As Airfares Continue to Stoke Controversy 

The Federal Competition and Consumer Protection Commission is engaged in controversial media brickbat with Air Peace over the high cost of air fares, which the commission alleged is exploitative. But there could be better understanding with the review of forex and its role in airline operation, writes Chinedu Eze

In Nigeria, air travellers are always incensed when airlines increase fares, and most often, they are not patient to listen to airlines’ technical explanations why fares have to go up. 

Last year, there was almost a protest staged to oppose the rising fares of domestic airlines as the value of naira nosedived along with the diminishing capacity of operating aircraft.

What exacerbated the anger of air travellers during last year’s Yuletide season was that the fares to old Eastern Nigeria was higher than other destinations; a trend which happens every year, even in the best of times; as airlines yield to the reality that flights that fly to those Eastern destinations with full passengers return to base empty and also to the demand and supply principles because of the high demand of flights. Since the last 30 years, at least, fares have always been higher to those destinations during Christmas; just as road transporters charge more during that season.

Obviously, it was the protest of passengers against increasing airfares that prompted Federal Competition and Consumer Protection Commission (FCCPC) to step in and accused Air Peace of charging exploitative fares. In the media war that ensured, FCCPC did not display any studied analysis of its investigation of the airline to justify the allegation of charging exploitative fares and it did not also present alternative fares that should be charged; maybe after carrying out the investigation of the airlines or particularly Air Peace.

Genesis

In February 2022, oil marketers suddenly increased cost of aviation fuel from N400 per litre to N650-N700 per litre. This prompted the airlines to introduce a base fare of N50, 000. Airfares rose from N30, 000; N40, 000 to N50, 000 and above. The increase prompted FCCPC to step in and accused airlines of exploiting passengers with high fares. So, there is also a connection between the cost of operation and fares charged by airlines.  

A report by The Cable, an online newspaper, on March 2, 2022, had this headline: ‘It’s against the law’ — FCCPC orders airlines to suspend ‘coordinated’ airfare hike. The report stated, “The Federal Competition and Consumer Protection Commission (FCCPC) has issued an interim order prohibiting the sudden hike in the price of airfares by domestic airlines. FCCPC then accused the airlines under the aegis of Airline Operators of Nigeria (AON) of price fixing.”THISDAY investigations indicated that airlines did not stop the new fares or stopped flight operations; because AON insisted that the fares were reflective of the cost of operations. 

Justification

In the recent development, FCCPC singled out Air Peace and accused it of exploiting passengers with high airfares and insisted it was investigating the airline.

In reaction to earlier press conference held by Air Peace, where it explained what it cost the airline to put its aircraft in the air and suggested that the commission should go through the Nigeria Civil Aviation Authority (NCAA), which regulates the aviation industry. FCCPC had reacted to the airline’s explanations and disagreed with the domestic carrier.

FCCPC said it was investigating Air Peace in response to the “avalanche of petitions received from passengers.”

“For instance, in asserting that only the aviation regulatory agency could inquire into its affairs, Air Peace only betrays a terribly poor understanding of both the legal and moral pillars of its operating environment. Passengers are consumers of its services. Their rights are inalienable and guaranteed under the FCCPA. It is the basis of FCCPC’s intervention.

“As stipulated in Section 17(e) of the FCCPA 2018, the FCCPC is mandated to carry out inquiries considered necessary or desirable in connection with any matter falling within the purview of the Act. Furthermore, Section 127(1)(a) empowers the FCCPC to ensure that pricing practices across all sectors, including aviation, are fair, competitive, and non-exploitative. Specifically, it states that no undertaking shall offer to supply, supply, or enter into an agreement to supply goods or services at a price or on terms that are manifestly unfair, unreasonable, or unjust,” the commission said.

Expert’s View

An aviator, who has managed schedule service airlines and has been in the industry for over 35 years, spoke to THISDAY on the pricing mechanism of airlines. Managing Director, Flight and Logistics Solutions Limited, Amos Akpan, explained how airline pricing mechanism works.

Reacting to the allegation of exploitative fares, Akpan said: “Airline’s pricing system is not exploitative. I know airline’s pricing system is complex. If you don’t know the how and the why, you are likely to assume wrongly. If you realise that your neighbor on a flight paid N60, 000 while you paid N200,000 for the same flight, you will react with your emotions. The passenger with N60, 000 fare bought under a different programme while the passenger with N200,000 fare bought under a different programme both on the same product or service. Technical terms like algorithms, matrix, clubs, mileage, segmentations are applied as formulas in calculation and setting of fares.”

On why it is difficult for Nigerian airlines and air travellers to reach amicable understanding about air fares in the local market, Akpan said that most elites in Nigeria do not want to know the cost of producing a service or product in Nigeria. 

“All we want is to pay lower or same price for same quality of product or service as obtained in other countries. Except for labor, all inputs to production are astronomically high in Nigeria. It is better experienced to know how difficult it is to operate in Nigeria. Even the cost of taking financial facility to do the business is extremely high in Nigeria,” he said.

