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Jet fuel: Between another subsidy regime and market realities

By Wole Oyebade
13 May 2022   |   4:09 am
For the second time in two months, the National Assembly on Monday, summoned airline operators, oil marketers, Nigerian National Petroleum Corporation (NNPC) and the Central Bank of Nigeria (CBN) to a round-table over soaring cost of jet fuel for which the operators threatened to shut down local air transport services.

aviation fuel

The National Assembly’s intervention on the cost of aviation fuel has calmed storms in the air transport sector. But knee-jerk legislative fiat placates economic problems more than it solves them. And with the beneficiary local airlines neither willing nor compelled to face market realities, the government risks another vicious cycle of subsidising jet fuel. WOLE OYEBADE writes.

For the second time in two months, the National Assembly on Monday, summoned airline operators, oil marketers, Nigerian National Petroleum Corporation (NNPC) and the Central Bank of Nigeria (CBN) to a round-table over soaring cost of jet fuel for which the operators threatened to shut down local air transport services.

The fact is that the air transport business, like the fuel it uses, is deregulated and subject to vagaries of market realities. “By that standard, the meeting and lawmakers’ intervention are uncalled-for,” fuel marketers had said.

But the air transport sector is too essential to be left to its hurdles. Besides its central position in a modern economy, it has become the only means of safe travel for Nigerian elites that want to evade rail and road terror attacks and kidnappers.

The lawmakers, in enlightened self-interest, negotiated a temporary reversal from N700 to N480/litre, at least for the next three months. It was a good day from the operators’ perspective.

While operators said they had averted the likelihood of passing the high operating cost to air travellers and worsening inflation, neutrals did see through the Pyrrhic victory. They said the circus of going round the age-long problem is not the way to fix it.

Stakeholders said instead of realigning the business model along the market realities as stipulated in the rule book, perpetually “arm-twisting” governments for interventions is not a sustainable solution. They said in three months, the sector will be back at the “subsidise-us” table.

Customers first
Aviation fuel, also known as Jet-A1, accounts for between 30 to 40 per cent of operating costs in the sector. As a deregulated arm that is exclusively controlled by suppliers, the price has consistently fluctuated along with Naira to Dollar exchange rate.

Recall that the carriers had in controversial circumstances earlier jacked up the base airfare by 66 per cent, scaling up the minimum ticket fare from about N30, 000 to N50, 000. ‘Today’s flight’ economy tickets sold for an average of N80, 000 on one-way, and its round-trip variant was offered for about N130, 000.

Chairman of United Nigeria Airline, Dr. Obiora Okonkwo, in February said it was regrettable that the fuel that sold for N190/litre in February 2021, when the airline began operations, had in 12 months increased, more than 100 per cent. About two months later, the cost ballooned by 300 per cent, allegedly selling at N720/litre.

Okonkwo said it was difficult to find any aviation sector that survives on such instability and a reason all operators are worried.

To save the carriers from the dire situation, Okonkwo said there was need for special funding for the sector that heavily supports the economy.

President of the Airlines Operators of Nigeria (AON), Abdulmunaf Yunusa, noted that government’s earlier intervention in the aviation fuel crisis failed to forestall imminent shutdown, with Jet-A1 scaling the N500/litre benchmark.

“No airline in the world can absorb this kind of sudden shock from such an astronomical rise over a short period. While aviation fuel worldwide is said to cost about 40 per cent of an airline’s operating cost globally, the present hike has spiked Nigeria’s operating cost to about 95 per cent.

“In the face of this, airlines have engaged the Federal Government, the National Assembly, NNPC and oil marketers with the view to bringing the cost of Jet-A1 down, which has currently made the unit cost per seat for a one-hour flight in Nigeria today to an average of N120, 000. The cost cannot be fully passed to passengers, who are already experiencing a lot of difficulties,” Yunusa said.

Marketers pushback
Major marketers, however, said that the “harsh economic realities and attendant high cost of fuel” was due to global challenges and not peculiar to airline operators.

Notwithstanding, Chairman of Major Oil Marketers Association of Nigeria (MOMAN), Olumide Adeosun, denied selling at such exorbitant rate alleged by the airlines.

Adeosun explained that the verifiable prices in West Africa range from $1.25 per litre in Ghana to as high as $1.51 per litre in Liberia.

