Nigerian transport section benefitting from a period of investment

The aviation sector in Nigeria is going through a significant period of transformation. In all aspects, from infrastructure and airport management to domestic carriers, investment and change are on the cards. Given the current inefficiencies and challenges facing the sector, including long delays, burdensome costs and concerns over safety, this period of change will be welcomed. Alongside substantial investment, the sector also stands to benefit from Nigeria’s growing population and increasing incomes, resulting in an encouraging long-term outlook.

Short-Term Turbulence 

The past year has been difficult for the aviation industry due to a challenging economic environment at home, caused in part by currency pressures and slowing headline growth. “We have a lot of corporate clients, especially in the oil and gas sector, and it seems that they have changed their travel policy in favour of spending cuts,” Ohis Ehimiaghe, regional manager for North, West and Central Africa at South African Airways, told OBG. “Before now, for any trip above four hours in travel time, personnel typically flew in business class, but now only the top executives do that while other employees fly economy. Most clients have also reduced their travel spend by as much as 40%.”

This is particularly critical given that business class is a strong generator of revenue in the Nigerian market. Ehimiaghe estimates that business class traditionally generates almost 50% of revenue. However, in the current market this has dropped to 40%.

Yet it is not simply in terms of spend that the market has been affected. According to the latest statistics from South African Airways, volumes are also down. In the second quarter of 2015 international passenger traffic in Nigeria was down by 27.93% on the previous quarter and, compared to the same period of 2014, international passenger numbers were down by 6.55% while domestic passenger numbers fell by 12.39%. Overall, the market is dominated by domestic traffic. The 2.4m domestic passengers recorded in the second quarter of 2015 represented 69.37% of all passenger traffic in the country.

Cargo Services 

A slowing economy, a weakening naira and restrictions on the availability of foreign currency have influenced the volume of cargo traffic as well, substantially impacting carriers like South African Airways, for whom the 184m-person country ranks as the biggest cargo market in Africa. In the second quarter of 2015, air cargo volumes fell by 4.38% compared to the first quarter, a decrease of 1.85% on the same period the previous year. The vast majority of cargo – 89.6% – passes through Lagos, the country’s commercial centre. While current conditions are not favourable for growing this revenue stream, carriers see huge potential in the Nigerian market.

Costs 

Both domestic and international carriers must face down high overheads in the local aviation sector. While the costs of flight operations in Nigeria are comparable to many other West African markets they are significantly elevated compared to OECD countries. One of the most burdensome operational costs for domestic carriers is the price of insurance. Nigeria is designated a high-risk country by insurers, which means carriers that have aircraft registered in the country face significant premiums. The local industry has been affected by 10 air accidents in the last two decades and thus pays more for liability insurance. Domestic carriers pay at least twice as much for premiums as international carriers.

The government is working to mitigate this by improving safety, and the perception of safety, within the local industry. Nigeria already holds a category one rating under the US Federal Aviation Administration’s International Aviation Safety Assessment. Category one is given to those countries whose civil aviation authority is in compliance with International Civil Aviation Organisation (ICAO) safety standards. Now, the Nigerian Civil Aviation Authority (NCAA) is working on certification with the ICAO for all four of its major international airports, situated in Lagos, Abuja, Kano and Port Harcourt. Furthermore, in February 2016, three local carriers – Arik Air, Aero Contractors and First Nation Airways – received Operational Safety Audit Certification from the International Air Transport Association.

Fuel 

Insurance is not the only burdensome cost afflicting the sector. Despite a drop in the price of oil, carriers face high costs for aviation fuel. According to press reports, Africa has the highest jet fuel costs in the world, paying on average 21% more, while the West African sub-region has the highest fuel costs on the continent. In Nigeria, due to the lack of local refining capacity, most fuel is sourced through traders and is vulnerable to inflation associated with the depreciation of the local currency. In June 2016 the price of JET A1 fuel hit an all-time high of N170 ($0.54) per litre. Muktar Usman, director-general of the NCAA, told an aviation business summit in Abuja in April 2016 that aviation fuel constitutes 40-50% of an airline’s direct operating costs in Nigeria.

Currency Access 

High operational costs are compounded by the difficulty in accessing foreign currency. International carriers are struggling to repatriate revenues due to restrictions on the country’s dollar supply (see Economy chapter). Carriers are receiving as little as 5% of their foreign currency requirements as a result. The lack of foreign currency availability has led international carriers, including Iberia and United Airlines, to suspend flights or reduce capacity on routes in and out of Nigeria in 2016.

Airport Operations

The greater issue for the health and profitability of the sector in the long term are inefficiencies in airport operations. “We have the problem of infrastructural challenges at the airports, which restrict operations in Nigeria,” Chris Ndulue, managing director of the Nigerian carrier Arik Air, told local press in October 2015. “So you are utilising your aircraft for about eight or nine hours instead of about 16 hours. This is a major problem because if you don’t utilise aircraft to a certain level then you cannot make profits. This is obvious. So the important thing is that we have to address this infrastructural challenge.”

Nigeria’s major airports, which are run by the Federal Airports Authority of Nigeria, have historically suffered from underinvestment and poor maintenance, with baggage handling and immigration often causing major bottlenecks. “It is extremely difficult to operate on schedule,” Ehimiaghe told OBG.

The government, however, is looking at ways to address this. By the end of 2016 Murtala Mohammed International Airport in Lagos will open a new passenger terminal, raising the capacity to 30m. The airport accounted for 69.43% of international passengers and 39.42% of domestic passengers in the second quarter of 2015 and handled 1.66m passengers during that period. In terms of customer flow, the new terminal is expected to help enormously. However, as the facility has not been built with an apron for aircraft parking, there will be a long distance between it and the planes, making the boarding process longer. Overall, capacity is not a major issue, as there is good landing slot availability. However, congestion can become problematic in the evening when most flights arrive and depart. The airport authorities in Lagos and Abuja levy a flat landing and parking charge, rather than a fee based on the time of day. As such, there is little incentive for carriers to reschedule flights.

Privatisation Process 

Although management is likely to remain in government hands for the foreseeable future, some elements of airport operations have been privatised, which has helped improve efficiency and reduce costs. Baggage handling has already been tendered to private companies and has resulted in healthy competition on pricing and service in Lagos between Nigerian Aviation Handling Company and Skyway Aviation Handling Company.

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The Report: Nigeria 2016

Transport chapter from The Report: Nigeria 2016

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