Airline business is tough, and virtually unprofitable. Prior to the devaluation of Naira, the majority of our airlines were submerged in colossal debts, with less than 8 years of useful life. It is unimaginable to foresee what will become of those clinging to life with the unending downward value of Nigeria’s currency.
Since 1983, over 30 airlines have gone bankrupted in Nigeria. Some of them are: Zenith airlines, Okada, Kabo, Air Midwest, KolKol, Harka, Harko, Chanchangi, Sosoliso, Oriental, Savannah, ADC, Belleview, Air Nigeria, Nigeria Airways, Virgin Nigeria, IRS airlines, Transair, Gas air, Das air, etc
Even the well-managed airlines struggle to stay in business, because airlines are mere catalyst of economic development. They generate revenues for other businesses, but can hardly sustain their own growth and profitability. Aircraft manufacturers, airports, fuel suppliers, caterers, tourism industry, depend heavily on airlines for survival.
These vital economic roles played by the airline companies create erroneous beliefs that commercial aviation is a viable business venture. There is no entrepreneur in airline business that has not burnt his fingers.
In Nigeria, it is twice as expensive to engage in commercial airline business. The reasons for these abnormal situation are simple: cost of funds is exorbitant; landing, parking and navigational charges are enormous; regulation fees are astronomical (of course because of the new 11 directorate), and finally, the high frequency of arbitrary and destructive policies enacted by successive governments which strangulate airline operators.
So why are there new entrant into the business? The reason is this: the majority of those who ignore the odds to start airlines are either completely ignorant of the venture or are simply fascinated by the sexy nature of airplanes. It takes a new venture capitalist less than one year to understand the constant necessity to inject, non- profit yielding funds into the company to keep the airplanes flying.
The majority of aviation-friendly countries have low interest rates, stable and easily convertible currencies, and nil draconian policies that adversely affect airline operations. Nigeria is endowed with the opposite of the factors mentioned above, therefore, airline industry will never grow and prosper.
The issue of a devalued Naira has absolute negative component on airline business: with low revenues, airlines are left with empty treasury to enable them acquire foreign exchange for routine and schedule maintenance. Consumable spares will become harder to buy and stock in large quantities. Repayment for lease rentals, loans will keep dragging as more Naira is needed to meet the desirable US dollars.
Ticket fares on domestic flights is relatively very cheap: an hour flight on a jet airplane costs less than $150, while in some cases, competition has lowered fares below $60 for similar routes. With more Naira required to buy $1.00, fewer passengers will fly, and that means less revenue for the airlines.
Jet A1, the dominant fuel used on most airplanes is relatively scare in Nigeria. While some people speculate hoarding for improved prices as the core reason for the shortage, others support the idea that aviation fuel vendors have become cash-strapped as a result of the devaluation of our currency. Whatever the case, the cost of buying a litre of aviation gasoline has increased in the past one month by as much as 10%. This cost has multiplier effect as airfares remain the same, and employee wages have not dwindled to tradeoff for fuel expenses.
Aviation intervention funds, introduced by late President Yar’Adua, was meant to ease pressure on high cost of borrowed funds from the banks. But the few fortunate airlines that received the bailout, misappropriated it. Some invested the money outside aviation, while others remain indebted to the Asset Management Company of Nigeria (AMCON). Both Aero and Arik air have become properties of AMCON through the bailout dole.
Naira, our national currency, may not recover from the downward spiral as long as the price of fossil fuel remains below $100 per barrel. Consequently, airlines will have two tough choices to make: increase airfares or stay out of aviation business. It may sound easier to increase airfares and remain in business, but an increment in ticket prices means fewer travelling passengers. Declaring bankruptcy by an airline operator will mean more unemployment in the system, and huge losses to the lending bank. Neither is feasible at this time, but the more an airline keeps operating in the negative, the more the looming danger of insolvency.
One possible option for the government to support growth and development of commercial air transportation is to lower direct operating cost of the carriers: navigational and landing fees are two prime examples. Subsidized fuels for aircraft will greatly enhance airline profitability and possible survival.
There have been numerous suggestions for merger among the airlines. A merger can only take place if two or more airlines have the same operating cultures, values, and financial leverages. In a normal country, which Nigeria is not, air carriers merge on one platform: straight forward acquisition, where a richer company buys the majority shares of another. The acquired company’s personnel will be diluted into the culture of the new parent company. Simple and short.
In a situation where partial acquisition is the case, the financial strength of the two companies or route(s) transfer must create advantages for profitability or the deal will never survive. To avoid unnecessary hurdles, airlines simply code-share. This means one airline’s ticket is usable on another airline. At the end of the month, a clearing house sorts out payments to each carrier.
There is no reason for airlines in Nigeria to merge at this stage. What is absolutely necessary for now is code sharing. A situation whereby two airlines operating from Lagos to Abuja at the same time, with less than break-even number of passengers, is of disadvantage to each of them. It is better to transfer the passengers of an airline to its code sharing partner. Both carriers will gain in the end. The big question here is: which financial institution or government agency will act as the clearing house to avoid intense dispute?
Nigeria’s airline operators hardly agree on issues; every one’s business motive is at variance with the others. To even maintain one association that will cater for the welfare of the industry is difficult to achieve. While some operators prefer to form a group, an umbrella that will promote the industry/profession through standardized regulations that can enhance safety, others prefer an association that can be used as a tool to gain financial favour from the government.
This divergent views are so pronounced in the system that it is practically impossible to effectively merge all unhealthy airlines currently operating in debts.
Hajj operation is a simple example of how uncooperative carriers in Nigeria are: airline operators regularly strive to undercut each other’s quoted fares to Jeddah; a guaranty revenue for all, if they can effectively unite with a single voice. The overbearing cut-throat competition of those with wide body aircraft against smaller carriers has created so much bad- blood that of recent, many carriers prefer to loan their assigned pilgrims to foreign carriers.
What the future holds for Nigeria’s carriers is visibly bankruptcy. The majority of our airlines will not survive beyond 2022, if they ever get there. The rising exchange rate is an obvious impediment to growth and a fore step to liquidation.
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