Akpan: We Expect Low Traffic When Airlines Resume

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Amos Akpan

Aviation industry consultant and Principal Partner, Etimfri Group, Amos Akpan, in this interview, says Nigerian airlines are likely going to face huge debts, which they may not be able to pay, when they resume after the COVID-19 lockdown. Chinedu Eze brings the excerpts:

How do you think management of airlines would get pay to settle immediate bills like fuel, allowances, salaries, inflight catering upon resumption of flights, because you have advocated that they should not be given cash?

Flight operations fuel must not be cash and carry. Fuel bills are paid by the airlines’ bankers directly to the fuel company upon reconciliation between the field operations managers of the fuel and the airline companies. The invoices are submitted to the bank at the end of an agreed period. This eliminates fraud and enhances the credit rating performance of the airline. Same procedure will apply to suppliers of allied services like inflight catering and handling companies. The real issue is for the commercial banks to grant working capital overdraft facilities to the airlines based on the size of each airline’s operations. This is where the federal government needs to assist the industry by instructing the removal of collateral on such overdraft requests, except that sales must be domiciled in the bank granting the overdraft. Also, the interest rate must be at maximum of five per cent in the first twelve months at resumption of operations.

How do you see the domestic airlines surviving post covid-19?
It will be difficult for most domestic airlines to survive the way they were operating before the COVID-19 break. It is economically unviable to purchase/lease and deploy B737 aircraft on the Lagos – Benin, Lagos – Asaba, Lagos – Port Harcourt and other routes. It takes 90 passengers to breakeven at N25, 000 per seat on an hour’s flight with a B737 in Nigeria. On the contrary, it takes 45 passengers to break even at N25, 000 per seat on an hour’s flight with (Embraer) EMB -145 or a (Bombardier) DASH – 8. Nigerian airlines have to address the issue of right equipment for the environment. If we add above to multiple taxation, high cost of foreign currency, high cost of fuel, and cost of maintenance abroad, then we can safely predict that airlines with low investment capital will not survive except the government is determined to stop all existing operators from going bankrupt. Here again, the government itself needs help with very low oil prices and collapsing small and medium scale industries. It is a tight call for the management of the aviation industry. My direct answer is that some airlines will collapse while some will survive with government’s support. In this COVID-19 shutdown, airlines earn nil income but their fixed expenses are still running. Fixed expenses are the costs airlines bear whether they are flying their aircraft or not. Just before the lockdown the traffic was low causing the airlines to operate at a loss; that is, income per flight was less than the cost of operation. We expect very low traffic when operation resumes because people and corporations will be apprehensive to travel; therefore, flights will operate at less than 50 per cent of capacity. There will be redundancy for the machines and the human resources.

What do you think will happen to other aviation agencies and corporate organisations?
Travel and cargo agencies, handling companies, the Nigerian Civil Aviation Authority (NCAA), Accident Investigation Bureau (AIB), the College of Aviation Technology (NCAT), Zaria and the Nigerian Airspace Management Agency (NAMA) will also make very low income. The reason is because the primary institution for which they derive their function is the airline. If the economy of the airline is poor to the extent that it threatens their survival, their income will certainly receive the fallout. Very large portion of the income earned by NCAA is from the five per cent sales tax of passengers and cargo paid by airlines. NCAA shares this income with AIB, NAMA, and NCAT. In addition, NAMA earns income from navigational fees paid by airlines. Travel and Cargo agencies earn income when airlines operate flights. Handling companies exist to handle passengers, cargo and aircraft for airlines. In summary, airlines will not be able to pay fixed and operational cost bills upon resumption of flights as a result of the effects of COVID-19. They will be confronted with more bills than their income can meet. Consequently, all other service providers to the airlines will take the hit. They will reduce tariff and charges, while some out standings will be out rightly cancelled. Every organisation and everybody in the industry will be affected.

