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AN ASSESSMENT OF THE RELATIONSHIP BETWEEN AIRFARES AND AIRCRAFT MOVEMENTS IN NIGERIA

ABSTRACT

This study carried an assessment of the relationship between airfares and aircraft movements in Nigeria with focus on Murtala Mohammed International Airport (MMIA). The study adopted empirical research method. Data on the relationship between airfares and aircraft movement, airfares and air passenger movement, airfares and air cargo movement and airfares and aviation fuel were sourced from Nigerian Airspace Management Agency (NAMA), Federal Aviation Authority of Nigeria (FAAN) and Nigerian Civil Aviation Authority (NCAA) for this study. The data collected and analyzed are presented in tables, figures, histogram and bar charts. The study revealed that airfares increase has insignificant influence on air passenger movement volume in Murtala Mohammed International Airport, that airfares increase has insignificant influence on air craft movement volume in Murtala Mohammed International Airport, that airfares increase has insignificant influence on air cargo movement volume in Murtala Mohammed International Airport and that there have been significant increase in airfares as a result of increasing cost of aviation fuel in Murtala Mohammed International Airport. Recommendation was made that airline companiesprotect themselves from volatile oil costs, and sometimes to even take advantage of the situation, airlines commonly practice fuel hedging. They do this by buying or selling the expected future price of oil through a range of investment products, protecting the airline companies against rising prices.

CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

The Aviation industry can be defined as those activities that are directly related to the transporting of people and goods by air from one location to another (Onyeanu, 2009). Airline industry plays a major role in every countries economic activity and it aids in opening up of the countries market to both local and foreign investors (Samuel, 2006). Globalization has made it even more necessary for everyone to be every-where at anytime. Over 2.1 billion passengers departed on scheduled journey in 2006 (IATA 2007). Strong economists saw international passenger demand grow by 5.9%. Driving these development are further market liberalization and the availability of more fuel efficient and longer range aircraft that are better able to serve thinner routes.

Making a trip by air involves a set of complex experiences over a period of hours with many opportunities for the air passengers to be pleased and comfortable, or disappointed, frustrated and infuriated (Berry and Lampo, 2004). Air passengers make decisions on a particular flight to board based, largely on their perceived safety and past experiences with the airline, which in turn depend on the quality of service product provided by the airline. Airline operators increasingly strive to attract, build, and retain customers through the quality of their service product offerings. In this regard, many airline operators invest heavily on innovative, streamlined, and efficient service systems to improve performance and remain in the competition (Olsen, 2005), however, Churchill and Peter (1998) observe that not many of these investors have developed competitive edge over others. In Nigeria, for instance, some airlines have even suffered entropy (e.g., oriented, Barnax, Concorde, ADC, Sossoliso airlines). Perhaps, unable to provide the required service quality, some of these airlines experienced low patronage and abysmal profit margin; and eventually collapsed.

Air Fares are the price charged by airline operators for transporting a passenger from one destination to another destination and goods from one point to another point. The airline industry is unique in that there are various airline fare types. Imagine this: 2 customers walk into a local consumer electronics store to a purchase a television. They both walk out with the exact same TV—same size, same features, same model number but one customer is charged $350 more than the other. It sounds outrageous when making the comparison to any other industry, but this is completely accepted in the airline industry. Two economy passengers on a flight from San Francisco to New York compare their ticket prices only to find that one passenger paid hundreds of dollars more for the exact same flight (and they both still have to pay for $7 extra for a pillow and a blanket). Believe it or not, there is a method to the madness, and understanding this method can help you find the lowest fares for your clients. Or if that’s not possible, you can educate your clients on why you don’t have access to those airline fare types.

Air passengers are most likely to value low cost airfares and hitch-free and stress-free air travel experience. Air fares are critical in air passenger choice of flight booking. Customers are averse to airlines that are associated with incessant unexplained delays (Asiegbu, 2011), flight cancellations and track record of avoidable air mishaps. Air travelers consider ticketing systems, flight connections, processing time, security checks, booking systems, Routine and periodic servicing and maintenance systems of aircraft, refunds that accompany flight cancellations and passenger experience management systems of airlines in making decision to board any airline.

The aviation industry as we know it in the current form went through a long development. The process of internationalization, globalization, and many other factors greatly increased the amount of travelling people. Trade agreements, expansion of cargo transportation caused greater mobility of business travelers. The behavior of leisure passengers also changed. All these factors have had a notable impact on creating of the airline airfare strategies.

Traditional carriers can offer two different vertical quality products (economy cabin vs. business cabin, refundable ticket vs. nonrefundable ticket, VIP lounge access vs. no VIP lounge access), while low-cost carriers offer only one type of product (economy cabin, nonrefundable ticket and no VIP lounge access). Customers for this product could be divided into two types of travelers, business travelers and leisure travelers. Both of these categories have different preferences and look at the quality product. It is important to remember that these differences have significant impact on airfares of airline. Therefore, this study is aimed at investigating the relationship between airfares and aircraft movements in Nigeria.

1.2 Statement of the Problem

There are four key factors threatening Nigeria’s airline industry. One is that everything about aircraft maintenance, including repairs and most often technical personnel is imported and C-check is done overseas. So in a recession whereby over N400 is exchanging for $1, it is difficult for Nigerian airlines that sell tickets in naira to raise enough funds to maintain their aircraft.

