Fuel price woes

Five questions to help understand the impact of soaring fuel costs in Africa

By Nelly Fualdes

Posted on July 20, 2022 10:30

 A logo of the Nigeria National Petroleum Corporation (NNPC) at a petrol station in Abuja, Nigeria, 19 March 2020. © Afolabi Sotunde/REUTERS
A logo of the Nigeria National Petroleum Corporation (NNPC) at a petrol station in Abuja, Nigeria, 19 March 2020. © Afolabi Sotunde/REUTERS

Although airlines around the world are keeping an eye on the price of Brent crude oil, the situation is even more critical in Africa.

1 – What is the situation?

“Since the crisis began between Russia and Ukraine, the price of crude oil has continued to rise because of all the embargoes in place, which have reduced the level of supply,” says Abderrahmane Berthé, secretary-general of the Association of African Airlines (Afraa).

For its part, the International Air Transport Organisation (IATA), notes that jet fuel, which historically trades at $20 per barrel above crude oil, has seen this gap widen to more than $50 since March.

Even the companies that had cash reserves have burned them over the past two years

“With an average jet fuel price in 2022 of $143.5 per barrel, the combined fuel bill of the world’s airlines will increase by $134.1bn this year, compared to 2021,” says a note that the organisation published on 8 July.

2 – Why is this new crisis unfortunate?

After two years of crisis due to the Covid-19 pandemic, the accounts of most airlines are in the red. “Even the companies that had cash reserves have burned them over the past two years,” Kamil Alawadhi, IATA’s regional vice-president for Africa and the Middle East, tells us. He says African airlines, like their international competitors, have little alternative. “Either they survive with very thin margins, or they have to take out loans that automatically increase their operating costs.”

In either case, the slightest problem that results in additional costs hurts a lot, he says. “Today, for example, it is no longer possible to test new routes with half-full planes, all flights must be profitable.”

3 – Why are African airlines particularly vulnerable?

Several factors make African companies vulnerable and the price increase is compounded by logistical costs. “The rise in the price of a barrel of oil has led to a significant increase in the price of diesel used by shipping companies, which have consequently increased their transport costs for all fuel shipments arriving in Africa from Asia and Europe,” says Berthé.

African airlines mostly use imported paraffin as even oil-producing countries, such as Angola and Nigeria, do not have local refineries for this type of fuel.

This situation is particularly worrying in Nigeria

This is compounded by a particularly unfavourable exchange rate regime for airlines. Although they earn most of their revenue in the local currency, they pay most of their expenses in dollars, from jet fuel to maintenance. This situation is “particularly worrying in Nigeria”, says Alawadhi.

4 – What does fuel represent in operating costs? 

On average, fuel accounts for 35% of the total operating costs of airlines in Africa. For the rest of the world, it represents 25%, a significantly lower percentage, says Berthé.

With rising oil prices, fuel represents “40 to 50% of costs, or even more” for African companies, says Alawadhi. Tahir Ndiaye, managing director of SkyMali, which offers domestic flights and a regional route to Conakry, puts the ratio at 65%.

5 – What levers do airlines have? 

The first obvious lever that airlines can use is ticket prices, but this can be counter-productive. “When [ticket prices] start to rise, the number of passengers decreases,” says Alawadhi. “But you have to ensure a minimum capacity before you start making a profit.”

Alawadhi also points out that this solution entails a delay in implementation, “since 60% of bookings are made at least three months in advance”. The companies, therefore, set their fares without knowing the biggest variable, namely fuel.

Convinced that after Covid-19 African airlines can no longer afford to play around with their profit margins, Iata’s vice-president mentions that there have been reductions in frequency and capacity on routes (an A330 instead of a B777, for example). However, above all, he believes that African airlines will need governmental support to avoid mass bankruptcies.

For his part, Berthé says Afraa organises an annual call for tenders to jointly purchase fuel, in which some 15 companies participate. “Pooling volumes increases negotiating power,” says the leader, who calls for a reduction in the paraffin taxes applied in certain countries “in violation of the Chicago Convention”; for supply circuits to be controlled at supplier level “to avoid the paraffin shortages observed in certain countries”; usage of the latest generation of aircraft that consume less fuel; and for airlines to implement operational procedures that reduce their consumption.

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