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Naira depreciation: Air fare may go up by 25 % in Dec

Nigeria’s foreign reserves stand at less than $38 billion and the Central Bank of Nigeria is reluctant to continue to deplete the reserves to salvage…

Nigeria’s foreign reserves stand at less than $38 billion and the Central Bank of Nigeria is reluctant to continue to deplete the reserves to salvage the naira, considering the hurt a depleted foreign reserve can also do to our struggling economy.
As at Monday this week, the naira was exchanging at about N185 to a dollar at the black market and N174 at the interbank market.  Experts fear if the downward slide of the naira isn’t stopped by December 2014, it would be exchanging at N200 to the green back global trading currency.
Even at the current rate, soon, the effects would reverberate across all sectors of the economy as process of goods and services would go up, naturally. Since Nigeria is basically a consumer nation (majority of the basic goods, consumables and non-consumables, sold in Nigeria are imported from overseas), if the naira continues to fall freely, the wholesalers and retailers of goods will have to adjust the prices of their products upwards to reflect the new cost of importation. This may also lead to rise in inflation.
Just like other sectors of the economy, the aviation industry will be significantly affected negatively. Experts project that air fares may rise to as high as 25 percent by December if the naira continues to lose value to the dollar. This is because majority of the airline operational costs are priced in dollars yet for domestic airlines, they charge airfare in Naira. This suggests that, beyond the rise in cost of doing aviation business, local airlines will be forced to adjust fares to even up with the loss in naira value to the dollar.
“Anytime there is a devaluation of the naira, there is an immediate effect on airline operations as most services rendered in the sector are priced in dollars. For instance, the reservations system rental; operations system rental; aircraft lease payments; aircraft maintenance; aircraft parts as well as pilot training (simulator training required from each pilot once every 6 months). There are many more areas that are affected including the cost of aviation fuel. Almost all aviation fuel in Nigeria is imported,” an operator who wants to be anonymous said.
Another aviation expert, Engr. Jirgba Bitacy, explained that on the average the cost of an A-Check for aircraft which is done monthly or after every 250 flight hours cost about $100,000. This he said may be one of the immediate huge effects the rising dollar may expose airlines to.
He however noted that for now, the airlines may not be too pressured to increase their fare except the naira lost in value persists for at least a month. According to him, most of the airlines may have done at least the A-Check by now or may have acquired the equipment they need. But if the fall in naira value persists for more than a month, the airlines would be affected and they may not have any choice but to readjust their fares, he said.
Also commenting, the Managing Director/CEO of Med-view Airline, Alhaji Munir Bankole, told our correspondent that even the aviation industry will feel the heat as the cost of maintaining aircraft would go up significantly. According to him, if the naira continues to slide, profits of the airlines will be eroded, adding that “we charge fares in naira yet we run almost all our operations in dollars.”
He further explained that “for you to be in business, you must have an aircraft that is serviceable and airworthy. For you to acquire a new aircraft, you must have a minimum of $50 million. To lease an aircraft starts from $7.5 million dollars. By the time you convert $7.5 million into the sort of exchange rate we are having now, it’s over a billion.”
“For fuel alone, we spend an average of N300 million, that’s about 70 percent of the running cost. This is besides the wear and tear on tyre, engine circle maintenance and other maintenance cost,” he noted.
Engr. Sheri Kyari, the MD/CEO, Finum Aviation Services Limited, said the aviation industry relies about 80 percent on the dollar – from maintenance, spare parts purchase, expatriates remunerations and even paying service providers.  
He said when the cost of operations rises; “we anticipate that airfare will rise by about 20 percent. Again, if the fare rises too much, it would affect passengers’ traffic so more tough times for airlines.”
He also noted that most airlines that are currently indebted may not be able to service their debts obligations and these may even lead to a collapse of some ailing airlines.
He also noted that in some extreme cases, it may force airlines to begin to cut corners and this may heavily compromise safety.
He added that if inflation bites more harder, even staff would demand more pay and that may have negative impact on the airlines.  A top management staff in Arik Air, who prefers not to be named, said: “Airlines with international routes, particularly local airlines, will be forced to increase air ticket to survive.”
He said since the international tickets are denominated in dollars, the ticket costs will have to go up if the airlines would remain in business.
He also noted that the cost of running the airlines will definitely go up because almost all the maintenance are done abroad and paid for in dollars.
“All the spare parts of an aircraft is sourced abroad and paid for in dollars. Almost all the major maintenances are done abroad and paid for in dollars. If sourcing dollar is expensive locally, we won’t have a choice but to increase air tickets. That’s how we will survive.”
“Even domestic tickets may also rise as the cost of operations rises with the falling naira. So, just like other sectors of the economy will be affected, aviation won’t be spared. In fact, it would be one of the worst hit as the dollar is the dominant currency that is used,” he explained.

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