Jet A1: Airlines mull hedging to lower cost

There are indications that Nigerian carriers may decide to enter into partnership with a view to resolving some of the bottlenecks that affected their operations last year.

Consequently, two airlines are planning on fuel ‘hedging’ to minimise the excruciating pains they went through that crippled their operations.

The carriers are said to be planning to build huge storage facilities where fuel can be stored. The facility, it was learnt, are to be built in Lagos.

Alternatively, fuel marketers could also help the carriers to store their product as long as payment is done in advance for the quantity of JET A1 they would need within a certain period of time.

Top officials of the airlines who spoke on condition of anonymity because they have not concluded yet with the Nigerian Civil Aviation Authority (NCAA), said what the carriers are currently experiencing with aviation fuel scarcity was uncalled for.

The airline industry is cyclical in nature and sensitive to many key drivers, the most prominent being the global price of crude oil.

It is a well-known fact that movements in oil prices have a significant impact on the well-being of companies in the airline space. Fuel costs account for a significant chunk of an airline company’s operating expenses.

Consequently, lower the oil prices, the merrier for airline stocks. This has been the trend for the last year or so. The persistent fall in oil prices has tremendously boosted the bottom lines of most airline stocks.

Fuel accounts for over 35 per cent of an airline’s operating costs, and is the number one expense for airlines ahead of labour costs.

Airlines need to rein in fuel costs to stay afloat. Indeed, achieving the lowest fuel unit cost has become the strategy par excellence for airlines to maintain a competitive edge Hedging strategies are widely used by airline companies as a profit protection tool to cope with the rising fuel prices.

Domestic airlines in Africa’s largest economy have grappled with shortages of Jet A1, as dollar supplies fall way short of demand.

Airlines in Nigeria have a daily demand of about two million litres of aviation fuel. Consequently, refining the fuel locally could equate to saving as much as $152.75 million (N34 billion), incurred on the back of importation.

Government has not made the importation of aviation fuel its focus and it has left it solely to marketers who are now having challenges with sourcing forex to meet the demand for the product.

Many of the marketers are having challenges with foreign exchange. Aviation fuel, which sold for N105 in March, now sells for N200 in Lagos and N240 outside Lagos while in Ghana, the same product sells between N130 and N150.

Because of this huge price difference, as well as the scarcity in Nigeria, there was the fear that airlines may take advantage of that to buy their commodity in Accra.

Nigeria imports Jet A1. But, given the collapse in the value of the naira in recent months and given the scarcity of foreign currency, importers have struggled to source enough products to meet local demand.

An oil marketer who spoke on condition of anonymity told New Telegraph that, said marketers are finding it difficult to source for forex at the stipulated current rate of N306 to a dollar.

The Minister of State for Aviation, Hadi Sirika, had recently assured that the problem associated with scarcity of aviation fuel would soon be a thing of the past when government finalises work on Kaduna and Port-Harcourt refineries that would be dedicated solely to the refining of aviation fuel.

Sirika said for the operators to overcome scarcity, plans were in top gear to refine aviation kero locally, which he said would bring down cost.

He stated that the refining of the commodity in Nigeria would help to bring down the rising cost of aviation fuel.

Wole Shadare