Harold Demuren, director-general, Nigeria Civil Aviation Authority, NCAA, recently stirred up the hornets’ nest when he declared that domestic airlines were heavily indebted to regulatory agencies in the aviation industry. At the last count, it was said that airlines owed Federal Airports Authority of Nigeria, FAAN, over N6 billion. They also owe the NCAA over N1 billion in remittances for passenger service charge, while owing the Skypower Aviation Handling Company Limited, SAHCOL, over N2 billion. But for industry watchers and stakeholders, Demuren’s declaration on the poor financial standing of domestic airlines with aviation regulatory agencies did not come as a surprise; rather, it goes to further buttress the deepening financial crisis that is threatening to cripple the industry.   

Following the outcome of the Paul Dike’s task force on aviation reforms of 2006, stakeholders were of the view that if the recommendations were fully implemented, the nation would have a robust aviation industry. One of the recommendations was that domestic airlines needed to recapitalise. However, unlike the flat rate of N25 billion given to banks during that industry’s recapitalisation exercise under Chukwumah Soludo, former Central Bank of Nigeria, CBN, governor, airlines had the luxury of a flexible recapitalisation option. Depending on their choice of operation, airlines interested in only domestic operations were to have a minimum of N500 million; airlines wishing to combine both domestic and regional, N1 billion; and those interested in domestic, regional and international, N2 billion. But almost two years after the conclusion of the recapitalisation

exercise, airlines are now moving at an alarming rate back to the old order, as most of them have either stopped operating or are on the verge of closing shop. In the last 10 years and slightly beyond, several airlines have either closed shop completely, temporarily, or on the brink of collapse. Some of these include Okada Air; KOLKOL; Chrome; Afrijet; Gas Air; Aviation Development Corporation, ADC; Albarka; NICON Airways; Fresh Air Limited; Executive Aviation Services, EAS; Space World; Allied and UMAR. Others include Sosoliso; Harka Air; Harco; Freedom Air; Kabo Air; Savannah; Hamza; Bellview; Triax and Oriental; Capital Air; Skyline Aviation, Intercontinental Air; Concorde Southern Air; and Dasab. Similarly, in 10 years, airlines like Arik Air; Dana Air; and Slok (later grounded by government), have entered the sector.

Consequently, the recapitalisation exercise have since proved to be ineffective, as the fortunes of domestic airlines have consistently been on a steady decline; even some airlines that scaled through the exercise have either failed to operate or are now grounded. For instance, NICON Airways, (formerly EAS), owned by Jimoh Ibrahim, chairman, NICON Group, has not operated a single flight since losing its aircraft to a bird strike on April 30, 2007; while Fresh Airline did not commence operation at all, Bellview, owned by Kayode Odukoya, has long stopped operation, although with a promise to resume same later in April. Capital Airline has also stopped operations.

Bayo Oguntade, an aviation consultant, contends that given the huge financial requirements of airline business, the benchmark set for the recapitalisation exercise in the industry

the industry was grossly inadequate. For him, owners of airlines simply capitalised on the meagre amount required to recapitalise without taking into cognisance the huge expenses involved in running the business. Indeed, many airlines have failed to look beyond the set financial benchmark, which has now placed them in a precarious situation. Stakeholders reason that there is no rule preventing airlines from having more than the stipulated amount, which would have placed them in a stronger stead. In this regard such airlines like Arik Air, Aero Contractors, and lately Dana Air, have been able to position themselves financially to cope with the operations. Arik Air, for instance, has an investment of over $4 billion, or N600 billion.

Dele Ore, a retired pilot and coordinator of the Aviation Roundtable, reasoned that recapitalisation was not the only solution to airline problems in the country. He believes that operators should emulate the defunct national carrier, Nigeria Airways, which employed the strategy of route development for its growth. “Routes developments are a major part of an airline’s asset, not just financial recapitalisation. When they develop routes, then they would make a lot of money from it later; for now, they are only enjoying the routes that have been developed by the defunct Nigeria Airways”, he explained.

An area that airline operators have failed to explore is that of merger. A top member of the Airline Operators of Nigeria, AON, explained that though mergers and acquisition would do the industry a lot of good, no operator was willing to let go of his airline. According to the source, business owners in the country

are sentimentally attached to their business concerns such that they hold on tenaciously to it even in the face of an imminent collapse. The case of NICON Airways buttresses this standpoint. At the beginning of the aviation reforms in 2006, industry watchers and stakeholders had thought that the merger/acquisition of EAS by NICON Airways would bring a new lease of life into the ailing airline which was struggling to remain afloat after it recorded an air crash on May 4, 2002. Today, more than three years after the merger/acquisition, the airline is completely grounded.