Two, over 40 per cent of operational cost is spent on aviation fuel. Today that product sells at N230 per litre because it is imported. Nigeria has refineries that are not working. They were not privatised and under the Nigeria National Petroleum Corporation (NNPC) they have not been put to good use for years, so Nigeria imports its fuel products.

Three, airfares do not reflect the actual cost of operation because of the low disposable income of Nigerian citizens. At the current cost of aviation fuel and maintenance, for a Nigerian airline to make profit it should charge about N45, 000 for one-hour flight, according to aviation analysts. This amount will seem outrageous but that is the actual pricing that could generate profitable revenue for airlines. But airlines cannot charge N45, 000 for one-hour flight. If they do they would lose customers.

The fourth factor is that Nigerian airlines have lost over 40 per cent of their passenger traffic since February this year due to the downturn of Nigeria’s economy. The passenger traffic continues to deplete as recession sets in and the industry continues to degenerate.

It is all these challenges that are threatening the operations of Nigeria’s domestic airlines. Aero and First Nation Airways have suspended their scheduled services and there is fear that other airlines may join as the economy bites harder and as they find it difficult to continue to maintain their aircraft and purchase aviation fuel at a very exorbitant rate. Aero Contractors on Wednesday announced suspension of scheduled services from Thursday September 1, 2016. A statement from the Chief Executive Officer, Capt. Fola Akinkuotu, said the development was part of the strategic business realignment to reposition the airline and return it to the part of profitability. The airline said this business decision, which is a result of the current economic situation in the country, has forced some other airlines to suspend operation or outrightly pull out of Nigeria. In the case of Aero, Akinkuotu said the airline had faced grave challenges in the past six months, which impacted its business and by extension the scheduled services operations. “These factors, according to him are both internal and external environmental factors that have made it difficult for the foremost airline to continue its scheduled services,” the airline said.

The growth and performance of domestic airlines and their ultimate survival is threatened by the burden of managing these challenges. The possible solution to the aforementioned challenges is interconnected with airfare price of airline operators. Airfare price of airline operators is connected with aircraft movement, air cargo movement and air passenger movement. Therefore, this study is aimed at investigating the relationship between airfares and aircraft movements in Nigeria.

1.3 Aims and Objectives of the Study

The aim of this study is to carry out an assessment of the relationship between airfares and aircraft movements in Nigeria. Other objectives are;

1.      To determine the relationship between airfares and air passenger movement in aviation industry in Nigeria.

2.      To discover the relationship between airfares and aircraft movement in aviation industry in Nigeria.

3.      To examine the relationship between airfares and air cargo movement in aviation industry in Nigeria.

4.      To access the relationship between airfares and aviation fuel in aviation industry in Nigeria.

1.4 Research Questions

The following research question were sought so as to provide solutions to the problems of the study.

1.         Will airfares affect air passenger movement in aviation industry in Nigeria?

2.         Is there a relationship between airfares and aircraft movement in aviation industry in Nigeria?

3.         Can airline airfares determine air cargo movement in aviation industry in Nigeria?

4.         What is the implication of high aviation fuel on airfares in aviation industry in Nigeria?

1.5 Justification of the Study  

Transportation is an essential part of economic development. It is one of the indices for measuring the development of a country. Nigeria’s Airport transport infrastructure has been identified as a crucial component for the economic development of the country FGN (2007). A good transportation network expands economic activities by improving accessibility and facilitates movement of passengers, mails and cargo goods to all the nooks and cronies of the country. According to Oni and Okanlawon, transport is the cornerstone of civilization. As the society and economic organizations become complex, the relevance of transport grows. Also, the demand for transport is a derived one, because it depends on the demand for the commodities carried or the benefit of personal travel and each travel is unique in time and space. Hence, the demand for transport services increases with the extension of the input-output relationships of an economy. Transport infrastructural development remains a major tool for achieving meaningful development.

1.6 Scope of the Study  

This study is an investigation of the relationship between airfares and aircraft movements in Nigeria. This study will not involve all airline operators in Nigeria aviation sector. It would be limited to information obtained from Federal Aviation Authority of Nigeria (FAAN) and Nigerian Civil Aviation Authority Office only. This study limitation is further constraint by time, finance and difficulty in information dissemination in Nigeria Aviation industry.

1.7 Study Area

Geographically, the city of Lagos lies in south-western Nigeria and lies approximately on longitude 3° 24' E and latitude 6° 27' N. It covers an area of 3,577sq.km. The Metropolitan Lagos extends over sixteen (16) of the twenty (20) Local Government Areas of Lagos State, and contains 88% of the population of Lagos State. Lagos is the smallest and most important city in the Federation of Nigeria. The country, which is located in the coast of West Africa, consists of 36 states and a capital territory. Nigeria shares borders with Benin, Cameroon and Niger. Lagos is one of the important cities in Nigeria, which is situated in the south-western coast of Nigeria. The Metropolitan area of Lagos takes up to 37 per cent of the land area of Lagos State and houses about 90 per cents of its population (Unicef 1995, Aina 1994a). Lagos is a huge metropolis which originated on islands separated by creeks such as Lagos Island that fringe the southwest mouth of Lagos Lagoon protected from the Atlantic Ocean by long sand spits such as Bar Beach which stretch up to 100 km east and west of the mouth. From the beginning Lagos has spread on the mainland west of the lagoon and the conurbation, including Ikeja (Figs 1&2) and Agege, now reaches more than 40 km north-west of Lagos Island.