How low can airfares be in Nigeria?

 

The prospect of having new low cost airlines in Nigeria is already raising hope of sharp drop in fares. But WOLE SHADARE asks how low can fares be in Nigeria

 

New model

Before the end of this year, two carriers are expected to commence operations in Nigeria. This would add to the existing eight commercial airlines that are already in existence. One of the airlines is Jetwest. While Jetwest has finalised its plans, the other carrier is still trying to sort out itself. Its operations is being kept to the operator’s chest.

One central word on their lips is ‘low-cost’. They want to offer low cost fares. No one would have thought that investors would still find Nigeria’s aviation industry attractive to want to invest several billions of dollars in an industry that airlines have burnt their fingers and consequently led to their extinction.

In truth, the country’s aviation sector provides fertile ground for serious minded investors who are business minded and backed up with deep pocket.

But despite the gloomy conditions, the team behind it is aiming high. The venture’s founder is Dikko Nwachukwu, a serial entrepreneur with a background in aviation, said the mission of JetWest is to make air travel accessible for more people.

He said: “We want to do for travel what cell phones did for telecoms.

“Fifteen years ago, there were less than one million phone lines in Nigeria and now there are 100 million…We could have 100 million air travelers and I know jetWest will be in the middle of the revolution.”

If all goes to plan, jetWest will launch this year with 100 employees and a fleet of three Airbus A320 jets flying local routes in Nigeria.

That could expand to 15 planes within three years and 40 within five, carrying over 10 million passengers a year. The company hopes this will cover neighboring countries in the region.

But not all analysts are convinced that such a smooth ascent will materialise. Nigeria looks like a low-cost operator’s dream with massive population density,” says an aviation analyst.

“But Nigeria is a very difficult operating environment…the economy is down and foreign exchange is getting eased off, so it is very difficult to get revenue out of the country for leases.”

 

Poorly priced fares

 

How possible is applying low-cost model in an environment where fares are already low? Airfares do not reflect the actual cost of operation because of the low disposable income of Nigerian citizens. At the current cost of aviation fuel and maintenance, for a Nigerian airline to make profit, it should charge between N40,000 and N45,000 for one-hour flight and between N55,000 and N65,000 for one hour-plus one way trip.

This amount will appear too much for so many people whose salaries are less than N100,000 per month. But that is the actual pricing that could generate profitable revenue for airlines and make them to be in business. Currently, air fares oscillate between N25,000 and N26,000 and in rare cases N28,000.

This is not sustainable for any airline that wants to be in business as the carriers already offer what is generally termed ‘low-cost’. This is even made worse because airlines have lost over 30 per cent of traffic.

Any attempt to raise it further would make more people travel by road, which is very dangerous because of the state of Nigerian roads.

Low-cost concept

The concept of a low cost airline was started in the seventies by the American domestic carrier Southwest with the sole objective of offering cheap airfares to the consumers.

This created a situation where already established flag ship carriers or legacy airlines lose a significant amount of the market share to these newly formed low cost airlines, purely because of their ability to charge a lower price over traditional full cost airlines. Many of the low cost airlines all around the world initially based their strategy on the South West’s model.

However, as the number of Low Cost Airlines (LCAs) increased over time, more and more of these airlines have deviated or ‘modified’ this model in order to survive in the industry due to competition.

The basis of operation of low cost airlines remains the same, which is to provide the lowest price for the consumers by undercutting the price levels of legacy carriers.

But because there are a number of airlines competing with each other, some LCAs have modified their strategy in order to try and stand out from their competition. This strategy is known as differentiation strategy.

The philosophy behind this being that if a company can differentiate their product in some dimension that the customers value and at the same time sustain this differentiation, they will be an above average performer in the industry.

Risk of increased fares

Nigerian carriers cannot make the mistake to charge N40,000 or above for one hour trip because of the negative reaction that would trail such action as many more would boycott air travel.

Early this year, there were indications that Nigeria might eventually adopt low cost airline model as a result of low traffic occasioned by tough economic situation rather than the willingness to do so. Already, because of the huge seat capacity that airlines provide on the domestic scene with low passenger traffic, many of the airlines offered then in June last year air fares as low as N12,000, depending on the time of booking.

The operators, investigations revealed, wanted to concentrate on huge volume to be able to apply the model because Nigeria provides such market to succeed.

They hope that at a very low cost, they would be able to attract more passengers to fill their aircraft, which would make up for the fares they are going to charge.

But this seems not to be realistic again following the continuous slide of the naira that has made it very cumbersome for airlines to be profitable.

Merits

The biggest advantage of low-cost airline is that the common consumer or rather the budget traveller can look forward to travel by air. Air travel is no longer a dream for the common man. Low cost air services do not involve expensive frills such as complimentary food and drinks. Instead, customers can purchase their meals and refreshment onboard. They have a broad range of vegetarian items, snacks and drinks to choose from. Some airlines even allow passengers to carry their food along. Low-cost airlines also enable customers to get low fares under premium brands. Many offer shuttling services including air conditioned buses to carry their customers to the aircraft.

Last line

In upcoming markets such as Africa and Asia, it will take a few more years before the low cost market reaches maturity due to the restrictive nature of the governments involved.

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