liberia, adding that even then, “the product remains scarce across the sub-region.”

 

He explained that due to the intervention of the Nigerian National Petroleum Corporation (NNPC) over the last several weeks, aviation fuel had landed into marine terminal tanks in Nigeria at between N480 and N500 per litre, depending on the logistics efficiency of the operator. He further stated that due to the high costs of specific handling of

Jet A1 (special transport and continuous filtration), the product is sold on the tarmac at Ikeja with their benchmark between N540 and N550 per litre and across other airports at between N570 and N530 per litre.

Intervention

He reiterated that during this period of NNPCL’s intervention, as NNPCL uses the nominal Central Bank of Nigeria (CBN) exchange rate, no independent importer would import aviation fuel as it is unable to access foreign exchange at the same rate, leaving NNPC as the major importer of aviation fuel for now, even though the product is deregulated. His words: “In comparative terms, the aviation industry is already benefitting from government’s intervention when local prices are compared to West African regional prices, despite the deregulated status of aviation fuel.

 

The situation is hardly sustainable, given the already humongous N4 trillion cost of PMS subsidy.” These interventions, according to Adeosun, are sometimes necessary to mitigate shock and help the economy, operating environment and the public to adjust to the new realities while efforts he noted were being made and innovations introduced to optimize costs and increase efficiencies.

 

“These interventions cannot however be permanent in nature. It is our hope that the war in Ukraine comes to a speedy conclusion and the integration of products from the local refineries into the supply chain (Dangote, NNPC and modular refineries) will mitigate the high costs being borne by government and Nigerians,” he added.

 

To him, a return to cost recovery and free market and competitive economics, including access to foreign exchange at competitive rates, is inevitable for the sustainability of the production and distribution framework in the petroleum downstream industry, adding that there is an immediate need to prepare the operating environment and indeed the larger economy for the eventual return.

 

Expert’s view

An aviation expert and an executive of one of the oil marketers told New Telegraph on condition of anonymity that marketers don’t dictate price. His words: “They cannot even dictate price to bye-products because it is a sellers’ market.

 

What you buy is what you sell. There is no emotion; there is no sentiment about it at all. The marketers you see at the airport go to Apapa to all the traders, whether third party traders or direct traders selling products, they tell them this is the price. It is left to you to determine whether you can buy at that amount or not. In three weeks, the product climbed from N508 per litre to N520, N535, N545 and N550 at the reception coastal storage depots Apapa.”

 

He also attributed the skyrocketing price of Jet A1 to the difficulty in sourcing foreign ex-change, noting that sellers of the product do not accept naira. “Those who sell this product don’t accept naira, not even in Abidjan, they won’t take naira not to talk of Europe and the Middle East where this product comes from. How do you explain where someone needs $5 million and he is given $100,000? What will he do with $100,000?

 

That is the typical situation we are in. It is a case of everyone being left on his own and God for us all. “We are now at the vagaries of the market forces. There is nothing any one of us can do beyond that. Government will only help the airlines if they intervene on behalf of the traders and set up a monitoring committee to ensure that the traders that have intervened do not overly make a profit from intervention.

 

As long as there is no intervention, these traders are ready to go into the market and get products on their own, there is the need to sell and recoup. The price keeps going up. There are global events that keep making the price of the product go up,” he said.

 

Last line

 

Until most of these challenges are taken off, airlines would continue to see a steady rise in the price of the commodity, while the cost is passed onto the travellers

 

 

 

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