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Economic Downturn: More Airlines May Close Shop

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There is an indication that more Nigerian airlines may close shop as the current economic downturn has hampered airlines operations.

Industry experts have expressed concern that the forex scarcity is taking a huge toll on the aviation sector because virtually everything done in the airline business requires foreign exchange, except the purchase of aviation fuel.

Investigation has revealed that already Nigerian airlines have lost over 45 percent of their passenger traffic while the value of their ticket has also nosedived.

An operator on Wednesday explained why the air transport sector is fairing badly under the present economic morass. He expressed doubt about the possibility of the airlines to survive, if the recession continues in the next six months.

“I doubt whether Nigerian airlines will survive the next six months if naira does not gain value and continues to lose against the dollar. Practically, let us look at the popular aircraft many Nigerian airlines use: Boeing B737. Average number of seats on that aircraft is 120 and if the fare for Lagos to Abuja flight is N25, 000 the airline will generate N3million for every flight.

“At the exchange rate of N400 for $1 dollar that N3million will be $7, 500. But 18 months ago, naira was exchanging N165 for $1 and the value of the same N3million $18, 750. Then during that period aviation fuel was costing N110 per litre and today it costs N220 per litre and the fuel volume for that one hour flight from Lagos to Abuja is 3000, including endurance fuel.

“About 18 months ago 3000 litres of fuel would cost N330, 000, but at the present price, it costs N660, 000. You have to note that airfares have not changed. It is just around that N25, 000. So the fuel price increased by 100 per cent while the value of the dollar has increased by over 200 percent.”

He also noted that as the value of naira has plunged, airlines still pay their expatriate workforce in dollars and these include pilots, engineers and others that are providing technical services and some Nigerian pilots that insist they be paid in dollars.

“So you can see that we spend more money in naira for far less number of dollars and this means that it is only for $7, 500 that a flight leaves Lagos to Abuja and vice versa,” he said.

The operator also disclosed that when an airline leases aircraft, the average calculation is that the airline will pay the lessor about $12, 500 per hour of the aircraft operation and, according to him, the amount could come down to $12,500 when the airline is making a bulk lease of the aircraft of over 200 hours.

So what this means is that while the Nigerian airline earns $7500 per one hour flight, it pays the lessor $12, 500 for one hour and incurs a loss of $5000 in each flight.

“This shows clearly that these airlines will not survive if the recession period is prolonged. So pilots, engineers, aircraft maintenance, insurance, spare parts and training are paid in dollars. This is a sector that is dollarized. So how can anybody survive this? This is simply a matter of postponing the evil day,’ the operator said.

In addition to the above, the airline pays for landing and parking, enroute and navigation charges to the Nigeria Airspace Management Agency (NAMA) and other miscellaneous expenses.

In a recent interview with the Minister of State for Aviation, Senator Hadi Sirika, he promised that government would facilitate the establishment of aircraft maintenance facility in Nigeria and also a leasing company so that Nigerian airlines could lease aircraft at cheaper cost and also maintain their aircraft locally. The cost of maintenance for C-Check begins from $600, 000 to over $1 million.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Crude Oil

Oil Rises as Threat of Immediate Iran Supply Recedes

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Oil prices rose on Tuesday, with Brent gaining for a fourth consecutive session, as the prospect of extra supply coming to the market soon from Iran faded with talks dragging on over the United States rejoining a nuclear agreement with Tehran.

Brent crude was up by 82 cents, or 1.13%, to $73.68 per barrel, having risen 0.2% on Monday. U.S. oil gained 91 cents, or 1.3%, to $71.79 a barrel, having slipped 3 cents in the previous session.

Indirect discussions between the United States and Iran, along with other parties to the 2015 deal on Tehran’s nuclear program, resumed on Saturday in Vienna and were described as “intense” by the European Union.

A U.S. return to the deal would pave the way for the lifting of sanctions on Iran that would allow the OPEC member to resume exports of crude.

It is “looking increasingly unlikely that we will see the U.S. rejoin the Iranian nuclear deal before the Iranian Presidential Elections later this week,” ING Economics said in a note.

Other members of the Organization of Petroleum Exporting Countries (OPEC) along with major producers including Russia — a group known as OPEC+ — have been withholding output to support prices amid the pandemic.

