Can Airlines Survive without Bailout?

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Nigerian airlines have been under financial distress currently exacerbated by the coronavirus pandemic devastation of the sector. Now that another bout of recession has set in, Chinedu Eze wonders if the airlines will survive without government intervention.

The domestic airlines are in financial straits because of so many factors. These include the high cost of operations, the fact that it is dollar denominated business. This means that airlines generate naira revenue and pay for spares, maintenance, training and aircraft acquisition in dollars.
They pay high interest rate for loans, comparatively outrageous insurance premium and inflexible and costly conditions in aircraft leasing.
These realities ensure that domestic airlines operate on a very thin margin. So flight disruptions occasioned by inclement weather, sudden increase in price of aviation fuel, labour unrest, sudden adverse government policy and other factors can take this little profit away.
Before the pandemic, indigenous carriers have been seeking for government support, urging for permanent waivers on tariffs on imported aircraft and spares, exemption from VAT payment and upgrade of airport facilities, especially installation of airfield lighting at airports so that they can fly for longer hours.

But with the coronavirus pandemic disruptions, it has become critical that for the airlines to survive they need financial help from government.
This is what other countries have done for their airlines. In fact, according to the International Air Transport Association (IATA), it will be very difficult for commercial airlines to survive without a certain form of financial support from government.

COVID-19 Pandemic
The commercial airline industry has been made lame by the pandemic. Recognising the critical role air transport plays in the economy of every nation, various governments starting from the period of the lockdown gave financial support to their own carriers.
IATA had warned that the airline industry faced a hard winter and called on governments around the world to continue providing relief measures as the COVID-19 crisis continues.
The global body said airlines are expected to post a loss of $84.3 billion in 2020 and that financial relief from government remains a lifeline to many airlines.

IATA during the lockdown renewed its call for government relief measures as the impacts of the COVID-19 crisis in Africa deepened.
It said airlines in Africa could lose $6 billion of passenger revenue compared to 2019. That is $2billion more than what was earlier projected.
“Job losses in aviation and related industries could grow to 3.1 million. That is half of the region’s 6.2 million aviation-related employment. Previous estimate was two million. Full-year 2020 traffic is expected to plummet by 51 per cent compared to 2019. Previous estimate was a fall of 32 per cent. GDP supported by aviation in the region could fall by $28 billion from $56 billion.
“Previous estimate was $17.8 billion. These estimates are based on a scenario of severe travel restrictions lasting for three months, with a gradual lifting of restrictions in domestic markets, followed by regional and intercontinental,” IATA said.
CEO of Aero Contractors, Captain Ado Sanusi told THISDAY that airlines are facing worse problems with the economic recession because they have not recovered from the COVID-19 lockdown and #endSARS protest, which negatively affected flight operations.
He noted that with the current recession, airlines would find it difficult to survive and some may even go under.
“The recession will affect every part of the economy. Prices of local commodities and services are already high so you can imagine the cost of imported goods.
“Aviation has multiplier effect. Everything we do in aviation has forex component. That is why airlines are struggling. The Senate Committee Chairman, Senator Smart Adeyemi stated that the airlines are facing dismal situation and this could be solved if government intervenes with bailout.
“It is not that planes will drop from the sky. That cannot happen because the industry is effectively regulated, but airlines may be forced to shut down if they do not have the funds to continue operation. I am sure the economic recovery team will pay critical attention to the aviation sector,” Sanusi said.
He said Nigerian airlines would have to pay higher insurance premium and this would dig deeper into their funds and this would be a big challenge to the operators, noting that insurance premium is higher in Nigeria because revenues are earned in the naira, which is very cheap now, so airlines would sell their naira to get dollars, which is currently very scarce.
“Airlines are still recovering from the impact of COVID-19 lockdown, #endSARS and now economic recession. This will leave a huge toll on the airlines. More airlines may go under. We are paying more for insurance.
“We will pay more for aircraft leasing. Anything you want to do that has dollar component will be a challenge, even if it is national carrier you wish to establish. So we must have to address the foreign exchange problem,” Sanusi said.
He also acknowledged that one of the reasons why government is seemingly unenthusiastic about supporting the airlines was because some airlines abused the privileges given to them in the past, noting that that was in the past and there are different airlines now and urged the economic recovery team to also find a permanent solution to the lingering economic challenges faced by the airlines.