On FCCPC challenging the high fares, he said, “FCCPC has a difficult job. They don’t want Nigerians to be taken advantage of, but they must appreciate the need to be cautious in regulating a technical industry where practices and procedures are globally unified. Domestic Airlines are also Nigerian owned businesses. It is difficult to plan and execute business plans in Nigeria where price change and policy somersault are constant.”

“For example, you planned to source forex at N1000/$1 to buy aircraft spare parts, but it rises to N1,750/$1 as you implement your plan. This would be tolerable if you get the forex as at when needed to keep your aircraft flying. Nigerian airlines have paid Naira to purchase forex but are yet to get the forex. As a result, most of their planes are grounded and their services are disrupted. Government institutions should work with the business corporations to enable production and sustenance of world class products and services in our country. The Minister of Aviation and Aerospace development has been working closely with industry stakeholders and the aviation agencies to solve these problems. FCCPC will not get desired results if they ignore industry inputs while carrying out their functions,” Akpan noted.

On the solution of the problem, he suggested, “It appears like an all losers war. There was need for FCCPC to gather relevant information from the industry, especially the NCAA, so they will be sufficiently armed with information to explain before going public. All parties should stop going public on this issue. Take time to gather information about all the inputs to production of flight services in Nigeria. There is a cost to produce a seat on a flight which is established, but there is also a holistic approach to retaining the flight operations. The result will enlighten us and we will be better informed. The ongoing press war confuses the less informed, it is heating an already tensed society.”

Keyamo’s Reaction

Meanwhile, the Minister of Aviation and Aerospace Development, Festus Keyamo, who quickly learnt the nuances of the industry and began to remove the clogs and cobwebs that beset and impaired the sector from making the expected progress did not take kindly to FCCPC’s statement. Keyamo described the FCCPCallegation as careless. He went further to explain what Nigerian airlines are going through currently and how lack of capacity is influencing the fares.

He said: “I think it was a very careless statement – I say that with all apology – by the agency, making such a statement without consulting the core agency involved in regulation, which is the NCAA. The power to regulate these airlines and for the airlines to inform you about their price increase and all of that is domiciled in NCAA; that is the core agency.”

“They should have contacted the NCAA for them to look at the books, which we have been doing, so we would have given them facts. But to single out a few airlines that we are struggling to expose to the world for them to get more enhanced capacity, it was a bit careless,” he added.

 Keyamo went on to emphasise that the issue at hand was not one of exploitation but rather the airline industry’s capacity limitations, especially regarding aircraft acquisition and servicing routes.

He said, “What we are facing is a problem of capacity of the airlines to acquire aircraft and to service their routes. Again, we have things that are totally out of our control, which is the issue of the fluctuation of the forex, the exchange rate, that affects everything in aviation. Everything in aviation is dollar based.”

He then explained that Nigerian airlines spend majorly foreign exchange due to their need to hire aircraft, which he referred to as wet leasing.

“All of these are foreign exchange, and with the fluctuating nature of our naira against the dollar, you will expect that it will affect also their cost of operation. Now, what we are therefore doing is to ensure that we expose them to the markets across the world where they can now access aircraft on very good terms, and this will impact on the prices of tickets and their cost of operation. That is what led us to addressing the issue of the practice direction pursuant to the Cape Town Convention. That is the core of the problem of the aviation industry that this President and Vice-President graciously supported us to get to, and we are there now,” he said.

Entitlements 

Industry analyst, Sindy Forster, referring to the cost of airline operation, noted that travellers and even concerned government agencies tend to ignore all the fixed costs and variable costs, choosing only to reference a few, noting that there should be correct calculation of fixed costs and variable costs, which are crucial in determining how airlines set ticket prices and manage profitability.

She explained that fixed costs create a baseline ticket price required for the airline to break even, noting that airlines try to increase frequency, maximize load factors (percentage of seats sold) to dilute these fixed costs over a larger number of passengers. According to her, variable costs change based on the number of flights or passengers and determinant expenditure include fuel costs (a significant variable cost and highly volatile); crew wages; food, beverages, and in-flight amenities; landing fees (vary by airport and flight frequency) and passenger service fees.

Forster said airlines must cover both fixed and variable costs while remaining competitive. 

He said, “That is why they use sophisticated pricing strategies such as:Dynamic Pricing: Adjusting ticket prices based on demand, seasonality, booking time, and competition; class segmentation: Offering different fare classes (e.g., economy, business) to capture more revenue from customers willing to pay more; yield management: maximizing revenue per available seat kilometre/mile (RASK/RASM) by balancing load factors and ticket prices.”

On FCCPC citing the newly advertised base fare of N80, 000 by Aero Contractors to justify its allegation of exploitative fares against Air Peace, Sindy Forster said, “You can’t compare the costs of a two aircraft limited destination airline, with an airline with multiple aircraft, including several ordered awaiting delivery, and with multiple domestic, and several regional and international destinations.”

It is expected that both FCCPC and Air Peace will review their positions and reach a compromise and hopefully, the commission will appraise all the said mechanisms in airline operation and adopt a new perspective in checking the possible excesses against the customer in air travel services.