What will the industry do to survive the post COVID-19 era?
The industry will have to hit the ground running with solutions timely enough to avoid delay and catch up with global recovery trends. This is our time to document our postulations and templates applicable to various scenarios. I hope my elementary and basic practical suggestions, which are not new because they have been mentioned before now, would be stored by aviation policy makers in government and in corporate institutions; they may need to recall from the various commentaries within the industry to add to their collection of strategic inputs. My position on bailout is that government should not create funds and invite aviation operators to apply and be granted money. Instead, the airlines should be given grants and incentives through existing institutions that aviation companies transact business with. Do not give airlines money. How? Nigerian Customs should set up a program on the instruction of CBN and Minister of Finance. They should publish a list of equipment and parts that will not be paying duty for airlines, handling companies, and service providers like NAMA, FAAN, and NCAT. The period covered for duty free for the items on such list should be a minimum of two years. The companies will liaise with the Minister of Aviation to send in the list of items. There is a difference between political waiver and technical exemption from duty for a list of items. There currently exists political waiver on duties for aircraft and aircraft spare parts. By way of illustration, if you go to any of our border posts and ask for the release of your aircraft tyres and brakes, the Customs duty officer will open his tariff schedule booklet. He will search for aircraft tyres and brakes, and whatever is documented as the tariff for those items is what he will apply. He cannot authorise for release without duty items that are dutiable by their tariff book. The Customs work by their gazetted Customs and Excise Duty handbook. The situation where an airline will have to write to the Minister of Aviation, who will write to the Minister of Finance, who in turn would direct the Comptroller General of Customs, just for waiver on that specific request may be defined as political waiver. We have to carry out a technical procedure and document it in whatever regulated guidebook used by customs in field operations.
What of payment of aircraft insurance?
The CBN and Ministries of Aviation and Finance should collect the list of aircraft and equipment insurers and determine the exposure of each equipment and company to each insurer. The government should underwrite 50 per cent of the premium on all existing aircraft and equipments, whether out rightly purchased or leased, provided it is the responsibility of the Nigerian Company to pay the insurance premium. The CBN, Ministries of Finance, Aviation, and FIRS (Federal Inland Revenue Service) will ensure aviation companies do not pay or collect VAT. In addition, they should be granted 20 per cent wavier on every tax returns filed by the company for the initial one year. Our Minister of Aviation had mentioned that he is working to reduce the multiple taxations on airlines. The time to remove most of the taxes is now. Payments of interest on loans should be frozen for one year. The offer terms for new loans from all banks should not exceed five per cent interest rate with a minimum tenor of five years.

You know training takes a large chunk of airlines fund. How are the operators going to deal with training?
I am aware that NCAT through the Minister of Aviation has been in the process of acquiring Boeing B737 simulator. This is very good news but we need to move quickly and rightly. From enquiries it takes six months, from date of commitment, to design, build, ship and install a simulator. Therefore, within 10 months of Post COVID-19, NCAT and NCAA should be enabled financially to deliver Boeing 737-classics and EMB-145/190 simulator in Nigeria. These two aircraft types are commonly used in Nigeria and our pilots need to do training on them every six to nine months.

How will localising the maintenance of their aircraft help to save huge funds for the airlines?
The Ministry of Aviation, AMCON (Asset Management Corporation of Nigeria), CBN, and NCAA should meet on Aero Contractors. The purpose is to increase their capacity to handle maintenance of more numbers of aircraft for Nigerian airlines. Obviously the space they currently use is too small, they therefore need to acquire more space. Also, recruit more personnel and bring in more MRO equipment. Aero is NCAA certified for category A to C maintenance on B737, Bombardier and helicopters. Let us use the opportunity that post COVID-19 recovery offers to grow maintenance. Many aircraft will reschedule their maintenance by calendar or by hours of utilisation coming out of storage. The facility built in Uyo by Akwa-Ibom State government should be visited. It may be cheaper for Aero Contractors to move into that facility. It may cost movement of machineries and personnel but that hangar in Uyo is big and not used as designed. The speed at which Aero can fix aircraft and release back to service is key to our airlines performance. They need space, infrastructure and personnel. They already have the capability and have demonstrated so. Let us get past the politics of ownership and use its area of strength to our advantage. Aero is better now as a maintenance organisation than as a flying company from my personal perspective.

What is your position on airlines’ plan to cut workers salary in order to survive the hard time?
The duration of COVID-19 before it clears out is critical in this case. Also, the issue of sacrifice by employees for companies whose employers do not share profit, or run an open financial reporting system makes it difficult. But there will be no profit in this situation. The first recommended step is that no staff should be laid off due to COVID-19. The second is that salary cuts should start with the directors, the general managers and other senior management staff, at least 50 per cent. The rest of the staff should take maximum of 25 per cent cut. We must all accept the need to make room for survival of the industry post COVID-19. This should be a maximum of nine months from the date of resumption of flights. The union should discuss and settle this matter now. If the incentives are implemented, the companies will survive. It would be very unwise to go in and disrupt flights during the recovery period.