17 February 2017

Nigeria: Why Nigerian Airlines Fail

Photo: Premium Times
(file photo).

Last week the Asset Management Corporation of Nigeria took over the management of Arik Air in a move aimed at saving the airline from imminent collapse. Chinedu Eze writes on the consequence of the take over and the factors responsible for the short life span of domestic carriers

The recent take over of management of Arik Air by the Asset Management Corporation of Nigeria (AMCON) has elicited varying reactions from Nigerians, especially air travellers.

To the airline's passengers, who often complained about delayed flights, cancellations and unruly attitude of some of the airline's ground staff, the take over by AMCON, is a welcomed development.

But to some entrepreneurs, they are pained that a man toiled for years and established a thriving business, only for it to be taken over by another entity years after.

The take over of the Nigerian largest carrier has also opened discussions about the attitude in the aviation industry whereby experts with managerial ability are not allowed to manage airlines; rather, the investors insist on running the business themselves. This to an extent has led to the collapse of most airlines and it is readily referred to as owner-manager syndrome.

Why the Take Over

AMCON, in a statement explained that but for its prompt takeover of the airline, it would have stopped operation this week because of its huge debt burden. AMCON has however promised to revive the airline; pay the debts it owed; bring back the aircraft that were ferried overseas for maintenance and pay the salary arrears owed the airline's workers.

"The development will afford Arik Airlines, which is the largest local carrier, to go back to regular and undisrupted operations, avoid job losses, protect investors and stakeholder funds as well as ensure safety and stability in the already challenged aviation sector," AMCON said.

But many industry observers are apprehensive about the take over of the company by AMCON. This is because no airline in the Nigeria travel market has brought so much hope as Arik Arik did. The airline started its operation with new aircraft and this marked a turning point in the domestic air travel market, which was known for its gerontocracy fleet, known sharply as classics. The airline raised the expectation of Nigerian travellers and made the market more competitive.

However, many industry stakeholders are not positively disposed about the take over of the company by AMCON. Many of them feel it has created uncertainty in the industry and a disincentive to investing in the country.

The Managing Director of Skypower Express Airways Nigeria Limited, Capt Mohammed Joji spoke to THISDAY in Kaduna on Monday and condemned the take over of Arik Air by AMCON, saying that it would discourage entrepreneurs from investing in Nigeria.

"Deloitte of London said Arik Air has a portfolio of about $4.3 billion worth of investment. As you can see, Arik's aircraft are new aircraft. It is the biggest operator we have here. What AMCON has done is inappropriate and morally and ethically wrong to take the business away from the owner. Now, they are talking about debts and debts; indebtedness is the instrument of business. By taking over Arik, AMCON has taken over assets belonging to foreign investors because most of the funds that established Arik came from abroad. Do you think tomorrow somebody will come to this country to invest again?

"You don't do that for God's sake. What you will do is to sit down with Arik, call Deloitte, call Afrexim Bank and other stakeholders and ask them: This Arik problem, how do we solve it? But, instead of doing that you take over the company. They owe you, yes, but you have not invested anything. You want to take over a company's asset with the same management. I do not support that; rather, you sit down and bring in financial experts and those that invested in Arik. It is just like you now; you are staying in your house and one day your landlord said he wants to take everything you have, including your wife. How will you feel about it? To me, the approach is wrong," Joji, said.

Also industry consultant and CEO of Belujane Konsult, Chris Aligbe has expressed doubt about the effective management of the airline by AMCON.

"The AMCON take over of Arik is unjustified and unjustifiable. First they took it, saying they don't want it to collapse. There is problem with AMCON; all the businesses it took over have collapsed.

"AMCON took over Virgin Nigeria and it left the airline's two brand new Embraer aircraft to rotten. AMCON took over Aero for about five years now. When it took it over Aero had about seven or eight aircraft. The last time there was a review Aero had only two aircraft.

"AMCON has taken over Arik. They saw only 10 aircraft. They said they need N10 billion to rescue the airline but Arik owes AMCON about N135 billion and they need to put in N10 billion to revive the airline. With that AMCON would put N145 billion in Arik.

"AMCON is a stakeholder in the airline because of the money it owes them. All other people Arik owes have become stakeholders in Arik; therefore, they have an interest in Arik. Arik itself is a major stakeholder because about five years ago the value of Arik assets was put as $4.3 billion. I don't know what that asset is today but let us assume that the company has lost 50 percent of its value in which case the value would be projected as $2 billion. $2 billion when converted with Central Bank of Nigeria (CBN) exchange rate is about N640 billion, which is more that three times what Arik owes AMCON. The total indebtedness of Arik to all the people they are talking about could be N300 billion. This means that Arik assets are worth two times the total debts," Aligbe said.

Challenges

There are factors that are responsible for failure of Nigerian airlines. These include hostile operating environment, unfriendly policies and exploitative taxation.

