As Airlines Contend with Economic Downturn

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The contraction in passenger traffic halves the yield for domestic airlines and threatens their existence. Chinedu Eze cautions that if the economic contraction continues, many local carriers may go under

Emerging figures on passenger movement from the Federal Airports Authority of Nigeria (FAAN) indicate that there is drastic reduction of air travellers to domestic destinations.

This has invariably reduced the revenues that accrue to the airlines. Conversely there is no equal reduction on cost of operation; rather as the airlines lament they are paying more to provide flight services.

This is because the price of aviation fuel has increased, the cost of aircraft maintenance has increased due to low value of Naira and also costs of leasing and insurance have also increased as most of the insurance risks are shared by international underwriters that partner Nigerian insurance companies.

Out of eight major schedule commercial airlines in Nigeria five have cut back their routes due to lack of operational funds, cost of operation and inadequate equipment.

For example, three out of four Nigerian airlines that fly to Ghana have cut back their operations, leaving only Arik Air, which use Accra as hub to West Coast destinations. On the domestic routes, Aero now operates from Lagos to Abuja, Port Harcourt and Warri because it only has two Boeing B737 and two turbo-props, Bombardier, Dash 8 in its fleet. All others are on maintenance or on AOG (Aircraft on Ground).

Aviation Fuel

Buoyed by high cost of importation and arbitrary pricing by marketers, the cost of aviation fuel has become too exorbitant and it is feared thatit could result in grounding of the operation of some airlines, if the cost of the product is not urgently reviewed downwards.

The airlines have said if the price of aviation fuel continues to stay at the present average price of N140 per litre in the next two weeks they would stop operation and ground their fleet.

The airlines said the market has depleted by about 50 percent from last year, pointing out that further increase in fares to reflect the high price of aviation fuel may reduce passenger traffic to less than 40 percent.

This means that the load factor would be reduced further and every flight would operate at a loss and cumulatively the airlines would lose huge sums and that eventually, could result in grounding their operations with huge debts.

According to industry observers, two factors are driving up the prices of the product. One is cost of importation and associated charges at the ports; two is the cartel status of the marketers who fix the prices arbitrarily due to lack of competition. The marketers come together and decide the company that would import the product on behalf of the others. The consequence is that the marketers do not import differently and do not sell at the different prices, thus killing competition. Also because one company imports the product on behalf of others, the volume imported at any point in time is always shorter than the demand, thereby driving up the prices.

Fuel constitutes over 50 percent of airlines’ operational cost and digs a big hole in their finances; cost of aviation fuel in Nigeria is arguably the highest in any country that is not in war in the world.

Travel expert, Ikechi Uko said the risk in allowing the current unfavourable situation to continue is that it exposes airlines to accidents. He revealed that the scarcity of aviation fuel has prompted some marketers to sell adulterated fuel, which could be injurious to aircraft and cause air crash.

“The aviation fuel issue should be looked into, Lagos can never be a hub if the aviation fuel is problematic. First it is scare, second it is expensive, some airlines tanker in the product, then just top up in Nigeria, it shouldn’t be so. For you to have a hub, supply of aviation fuel should be taken for granted.

“So government cannot say the marketers and airlines are on their own, no, the consequence of that is that the passenger pays the price. He can pay the price financially; he can pay the price with his life. The other day I was to travel and I boarded Ghana’s AWA flight from Lagos to Accra and the pilot refused to take off. He said the quality of the fuel meant for the aircraft was poor, so he would not take the fuel. We had already boarded the aircraft, we have to be disembarked, the pilot had to wait until he got the right fuel. And that was because they were able to test the fuel. So people are going to begin to cut corners when you just leave a market like that,” Uko said.

Maintenance Cost

Airlines are finding it very difficult to pay for the maintenance of their aircraft taken overseas for checks. Carrying out major checks is very costly because it is done overseas; Nigeria does not have big maintenance facility.

Industry analyst, Francis Ayigbe told THISDAY that airlines couldn’t pay for their aircraft that went for maintenance overseas because they do not have the funds to do so.

“Less number of people is flying. There is contraction in the market; there is less yield and low passenger flow; yet the operational environment remains the same. The airlines cannot draw money from the banks; they may not be willing to lend the airlines money. At least one of the airlines will go under. This is not the best of time for Nigerian airlines. They are not making money from interline because in their operational system there is no interline with foreign carriers who fly to many airports in the country. Unlike in the past, no new airline is coming in as existing ones are finding it difficult to continue to operate,” Ayigbe said.

Aero Operations Threatened

Except urgent action is taken, Nigeria’s foremost commercial airline, Aero Contractors may go under. The airline has said it is facing difficult times right now and has drastically scaled down its operations. The airline has expressed the fear that if there is no immediate funding, it would be difficult for it to sustain its operation.

The airline said it would sack over 700 of its workers for it to remain in business.

After waiting for several months for injection of more funds by the Asset Management Corporation of Nigeria (AMCON), which fully took over the company in February this year, the airline has decided to operate a very lean service to continue to stay in business.

AMCON as receiver manager took over the airline on February 6, 2016 and the airline currently has over 10 aircraft most of which are overseas on maintenance for C-check. It was learnt that some of these checks had been completed but there is no money to pay the maintenance companies and then ferry the aircraft back to Nigeria.

THISDAY learnt that Aero obtained a loan from AMCON earlier this year to stop lessors from repossessing some aircraft in its fleet but AMCON is not willing to offer further assistance without staff rationalisationof about 51 percent.

Informed source from the airline disclosed that the only way the airline could survive is for AMCON to provide more funds so that the airline would bring back the aircraft in its fleet and also acquire more aircraft.

The source said the airline would survive based on two factors. First is if AMCON would continue to support the airline financially for six months to one year to meet its immediate needs that include funding the airline to sustain its leases, getting back its aircraft that went for maintenance overseas, paying off some of the debts and providing the airline working capital.

The second option was to reduce the workforce, which might stir the ire of the workers union, but AMCON has given it as the only condition to assist the company with finance, which means that without the funding the airline would go under if it does not downsize and it has been indicated that anyone that was sacked stands the chance of being re-absorbed “when the airline turns the corner of these hard times.”

Government Intervention

Uko stressed in an interview with THISDAY that government must have to intervene in the aviation industry if the sector would continue to provide the lever for the growth of the economy.

“Nigeria had made so much progress, but where we are now we have gone back like 20 years in the past three, five months, it shouldn’t be so. We had progressively made progress.

“Movement, transportation, travel have always been the means of growth for an economy. So for those of us in the travel business, this is bad because the less people travel a lot of businesses won’t grow. And there is also the safety implication; the safety implication is that an airline that has invested money in equipment needs return on investment to be able to service the equipment. If money is not coming and the banks are not giving loan, how will they service the equipment? So you start cutting corners, so there is also a safety implication to that,” Uko said.

It is expected that government would realise the importance of the airline industry and take critical decisions to ensure that they do not go under, especially as there have not been any new airline that came into operation after Air Peace two years ago.