Will Nigerian airlines ever be profitable?

Jun 02, 2022|Dumebi Oluwole

Generally, businesses exist to make a profit. The moment any individual or group of individuals come together to provide a product or service—essentially meeting a need, the sole aim of that venture is to ensure that money spent (capital) is recouped and increased (profit).

Today, our focus will be on profit margins—net income. That’s basic accounting speak for when we take expenses, including taxes, out of revenue. Companies can make a gross profit but still be regarded as unprofitable ventures because their profit margins are extremely low or negative.

Key takeaways

Airlines are low-profit margin businesses due to the high cost of capital and operating expenses that they cannot pass down to passengers as demand is price elastic
In Nigeria, airlines were struggling before the Russian-Ukraine war, and now their costs have spiked to unsustainable levels, with aviation fuel (Jet A1) as the primary culprit
With other factors, including forex illiquidity, rising maintenance costs and inadequate government support, Nigerian airlines are unlikely to make profits in the near term

In that sense, it has been established that running an airline is not a highly profitable business due to the high cost of capital and operating expenses involved compared to the revenue generated. Because passengers (the primary source of income for airlines) are very price-sensitive, airlines find it difficult to immediately pass the burden of higher costs to the passengers through increased ticket prices—essentially dampening their pricing power. This, in addition to the existence of many government-subsidized airlines, makes it harder for other private-owned airlines to change prices at will—it would erode competition and force consumers to move to cheaper airlines. The demand for airline services has become price elastic, i.e., for every price increase, there will be a shift in the demand curve as consumers will most likely move to other substitutes. And airlines cannot afford to take such a huge risk.

So, will Nigerian airlines be profitable soon?

Well, first we need to understand the economics of the airline business, provide some context about the current events unfolding in the Nigerian aviation industry and then, with the evidence provided, we can attempt to answer the question.