Need for Bailout
The House Committee Chairman, Hon. NnoliNnajo recently explained that the IATA had in the wake of the pandemic canvassed for continued financial and regulatory support for airlines; particularly financial relief that does not increase industry debt levels through direct cash injections, credit or loans and deferrals or discounts on user charges to support airlines over the restart and recovery period.
“However, only the following African countries; Rwanda, Senegal, Côte d’Ivoire, Burkina Faso and recently Cape Verde have responded adequately to this plea said IATA Regional Director for Middle East and Africa, Mr. Mohammad All Bakri.
“The actions of these African countries, according to IATA have helped save thousands of jobs and would enable some airlines to restart and support the wider economies they serve in those countries,” Nnaji said.
He said as early as May, IATA had called for aviation-specific financial relief measures from the government of Nigeria to address the severe impact of the COVID-19 crisis on the air transport sector.

The global body said that air transport has grounded to a halt in efforts to stop the spread of COVID-19. Along with the direct impact on jobs and companies in aviation, related industries including tourism, hospitality and trade have been hit hard, adding that all play an essential role in creating jobs and powering economies.
IATA noted that prior to the crisis, aviation contributed $1.7 billion to Nigeria’s GDP and supported 241,000 jobs. IATA estimates that the COVID-19 crisis puts 124,000 Nigerian jobs at risk and some $900 million of the country’s GDP.
Nnaji said, “The IATA Regional Vice President for Africa and Middle East, Mr. Barry Kasambo in the Association’s publication also acknowledged that the situation of airlines in Africa are worsening and urged that the measures are essential to minimise job losses and ensure that connectivity can be restored within the continent.”

The Chairman, House Committee on Aviation also quoted Kasambo as saying, “We urge African governments and the development institutions which have committed funding to provide it urgently in a structure that does not weaken already stressed airline balance sheets, before it is too late.”
Nnaji added, “Here in Nigeria, our indigenous airlines are faced with enormous challenges like high interest rate on loans, lack of maintenance facilities, high insurance premium, multiple taxation, disadvantageous policies and high cost of jet-A1, (aviation fuel) among others which make it near impossible for them, (local airlines,) to break even.”

Intervention
Also the Chief Operating Officer of Ibom Air, George Uriesi, told THISDAY that with what is happening to airlines in the country, it would be very hard to predict what would happen in the near future but noted that airlines are struggling to survive by every means possible but they need urgent financial push from government but was not sure whether that push would come at all or it would come late when it would not be critical in saving airlines.
“It is very hard to say what will happen to the airlines. Many of the airlines have to renegotiate terms with their creditors. There was hope there was going to be some palliative with the federal government. “Airlines must by now be considering that the palliative may not be coming because government has its hands tied. But the N4 billion fund already pronounced is very, very little to share among airlines.
“Compared to when operations started after the lockdown, it has gotten slightly better since July and maybe because we are heading towards the festive season. We have seen the lagging indication of the economy. No one knows how it will affect the airlines,” Uriesi, the former Managing Director of the Federal Airports Authority of Nigeria (FAAN), said.

Support
Besides giving Nigerian carriers bailout as other countries are doing, it is expected that government would also help the airlines to run profitable business, which would be the incentives for more investment in the sector.

The operators listed the challenges, which they said have been crippling their operations that include non-implementation of the Executive Order on Zero Customs duty and zero VAT on importation of commercial aircraft and aircraft spare parts; non-implementation of the Executive Order on the removal of VAT from air transportation; inability to access forex; high cost of capital and lack of single digit lending interest rate for airlines.
The airlines urged the federal government to enforce the Executive Order on the implementation of waivers for the importation of aircraft, which has been made permanent by the current administration.

These waivers are supposed to help the airlines survive and continue to carry out their service, sustain their suppliers business, sustain other businesses that are dependent on their existence and also pay salary to thousands of workers.
Aviation economist and the lead consultant at ETIMFRI Group, Amos Akpan said recently at the public hearing by the House Committee on Aviation that if government wants airlines to survive in Nigeria, create more jobs and contribute significantly to the nation’s GDP, government should stop multiple taxes on operating airlines.
He said government should also reschedule the outstanding loans and debts of operating airlines so that they can have allowance to pay for current operating costs.

“Discontinue granting multiple entry points to foreign airlines so that domestic airlines can have more traffic. Encourage a service level agreement between services providers so that every organisation in the industry will be clear on what is expected from her.
“Let the COVID-19 bailouts granted be given to the designated companies and agencies. Name them and the amount received. The agencies, the unions, the operators must meet once every month to smoothen issues of disagreements and resolve to sheath swords until after the recession so the industry can survive.
“Any dead company means jobs lost, decay of machines, nil income for all. Without government bailout the industry won’t survive the recession. What the government should do immediately is to set parameters and modules for application of bailouts to agencies and operators in the aviation industry,” Akpan said.