We have received the following article from an industry participant in the Nigerian aviation sector. We believe that there is some merit in the content, hence we will publish it in it's entirety and unedited, the individual asked for anonymity for obvious reasons.
Original text below:
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It has recently been reported that the Federal Government in Nigeria has opened a probe into the exorbitant prices of tickets being offered in the market by the domestic carriers.
A well overdue mission for the long suffering domestic air travellers in Nigeria, in my opinion.
According to sources, the Federal Competition and Consumer Protection Commission (FCCPC) will investigate the excessive airfares being unleashed on the domestic travelling public.
Great headlines, great media but will the exercise actually be effective? In all essence; probably NO. Unless, the new administration really take the issue to task.
The reasons for the failure of the competitive pricing environment are many and interlinked into the current airline regulatory regime in Nigeria. The facts are that most of these airlines are poorly managed, have weak business plans or business models and are seriously indebted. A number of these airlines should not be in operation purely down to SAFETY factors concerning the unviability of the business models. When I mean safety risk I mean not having enough funds to ensure that no corners are cut in engineering, flight safety and other aspects of the operations.
Examples of this could be falsifying documentation saying that engineering works have been carried out on an aircraft when it has not or for example saying certain time/life limited parts have been changed (because there is no money available to purchase the parts or because suppliers are refusing to supply parts due to amassed debt) - when they have not.
Another sin is not having enough flight crew and asking current crew to illegally fly over the capped monthly flying limit which means tired crew are taking command of flights when they should instead be resting - as per official guidelines.
These examples are not fictitious, infact on the contrary.
So, who's job is it to make sure that airline business models are robust and that there is no corner cutting when it comes to safety of operations? This remit falls under the Economic Regulation department of the regulatory body, in this case the Nigerian Civil Aviation Authority (NCAA).
In order to ensure the works have been carried out on the aircraft falls under the Department of Airworthiness under the NCAA.
The reason we highlight these 2 departments is because the control invariably is interlinked between these two key departments. If an airline's business model is not robust then red flags need to be raised an extra scrutiny needs to be placed on secondary checks.
Safety first, as they say (or should be the mantra).
So how are all of these observations linked to the price of air fares? In summary, I believe that the Economic Regulation is weak. So if an airline is losing money 9 months of the year of course they will try to maximise any revenue during a peak period, this is normal demand and supply some would argue. We argue otherwise. The fact that some of the airlines are running loss making business models (as demonstrated by not paying suppliers, staff salaries, Ground Handlers etc.) they will try to make up the losses during the peak period. We also ask how often the airline business plans are benchmarked and variances analysed? Do the airlines submit 3 year business plans? If so, how are they vetted and assessed?
Now let's throw the side conversations into the mix. Even if a minority of airlines agree to increase fares in a co-ordinated manner the market is such that the rest will follow. As each airlines wants to maximise revenue. Price fixing is very simple to prove if they correct forensic and audit methodology is applied.
Let's look at the economics of demand and supply. If 1 carrier puts it fares up to the highest levels then the will normally see demand fall as the travelling public would be attracted to the lower fares being offered by the competitors. The fact that fares have risen in a stepped manner or rather in a co-ordinated way - this raises suspicions that something may be wrong. In the normal free market model fares tend to trend lower, the case in Nigeria is that they are constantly trending higher; not all of cost drivers are attributed to market forces.
Fuel prices fluctuate, you do not hear the local carriers politicking that fuel price have gone down and yet we hear some absurd claims when they increase from time to time.
Whilst we are on the subject let us also clear up another false claim by the local carriers; they price their tickets at the parallel rate and still claim exchange rate issues, even if they get 60% of their forex via the Central Bank of Nigeria (CBN) channels then surely they are profiteering on the 40% rate differential? Nobody talks about this, instead the carriers politik and mask their own weak business models and sell questionable news to the public.
Back to the topic in hand, fares in Nigeria are too high. Even when you factor in "the Naija factor" we believe that fares are still too high and the travelling public are held to ransom every year by the weak and ineffective airlines operating in Nigeria. Why can you fly from 29 Euros for a one and a half hour sector in Europe when you pay from 90 and upto 150 Euros in Nigeria for a one hour sector?
I came across a video from a customer of one of Nigeria's largest airline's asking why a one hour sector the East of the country cost nearly double that to the other regions (note: the video has duly been removed). The individual made a good point but claimed racial bias; sadly he failed on this point. The Airline responded that it was not the airline discriminating against a certain tribe or region, rather the "system" that automatically sets the fares.
Now here is a key point, people are easily blindsided by either an explanation that they cannot understand or because they do not understand the industry. The system is programmed by the airline under the revenue management process. So if that airline set a maximum fare of Naira 220,000 for a one way ticket the system parameters will guide the price to that level. But the key is that the airline set the parameters. The airline failed to take responsibility and blindsided the customer in a very well choreographed reponse.
I was also interested to read recently that the FG was considering a 50% subsidy on airfares for the travelling public, quite simply, this is the worst thing that they can do as they would simply be rewarding airline failures at the detriment of the tax payers. In summary, if you have to subsidise air travel at the central level, the system has failed.
It's easy to criticise and finger point and let the status quo remain but I also proffer solutions should a Regulator or Ministry care to listen and want to take action.
In the immediate term I recommend:
That the level of Economic Regulation in Nigeria needs to increase and be enforced effectively. There has to be serious punitive action for airlines failing to meet the financial credibility test to operate in Nigeria. All airline business models need a fresh stress test to ensure that they are financially fit to operate. This, we believe should be the Ministry's and regulators immediate priority.
The regulator needs to build its own economic models to regulate the fare ranges of tickets on certain sectors to ensure that the consumer is protected and that the airlines make a fair profit. Many regulators across the emerging markets insist on published fare ranges to protect the consumers.
Any signs of price fixing are actioned effectively (issues tend to just go quite and disappear in Nigeria as there are no punitive measures, hence the incumbents take these actions as they know there is no accountability or punishment).
The government abandons any notion of 50% funding of tickets or such subsidy as this would mean endorsing an ineffective regulatory process and financing airline failure.
The Federal Competition and Consumer Protection Commission (FCCPC) should engage industry specialists (that understand revenue management and airline commercial activity inorder to audit pricing systems effectively) as they undertake their review so that it is fit for purpose and all encompassing.
The government looks to re-engage a national carrier initiative in which the consumer is protected. Lessons have to be learnt (and not repeated) as per the Nigeria Air debacle as Nigeria desperately needs to build a credible aviation industry for the sake of its citizens, on the domestic front, at the least.
We believe that there is hope for the sector in this new administration under President Tinubu and the very proactive Minister of Aviation and Aerospace, Mr. Festus Keyamo, who have so far made all the right moves.
There are also encouraging signs that the new Acting Director General of the NCAA, Capt. Chris Najomo, will continue the sterling work of his predecessor and take further steps to clean up the sector.
However, it may be high time now to tackle the beast and make some even further bold steps to ensure that the industry is safe, profitable and has longevity in Nigeria. There is enough demand for a robust sector in the country which includes a National carrier competing against the private sector.
Competition as they say is good, but in this environment needs to be regulated well and weak airlines need to leave the sector so that the well funded, well managed and serious players can move the sector forward and break the stagnation of the sector.