Experts also believe that Nigerian airlines could explore interlining, a forum of collaboration by airlines to reduce operational costs as done in other countries. Interlining is a voluntary commercial agreement between individual airlines to handle passengers travelling on itineraries that require multiple airlines. When a ticket is issued for an interline itinerary, one of the carriers marketing flights on that itinerary will be selected by the ticketing agent as the "plating carrier". The plating carrier collects the entire fare from the customer and is responsible for distributing the proceeds to other carriers on that itinerary, so long as those carriers carried the passenger. A plating carrier, therefore, gets the benefit of cash flow. With this system, airlines would have saved cost flying an almost empty aircraft to a destination. Mohammed Tukur, assistant secretary, AON, agreed that such arrangement would augur well for the industry and operators. “Why would I fly eight passengers to Enugu in a 120 capacity aircraft, and another airline fly 20 passengers to the same destination, when

we could have an arrangement to merge passengers and then have a sharing formula?”, he queried.  

A reduction in the cost of aviation fuel, Jet A1, would also be a lifeline for operators. The price of this commodity is said to be the highest on the continent and rank among the highest in the world. Jet A1 sells for between N94 and N98 per litre currently. A medium-sized aircraft would require about N200,000 worth of the product between Lagos and Abuja.

A window of opportunity that should also be employed by Nigerian airlines is the Cape Town Convention. The Cape Town Convention is the domestication of all international conventions that a country is a signatory to. In times past, when an investor defaults in the terms of agreement in purchasing an aircraft, the original owner finds it difficult to withdraw the aircraft because the buyer would go to court for stay of action. But today, because of the domestication, the NCAA now stands as the guarantor for those aircraft purchased by Nigerian operators. So, if an airline is in default, NCAA will simply sign a release and the owner would have access to take over possession of the aircraft without recourse to court. This has given confidence to international investors to do business with local operators. But even at that, investigation showed that most domestic operators are unable to benefit from this arrangement due to lack  of funds or credit facility from banks. With the banking reforms started by Lamido Sanusi, governor of CBN, in 2009, banks have stopped granting credit facilities to businesses in the country while letters of credit issued by Nigerian banks are now being rejected by foreign

banks. Consequently, airlines are not immune to the credit crunch in the economy. Chike Ogeah, managing director, SAHCOL, agreed that the credit crunch suffered by its major clients was taking a toll on the business.  

The mindset in AON is that government has hardly ever come to the aid of operators by any means whatsoever, to relieve them of the burdens of expensive maintenance, spare parts procurement, pilot training and other areas of their operations. For now, a bailout option may be the only hope for ailing airlines. While government may have acceded to this bailout request from operators, offering them N10 billion, it may well turn out to be a drop in the ocean, considering that aviation business is known to require a large outlay of funds. Yet, operators are sharply divided on the sharing formula for the funds. Edward Boyo, chief executive officer, Overland Airline, is the chairman of a presidential sub-committee set up to find lasting solutions to the challenges facing the airline industry in the country. While submitting the committee’s report on February 18, 2010 to Mansur Muhktar, finance minister, canvassed for a 50 per cent reduction in airport charges for airlines just as he suggested that the five per cent ticket sales charges be slashed by 50 per cent. The report also requested that the Nigerian Airspace Management Agency, NAMA, terminal navigation charges and third party revenue collections be set aside, while airlines should retain 10 per cent of any charges collected on behalf of the agencies as administrative charges and NCAA statutory fees.

But even within the AON, the centre appears not to hold. Joseph Arumemi-Johnson, chairman, A

Arik Air, reportedly presented a minority report, disagreeing with AON’s submission and plea for reduction in various areas. Sources close to the Arik boss said  that granting such concession would create an uneven playing field for operators. Arumemi-Johnson’s stand may be understood given that his airline controls about 42 per cent of the market at present. Besides, if the situation continues, more airlines would definitely close shop and this would ultimately lead to a monopoly for the stronger and more stable operators like Arik and Aero Contractors.

