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Ghana’s domestic airfares up by 17.5%

By B&FT Online
Business & Finance Ghanas domestic airfares up by 17.5
JUL 5, 2015 LISTEN

Airfare from Accra to the four main domestic destinations — Takoradi, Kumasi, Sunyani and Tamale — has gone up by some 17.5 percent, following the imposition of Value Added Tax (VAT) on all domestic air travels.

The decision follows a meeting between the domestic operators and the tax authorities last week, about implementation of the tax that was approved by Parliament in the 2013 budget.

Starting from July 1, 2015, a one-way ticket that used to cost GH¢245 one-way to Kumasi now costs about GH¢297 as a result of imposing 17.5 percent VAT of the gross fare — which already includes a mandatory GH¢5 cedi airport tax.

A return flight to Kumasi now costs about GH¢600, much to the chagrin of passengers and operators.

Operators, who have been in discussion with the Ministry of Finance through the Transport Ministry for reassessment of the policy's impact on the domestic aviation sector, say the new fares will further erode gains made and lead to a drop in passenger numbers on all domestic routesFirst quarter figures released by airport authorities indicate a 20 percent drop in passenger load-factor on domestic routes, a situation that has been attributed to prevailing economic conditions in the country.

Mr. Apiigy Afenu, Chief Operating Officer of Africa World Airline (AWA) said: 'First quarter volumes are down by 20 percent. This, coupled with the cedi depreciation and the imposition of the 17.5 percent VAT, limits our ability to adjust prices to compensate for depreciation of the cedi.

'There is an artificial ceiling beyond which you cannot go in terms of pricing. You cannot charge GH¢400 one-way to Kumasi.'

Last year the cedi lost about 31 percent of its value, largely in the first half of the year. Domestic airlines, notwithstanding the slide in the local currency, had to absorb the exchange losses that were estimated to be about US$2million per operator.

The situation has yet to improve, with the cedi falling by some 23 percent since January this year.

'Over 85 percent of our operations are dollar-based. All the spare-parts we order from abroad are dollar-based — cost of aviation fuel, insurance and spare-parts are now very high. We also pay duties on the spare-parts we import. We have spoken about this for government to waive the tax, but we are still paying,' said Mr. Eric Antwi, Starbow's Chief Executive Officer.

The current load-factor is relatively poor, irrespective of the fact that Antrak has suspended its flights for operational reasons. With increasing cost of operation, none of the domestic airlines currently operating is able to cover their direct operating costs (DOC) — consisting of maintenance cost, ground handling, and fuel.

For a return flight between Accra and Kumasi, domestic carriers need up to about 70 percent load factor to cover their DOC — a figure mostly not achieved except for weekends when passenger numbers inch up close to 70 percent.

While the specialised fuel is sold for about US56cents per litre in Nigeria, it is sold for close to US90 cents per litre in Ghana.

'How can we compete against Nigerian carriers, and more importantly turn the country into the aviation hub that we want to with all these challenges?' an operator said.

There are currently two airlines — Starbow and Africa World Airlines — offering domestic flights from Accra to Kumasi, Tamale, and Takoradi. The operators have had to increase their flight frequencies to these three destination following suspension of Antrak's operations for three months.

Antrak Air, a wholly-owned indigenous domestic operator, has suspended its operations for the next three months following challenges with its wet lease arrangement with Swift Air for the use of the latter's planes.

Foreign exchange losses are believed to have increased the cost of operations for the airline, forcing it to ditch the wet-lease agreement. A wet lease is an arrangement whereby one airline provides an aircraft, complete crew, maintenance, and insurance to another airline that pays for hours operated in dollars

Parliament in 2013 approved the Value Added Tax (Amendment) Bill that was subsequently gazetted on December 31, 2013. The VAT was extended to include other sectors including domestic air travel.

One of the most significant amendments is the increase in standard VAT rate from 12.5% to 15%. The National Health Insurance Scheme Levy (NIHL) charged on goods and services remains at 2.5%.

As a result, the aggregate VAT and NHIL rate on the taxable supply of goods and services increased from 15% to 17.5%.

Source: B&FT Online

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