The recent fall in value of the cedi has raised the cost of operations for airlines and put their margins under pressure – in a dollar-dominated industry that requires operators to pay for services rendered in dollars or at the benchmark dollar rate.
The local currency has depreciated by some 3.5 percent against the US dollar as at press time on Friday, February 15, 2019.
This development, coupled with the rise in the dollar-denominated Jet A1 fuel (aviation fuel), has created a challenging situation for domestic and regional airlines – which have to pay for fuel, maintenance, and leasing costs among others in dollars.
The jet fuel price ended last week at about US$77.8 /bbl. Data by the International Air Transport Association (IATA) show that this figure represents a 0.8 percent increase in price of the commodity within a one-week period, and a 5.5 percent increase in the price of Jet A1 fuel within a month. This contrasts with the -4.1 percent decrease in the price of aviation fuel recorded a year ago.
This presents a delicate situation for domestic airlines, as they are not able to increase prices due to additional capacity and competition.
Africa World Airlines (AWA) currently offers flights from the capital of Accra to Kumasi, Tamale and Takoradi. Their increased frequency on these routes and offering of promotional prices on all domestic routes has served to grow these routes and stimulated the market. For instance, the cost of travelling by air to Kumasi in now similar to or cheaper than going by road.
Passion Air, which also started operations last year, now offers flights to Kumasi, Tamale and Takoradi. Unity has also started operations, offering flights to various domestic destinations.
African aviation analyst, Sukhjinder Mann of dre aviation, believes that margins will drop in the short-term given these dynamics. “The recent fall in value of the cedi makes the cost of operating higher – especially when you are leasing aircraft, undertaking overseas maintenance of aircraft and buying spares, all of which are normally priced in US$.
“The recent rise in Jet A1 fuel costs will also make operating costs increase. This will no doubt put some of the local operators under financial pressure, as they are unable to increase pricing due to additional competition and capacity in the domestic market. Margins will probably come under pressure in the short-term.”
To address the current cedi challenges, some analysts have urged the central bank to dig into its reserves and ensure there is enough supply to meet the demand for US$ by the market. Others also believe the situation is a short-term one, resulting from the on-going banking sector reforms, and that it will correct itself.