Currently, with a fleet of 25 state-of-the-art aircraft, Arik Air dominates the local aviation market, followed by Aero Contractors with nine aircraft, and Nigerian Eagle Airline, formerly Virgin Nigeria Airline, with a fleet of seven aircraft. Others include Chanchangi Airline, five; Dana Airline, four; IRS, five; Overland, three; Capital Airline, two; and Bellview, one. But Sam Adurogboye, head of media, NCAA, thinks otherwise. He said that the airline does not enjoy any monopoly, as there is a very stiff competition. Arik Air, he said, keyed early into the Cape Town Convention and by the time other airlines do the same, things would change for the better. Equally, a monopoly in the industry would not be good for the flying public, who would have no option when airfare is increased arbitrarily.

Ore is also convinced that government should ignore AON’s call for bailout or any form of concession. His argument is based on the managerial capabilities of operators, which he blames on the state of their airline. The retired pilot argued that an operator that could not manage his operatio

operation effectively with his funds or bank facility may be unable to do same if given a bailout by government. Rather, he wants government to probe how operators found themselves in such a situation. For instance, the case of Bellview Airline, founded in 1992, has not ceased to amuse industry watchers. At its peak, the airline flew 11 international destinations such as Amsterdam, London, India, among others, and was the first domestic airline to be certified by the International Air Transport Association, IATA. By June 1997, Bellview was worth $15 million, winning both continental and domestic laurels. Also, Afrijet Airline, which staged a comeback with much funfair, soon ran into turbulent waters as it could no longer finance its operations and had to withdraw due to its inability to pay staff entitlements and soon had no aircraft to operate, as it could not sustain its operations and lease payments.

For now, survival is the name of the business. Some airlines have devised means of cutting operational costs to aid their finances. Last November, Aero Contractors introduced a no-frills flight into the nation’s aviation industry. Shaf Syed, chief executive of Aero, expressed the delight of his airline to launch Sky Snax, a regime in which passengers would have to pay cash for refreshment on board its flights. “Our cabin crew would heartily attend to customers’ needs, ensuring that they get quality service on board. This clearly indicates our innovation in this market, and show us leading the way again for others to follow”, Syed said. By implication, this means that a passenger aboard Aero Contractors flight that is desirous of having refreshment

would have to pay for it. The cheapest item in-flight Aero is N100; therefore, if a passenger spends an average of N250 and there are 120 passengers on board, that translates to N30,000 saved on an hitherto free refreshment regime per trip. Aero Contractors operates about 60 daily flights, so it would have saved N1.8 million on refreshment daily, and N54 million monthly on the same item.

In the case of Afrijet, its paucity of funds is said to be receiving the attention of Afri-EXIM Bank, its financiers, just as the management hopes for an early return of its three aircraft which were reportedly send to the United States, US, for C-check maintenance. To ensure that it returns to business, the airline is also seeking financial assistance from some Nigerian banks, especially to expedite actions on the return of the aircraft. Conducting a C-check on an aircraft cost an average of $1.4 million or N210 million, depending on the type of airplane. But Afrijet’s hope of securing credit from domestic banks may hang in the balance due to the prevailing situation in the banking sector, which has made banks shy away from granting credit facilities.

Bellview on the other hand believes that if the airline is able to take delivery of two Boeing 767-300 it has ordered, then the situation would change, and would return to the sky in April 2010. Other airlines like Chanchangi and IRS have also placed orders for more aircraft to boost their operations. 

But even with these facilities in place, an early return to the sky may not be in the offing. Most of these airlines that have stopped flying have to fulfil stringent conditions to regain their Airline Operati

Operating Certificate, AOC.  By failing to operate at a point for 60 days at a stretch, affected airlines are deemed by NCAA regulations to have forfeited their AOC. Though they hope to return once they get airworthy aircraft, but getting AOC renewal takes a minimum of six months. Also, NCAA demands that returning airlines must meet certain criteria like compulsory payment of outstanding staff salaries; examination of the airline’s financial statements, and fleet availability.

While the industry awaits the return of these distressed airlines, stakeholders clamour for a change in government policies, which they insist have always been against business concerns. The issue of the banking reforms which has been widely accepted as not properly conducted readily comes to mind. An early intervention by government by reviewing downward the price of aviation fuel and other palliative measures, would go a long way to revive the industry.

 

Demuren: Declares the indebtedness of domestic airlines

Oguntade: Underscores the recapitalisation requirement

Ore: Tasks airlines on strategy of route development

Tukur: Supports the plating carrier arrangement

Boyo: Canvasses for reduction in charges for airlines

Arumemi-Johnson: Disagrees with AON’s submission

Adurogboye: Makes a case for Arik Air

Adurogboye: Defends Arik Air