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08.07.2014 Business & Finance

Cedi depreciation threatens domestic airlines sector

Cedi depreciation threatens domestic airlines sector
LISTEN JUL 8, 2014

Domestic airlines are facing their worst operational challenges ever, as rising cost of operations, fuelled by the depreciating cedi and a drop in passenger numbers, erodes their profits and earnings.

The situation has been compounded by new entrants into the already choked market.

This has forced a few of the airlines to pull out, downsize or diversify their operations into the sub-region in an attempt to contain the situation.

Officials of the three leading domestic carriers — Starbow, Antrak Air and African World Airlines (AWA) — confirmed these developments in separate interviews with the with Graphic Business last week.

“I have in-depth knowledge about the industry and I can tell you that most of us are running at a loss," the Northern Regional Manager of Antrak Air, Mr Abu Banda, said.

Mr Abu has been the Northern Regional Manager of Antrak since 2010.

“It's very tight for us because month after month we run losses and we can't even meet our operational cost, not to talk of breaking even. Yet the cost keeps rising," Mr Abu added.

The situation has caused Antrak Air, which is one of the pioneers in the industry, to contemplate a pull- out, amidst hopes that the cedi depreciation, among other challenges, will improve into the year.

The Managing Director of Starbow, Mr James Eric Antwi, confirmed the loss-making in the industry and said it was mainly as a result of the depreciating cedi.

He explained that the decline in the value of the cedi meant that the cost of services and spare parts for airlines, which are mostly paid for in dollars, had risen, although prices of their services to customers had remained unchanged.

Although the three officials declined to comment on the average amount of loss that each was incurring in a month, checks by the Graphic Business revealed that each loses about GHȻ600,000 a month, the most recent one being in June this year.

The airline industry is one of the few industries whose cost of operations is in dollars, while its revenue is in cedis.

In the industry, the cost of lease, fuel and insurance and the salaries of expatriate staff such as pilots and mechanics are in dollars.

Therefore, the steep decline in the value of the cedi from late last year through to the first half of this year means that the cost of operations of the airlines has almost tripled, although the cost of their tickets, from which they earn their revenue, remains relatively unchanged.

"Let's say that the, cost of our ticket to Kumasi is GHÈ» 100. Last year, that was $50, but as we speak now it's not even up to $30. Meanwhile, the lease of the aircraft we are using is over $100,000. Now, tell me, how many passengers can you carry to be able to make that amount of money?" the Chief Operating Officer of AWA, Mr Apiigy Afenu, explained.

"Beyond that, you have salaries to pay, fuel to buy and other expenses that you will incur, all in dollars, yet you are earning cedis. And here is the case that the cedi is depreciating. It's tough and I can say that none of the domestic carriers is making money. I think it's a general reflection of the economic situation we find ourselves in as a country," he added.

The cost of aviation fuel has been a major challenge to players in the airline industry, including those doing international flights.

Virgin Atlantic and Air Namibia pulled out of the country mainly as a result of unsustainable cost of operations, fuelled mainly, by high cost of aviation fuel.

The situation is not different with the domestic carriers, given that fuel currently constitutes about 40 per cent of the cost of airline operations.

Fly 540, which entered the industry some four years ago, halted its operations indefinitely in May this year, amidst reports that it was unable to break even.

Although the cost of aviation fuel is virtually outside the purview of the country, the three airlines contended that the impact of the increment could have been minimal if the depreciation of the cedi were contained.

Such challenges notwithstanding, the three airlines said they would rather expand by diversifying into more lucrative areas, while keeping to their traditional markets in the country.

The MD of Starbow explained that his outfit was currently preparing to fly into the West Coast, mainly as a result of the challenges.

"The distance from Accra to Tamale is almost the same as from Accra to Lagos, Nigeria, but the cost of the ticket is not the same.

To Tamale, you pay around GHÈ» 200 cedis, but to Lagos, you pay about $400. So if we do domestic, it will improve the numbers," Mr Antwi said.

Mr Afenu of AWA also explained that the airline was about increasing its fleet to enable it to fly into new markets, while strengthening its local operations.

They expressed the hope, however, that the decline of the cedi would be halted to enable the industry to survive.

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