“Due to the intervention of NNPC over the last several weeks, aviation fuel is landed into marine terminal tanks in Nigeria at between N480 and N500 per litre depending on the logistics efficiency of the operator. Due to high costs of specific handling of Jet-A1 (special transport and continuous filtration), the product is sold on the tarmac at Ikeja (our benchmark), between N540 and N550 per litre and across other airports at between N570 and N580 per litre.

“In comparative terms, the aviation industry is already benefiting from government’s intervention when local prices are compared to West African regional prices, despite the deregulated status of aviation fuel. This situation is hardly sustainable given the already humongous N4 trillion cost of the PMS subsidy,” Adeosun said.

Pressing the right button
Apparently unmindful of marketers’ position, the Monday stakeholders’ meeting, at the behest of the National Assembly, resolved that the NNPC would supply Jet-A1 to marketers nominated by airline operators for a period of three months at N480 per litre, pending when the carriers would be granted licences to import the commodity.

Speaker of the House, Femi Gbajabiamila, said the situation was a crucial moment for the country. “The shutdown of airline operations has the potential of shutting down this government. We cannot sit here as stakeholders and fold our arms and watch this happen. We need to address this matter once and for all. I agree with you; I think the problem is with the marketers.”

But the “political” solution did not suit aviation stakeholders too well. President of Aircraft Owners and Pilots Association of Nigeria, Alex Nwuba, has more questions for the interventionists.

Nwuba said: “Does the National Assembly understand the Nigerian economy? Fuel lands at above N300 based on an international benchmark for which we do not know the exchange rate used? Then it gets imported and all the taxes and levies that are unknown are imposed, before it is transported all the way to the aircraft?

“Whatever the cost, how do we impose a price on oil marketers? Have we abandoned the free market system for a controlled economy, and these are lawmakers? If we set the premium for jet fuel, would we set the premium for diesel? Of the N6 trillion naira spent on petroleum products’ imports, how much is petrol, diesel and jet fuel? What is the use in the economy and how much contribution to Gross Domestic Product are each of these users?

“We seem to have lost our bearing. One conversation about private profit is cascading to how the entire economy works. Bread price, which is a staple, also needs to find the N50 mark. Welcome to the new socialist state,” Nwuba said.

Aviation Security consultant, Group Capt. Ojikutu (rtd), reckoned with Nwuba, adding that the aviation regulations were clear on what to do in the face of high cost of operations, rather than seeking executive intervention.

“Instead of the airlines complying with the Nig. CARs Part18.17.1.1 to prepare new tariffs for the Nigerian Civil Aviation Authority’s (NCAA) approval, they prefer to run to the National Assembly and the Executive for concessions. There had been one such government intervention in 2010 and last year had another. But for how long shall we be moving against the traffic?” Ojikutu queried.

President of the Aviation Safety Round Table Initiative (ASRTI), a think-tank group of the local sector, Dr. Gabriel Olowo, said the crisis facing the aviation sector was real, but required more than a temporary solution.

Olowo said the fuel problem had lasted beyond 20 years and could hardly be resolved where operators are enmeshed in destructive competition.

Indeed, that lack of cooperation played out in the aborted plan to shut down operations in protest against the cost of jet fuel. Having signed the notice memo, several of the airlines backtracked just before the D-day.

Akwa Ibom state-owned airline, Ibom Air, publicly renounced plans to shut down scheduled operations citing allegiance to the state, travelling public and creditors. Green Africa, Dana Air, Aero Contractors, Arik Air and Overland soon affirmed the continuation of scheduled operation “in the overall interest of our guests, corporate partners, staff and the industry at large”. Only Azman showed commitment to the collective agreement, until the AON aborted the shutdown option.

Olowo said AON did not shut down because it is un-Nigerian to cooperate, collaborate or consolidate for common causes such as that.

“Otherwise, we wouldn’t be at this stage. Aviation fuel has been an issue for upwards of 20 years in Nigeria without serious attention. Yet, airlines keep operating out of being patriotic. Regrettably, this is like planning for an accident. Please, heed the voice of the watchman! God forbid.

“This has been the essence of my consistent advocacy for upward review of tariffs all the time. But how high can tariffs go, given the average passenger purchasing power? If any airline pretends about this problem, such airline must be receiving subsidies for the business or cutting corners. No operational and management skill can answer for this uncontrollable factor of the business. My take: the government must provide a lasting solution once and for all at this time,” Olowo said.