“Additional supply from OPEC+ will be needed over the second half of this year, with demand expected to continue its recovery,” ING said.

To meet rising demand, U.S. drillers are also increasing output.

U.S. crude production from seven major shale formations is forecast to rise by about 38,000 barrels per day (bpd) in July to around 7.8 million bpd, the highest since November, the U.S. Energy Information Administration said in its monthly outlook.

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Oil Prices Rise as Demand Improves, Supplies Tighten

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Oil prices rose on Monday, hitting their highest levels in more than two years supported by economic recovery and the prospect of fuel demand growth as vaccination campaigns in developed countries accelerate.

Brent was up 53 cents, or 0.7%, at $73.22 a barrel by 1050 GMT, its highest since May 2019.

U.S. West Texas Intermediate gained 44 cents, or 0.6%, to $71.35 a barrel, its highest since October 2018.

“The two leading crude markers are trading at (almost) two-and-a-half-year highs amid a potent bullish cocktail of demand optimism and OPEC+ supply cuts,” said Stephen Brennock of oil broker PVM.

“This backdrop of strengthening oil fundamentals have helped underpin heightened levels of trading activity.”

Motor vehicle traffic is returning to pre-pandemic levels in North America and much of Europe, and more planes are in the air as anti-coronavirus lockdowns and other restrictions are being eased, driving three weeks of increases for the oil benchmarks.

The mood was also buoyed by the G7 summit where the world’s wealthiest Western countries sought to project an image of cooperation on key issues such as recovery from the COVID-19 pandemic and the donation of 1 billion vaccine doses to poor nations.

“If the inoculation of the global population accelerates further, that could mean an even faster return of the demand that is still missing to meet pre-Covid levels,” said Rystad Energy analyst Louise Dickson.

The International Energy Agency (IEA) said on Friday that it expected global demand to return to pre-pandemic levels at the end of 2022, more quickly than previously anticipated.

IEA urged the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, to increase output to meet the rising demand.

The OPEC+ group has been restraining production to support prices after the pandemic wiped out demand in 2020, maintaining strong compliance with agreed targets in May.

On the supply side, heavy maintenance seasons in Canada and the North Sea also helped prices stay high, Dickson said.

U.S. oil rigs in operation rose by six to 365, the highest since April 2020, energy services company Baker Hughes Co said in its weekly report.

It was the biggest weekly increase of oil rigs in a month, as drilling companies sought to benefit from rising demand.

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Crude Oil

FG Spends N197.74 Billion on Subsidy in Q1 2021

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The Federal Government has spent a total sum of N197.74 billion on fuel subsidy in the first quarter (Q1) of 2021, according to the Federal Account Allocation Committee (FAAC) report for May.

The report noted that the value of shortfall, the amount the NNPC paid as subsidy, in the March receipts stood at N111.97 billion while N60.40 billion was paid in February.

In the three months ended March, the Federal Government spent N197.74 billion on subsidy.

The increase in subsidy was a result of rising oil prices, Brent crude oil, against which Nigerian oil is priced, rose to $73.13 per barrel on Monday.

The difference in landing price and selling price of a single litre is the subsidy paid by the government.

On May 19, the Nigerian Governors Forum suggested that the Federal Government removed the subsidy completely and pegged the pump price of PMS at N380 per litre.

The governors’ suggestion followed the non-remittance of the NNPC into the April FAAC payments, the money required by most states to meet their expenditure such as salaries and building of infrastructure.

However, experts have said Nigeria is not gaining from the present surge in global oil prices given the huge money spent on subsidy.

Kalu Aja, Abuja-based financial planner and economic expert, said “If Nigeria is importing Premium Motor Spirit and still paying subsidy, then there is no seismic shift.”

“Nigeria needs oil at $130 to meet the deficit. In the short term, however, more dollar cash flow is expected and with depreciated Naira, it will reduce short term deficit.”

Adedayo Bakare, a research analyst, said that the current prices do not really mean much for the country economically.

He said, “The ongoing transition away from fossil fuels and weak oil production from the output cuts by the Organisation of Petroleum Exporting Countries will not make the country benefit much from the rising oil prices.

“Oil production used to be over two million barrels but now around 1.5 million barrels. We need OPEC to relax the output cuts for the naira to gain.”

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