Despite the fact that airlines worldwide monitor Brent crude oil prices, the situation is considerably more dire in Africa. Impact of soaring fuel costs in Africa
What makes the current crisis unfortunate?
The accounts of the majority of airlines are in the red following two years of turmoil brought on by the Covid-19 outbreak. IATA’s regional vice-president for Africa and the Middle East, Kamil Alawadhi, tells us that “even the companies that had cash reserves have burned them over the previous two years.
” According to him, African airlines don’t have many options compared to their foreign rivals. “They have to take out loans, which instantly raise their operational costs, or they have to exist on very small profit margins.”
According to him, even the smallest issue that incurs additional costs has a significant negative impact. “Today, for instance, all flights must be profitable; it is no longer possible to explore new routes with half-full aircraft.”
Why are airlines in Africa particularly at risk?
African businesses are vulnerable due to a number of variables, and the price increase is exacerbated by logistical difficulties. According to Berthé, “the price of a barrel of oil has grown, which has significantly increased the price of diesel utilized by shipping companies, which has therefore increased their transport costs for all fuel shipments coming in Africa from Asia and Europe.”
The majority of paraffin used by African airlines is imported because even oil-producing nations like Angola and Nigeria lack local refineries for this kind of fuel.
In Nigeria, this scenario is especially concerning.
A particularly unfavorable exchange rate regime for airlines makes this situation worse. Nevertheless, they make the majority of their money in the local currency.
What portion of operating expenditures does fuel make up?
In Africa, the average cost of operating an airplane is 35% related to fuel. According to Berthé, it represents 25% of the remainder of the world, a much lower amount.
According to Alawadhi, rising oil prices mean that fuel represents “40 to 50% of costs, or even more,” for African businesses. The ratio is 65 percent, according to Tahir Ndiaye, managing director of SkyMali, which operates domestic flights as well as a regional service to Conakry.
What tools do airlines possess?
The first obvious tool that airlines have is the cost of tickets, but this approach might backfire. According to Alawadhi, “the number of passengers falls when [ticket costs] start to climb.” But before you start turning a profit, you need to guarantee a minimum capacity.
Additionally, Alawadhi notes that this solution will take longer to execute because “60% of bookings are booked at least three months in advance.” Therefore, the corporations fix their prices without taking into account the largest variable, namely fuel.
Iata’s vice president notes that there have been decreases in frequency and capacity on itineraries, convincing him that after Covid-19 African airlines cannot afford to experiment with their profit margins (an A330 instead of a B777, for example). Above all, he thinks that in order to prevent widespread bankruptcy, African airlines will require government assistance.
Berthé claims that every year, Afraa organizes a call for tenders for the collective purchase of fuel, in which about 15 companies take part. The leader claims that “pooling volumes strengthens negotiating power” and calls for reductions in the paraffin taxes levied in some nations “in violation of the Chicago Convention,” management of supply circuits at the supplier level, and an end to the paraffin shortages experienced in some nations.
Impact of soaring fuel costs in Africa: What is the circumstance?
According to Abderrahmane Berthé, secretary-general of the Association of African Airlines, “Since the crisis between Russia and Ukraine began, the price of crude oil has continued to grow because of all the embargoes in place, which have decreased the level of supply” (Afraa).
The International Air Transport Organization (IATA) observes that since March, the price differential between jet fuel and crude oil, which has typically been $20 per barrel, has increased to more than $50.
According to a note that the organization released on July 8th, “With an average jet fuel price in 2022 of $143.5 per barrel, the combined fuel bill of the world’s airlines will climb by $134.1bn this year, compared to 2021.”