The allure of airline business amid vanishing profit margin

In recent times, the airline industry has taken a hit as far as profitability is concerned. With multiple avenues directed toward increasing costs for the industry. Circumstances of the present create a unique environment for lower profit margins, writes, WOLE SHADARE

The big question

The question on the lips of many is why are businessmen, money bags, and aviation enthusiasts showing a remarkable interest in aviation, particularly the airline business if the profit margin is very slim? While many airlines, particularly in Africa are bidding goodbye to the sector a few years after starting operations with a lot of fanfare, others are queuing up and doing everything in their power to get all-important certificates of operation.

The Director-General of Nigeria Civil Aviation Authority (NCAA), Capt. Musa Nuhu in a recent chat with the media said, “From records, about 12 years ago, we had only 16 Air Operator Certificates (AOC). Right now, we have 32, out of which 12 are scheduled operators. We cannot keep operating the way we are operating.”

British business magnate and founder of Virgin Group, Sir Richard Branson had jocularly said if you were a billionaire, a venture into aviation could turn the fellow into a millionaire overnight.

Navigating murky waters

Airline businesses in Europe and the United States are more sophisticated as many of them have either joined one alliance or the other. Some have formed mergers to remain not only relevant but profitable. They daily invent and innovate to see how they could consolidate.

American Airlines and US Airways merged in 2013, leading to the retirement of the US Airways brand. The merger brought together two of the oldest airlines in the United States. It created the world’s largest airline at the time. This article looks back at the two airlines before they merged, the details of the merger, and its challenges.

The “big four” US airlines – American Airlines, Southwest Airlines, Delta Airlines, and United Airlines – have by far the most capacity, accounting for 74% of US airline seats, a total of just under 73 million between them.

At the time of the Air France-KLM merger, the coming together of these two airlines formed the world’s biggest carrier by revenue. It changed the shape of aviation, not just in Europe, but in the US too. Why did these airlines make the decisions they did and go ahead with such a merger?

To understand the impetus behind the KLM and Air France merger, it’s important to understand where these airlines were coming from. Particularly KLM had been one of the earliest pioneers of alliances, seeing the benefit in strategically aligning with airlines elsewhere both for its own revenue prospects and for the convenience of its passengers.

Low profit margin

Airlines only make $164 for every $16,400 they spend on the typical domestic flight, according to an analysis by Oliver Wyman at the Wall Street Journal. That’s a ridiculously low 1% profit margin.

The rest of the money goes to fuel (29%), salaries (20%), ownership costs (16%), government fees and taxes (14%), maintenance (11%), and other (9%)

The biggest thing eating away at profit is fuel, which has grown steadily more expensive. You can figure out what will happen if it keeps rising.

In Nigeria, it is not exactly known how much an airline makes on a one-hour trip costing between N70,000 and N80,000. On a bad day, it could be as high as N100,000 or more depending on the time of purchase.

Passengers flying domestic routes are forced to pay more in taxes and surcharges than the actual cost of the flight ticket, investigations have shown.

An analysis of the cost of tickets of major domestic airlines indicated that on some airlines, passengers paid up to 64 percent of the total cost as surcharges and taxes among others.

A breakdown of flight tickets on domestic routes gives the components of airfare which include the base fare, surcharges, taxes, and service fees, among others. In most cases, the surcharges are higher than the actual fare.

An analysis of an airline return economy ticket from Abuja to Lagos showed that the total cost is N70,000  but only N25,400 of the total cost is charged for the ticket fare, with the remaining N45,000 going as either surcharges, taxes, or fees.

Experts’ views

Chairman of Air Peace, Mr. Allen Onyema, during a recent aviation roundtable, attributed the taxes paid on air tickets to the inability of some airlines to meet their salary obligations.

Chief Executive Officer of Aero Contractors, Capt. Ado Sanusi said that the taxes and charges payable to the government were usually clearly defined on the ticket, adding that fuel surcharges also formed part of the add-on charges.

While jet fuel is skyrocketing, the high cost of aircraft maintenance with the scarcity of foreign exchange and the devaluation of the Naira has further worsened the precarious situation of the airlines and one that has wiped off any marginal profit they rely on to still remain in business.

Something must surely give the Chief Operating Officer (COO), Mr. George Uriesi stated at the just concluded Aviacargo conference held last week in Lagos.

According to him, insurance, one of the dollar-based payment components of any airline business is a sine qua non, and with the rising cost of the dollar so increases the losses.

He in fact stated that the airline’s losses are those accumulated in dollars due to rising costs.

He said,” Insurance is a growing problem and because we cannot fly an uninsured aircraft we have no choice but to hang in there and source for the dollars to do the insurance.

”The losses we accumulated were mainly dollar-based components, when you are procuring dollars above the then CBN rate, you apply when it was 400 to a dollar and you get it at 680. The difference is a lot.

” Now, it is being floated and it is running faster. Yesterday we bought a dollar for N915 but on the platform it was put at N890. Today, it is N900 on the platform I’m sure when we are getting it we would procure at 950.

” The new style now is they tell you ‘give us cash and when we buy dollar we will give you. But it delays, you ask for your cash back and they tell you that you wouldn’t get the dollar.”

” Then when they now have the $400,000 they will now tell you the price they got it for exceeds what was paid and you need to add more. That is where we are now, I don’t know how other airlines are managing,” he added.

Expressing his frustration at the airline business in the country, he said, “I don’t know but there is a point we get to, we may not be able to do it again but I hope we don’t get there.”

On raising fares to reflect current realities he said,” You cannot increase fares ad-infinitum, at some point you get to where’ na only you and your airplane go dey fly‘ so you have to first struggle where you are. We have not raised fares because at this point in time, if you attempt to do it, you’d be flying empty.

Last line

The airline industry is facing a unique set of challenges when it comes to getting profit margins back to a position where the industry may flourish. While all of these factors do drive the price for operation up, the revenues of the airline industry remain low.

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