Industry experts and operators have explained that taking over Arik Air may not be the solution to airlines going under in Nigeria. They posited that to ensure airlines operate profitable, government must change some policies and show more commitment to facilitating profitable operation of Nigerian carriers.

Reacting to the take over of the management of Arik Air by AMCON, the industry think tank, Aviation Round Table (ART) said Nigerian airlines face a lot of challenges adding, treating the Arik Air case as isolated, would be trivializing the magnitude of the problems Nigerian airlines face.

"Treating the Arik case in isolation will be to trivialize the magnitude of the problem. Going back to almost 40 years, government owned airline, Nigeria Airways failed, pioneer private airlines Okada, Kabo, etc failed, third generation airlines, ADC, Bellview, Chachangi, Sosoliso, etc. failed, fourth generation airline, Richard Branson Virgin Nigeria, which later became Air Nigeria, Afrijet and Discovery Air failed. Believe me, given the same Nigeria operating environment the national carrier yet to be born will fail," President of ART, Gbenga Olowo said.

Olowo said the major problem of Nigerian airlines is essentially a Nigerian business environmental factor.

"Business and government are permanently at variance. Cost is permanently higher than income. Tax overburden and infrastructural deficit erodes revenue steadily. Gazetted policies that will enhance performance are not implemented. Credit is not in the Nigeria business dictionary. Yet aviation is prone to the most minute situation in the economy, ranging from weather to politics, reckless holidays, etc," Olowo said.

He attributed the cause of these problems to lack of will by government and the airlines to do the right things to improve the industry.

MultipleTaxation

The Chairman of Airline Operators of Nigeria (AON), Captain Nogie Meggison, reacting to the take over of Arik on behalf of other operators, said airlines could have contributed in jump- starting the economy out of recession if government had provided the right policies to grow the industry.

Instead of supporting the airlines, Meggison said the system is continuously manipulating, feasting and pushing the financial envelope of airlines by inflicting multiple taxes, charges and levies to the extent that airlines are now groaning under the pressure and some are going bankrupt.

"AON has been screaming and complaining about the same issue over the years that have culminated in sending over 27 airlines under in the past 25 years. A case in point is the recent takeover of Arik Air and Aero Contractors by the Asset Management Corporation of Nigeria (AMCON) in the face of huge financial burdens that have shown themselves as fallout of the multiple and sometimes unfair charges, levies and taxes airlines are forced to grapple with on a daily basis.

"This is without recourse to the fact that aside from all the multiple charges, levies and fees, airlines still have to pay mandatory statutory corporate taxes to relevant agencies.

Ordinarily, airlines meet so many costly foreign exchange components on daily basis that accounts for 70 percent - 80 percent of their direct operational cost, such as Jet fuel, spare parts, insurance and simulator training among several others," Meggison said.

He said it is unfortunate that domestic airlines have become a cheap target for the agencies that are putting additional pains and burden on operators through multiple taxes, charges and levies which they demand from airlines with impunity.

"The Civil Aviation Act of 2006 (Part 18.12.3) requires that the NCAA regulates civil aviation and the charges imposed by civil aviation authorities and/or agencies. These charges, in consultation with stakeholders are to be approved and reviewed periodically by both parties. On the contrary however, airlines are saddled with charges without any form of consultation whatsoever.

"Domestic airlines, on the average, pay about 35 percent to 40 percent of a ticket cost as taxes and charges that come under the guise of statutory levies in addition to other charges. These include five percent ticket sales charge, five percent cargo sales charge, five percent Value Added Tax (VAT), Passenger Service Charge, charter sales charge, aircraft inspection fees, simulator inspection fees, Landing charges, parking charges, terminal navigational charge, enroute charge, fuel surcharge, airport space rent, electricity charges, and apron pass, ramp access charges, On Duty Card (ODC) and a newly imposed registration fee all of which are paid to government agencies," Meggison said.

He noted that many of these taxes and charges amount to double taxation such that any incentive seemingly provided by government to airlines is taken back by the agencies.

According to him, the Nigerian Airspace Management Agency (NAMA) charges domestic airlines different kinds of navigational charges which they should ordinarily be exempted from in line with global best practices, except Nigeria. The implemented charges range from terminal navigational charges to enroute navigation charges, Over-flight charges, clearance charges, and extension charges, noting that even foreign airlines don't pay enroute charges or extension charges which the local airlines are forced to pay.

Airline operators and other industry stakeholders said that as long as these multiple taxes are levied on the airlines; as long as there is infrastructural limitations, which forestall maximum use of aircraft; as long as major aircraft maintenance is done overseas; as long as aviation fuel is scarce and costly and as long as government does not have incentive policies for airline operation in Nigeria, it would be difficult to have successful airlines that are profitable with long term existence.

More on This

As NCAA Steps Up Measures On Air Safety

Safety in air transportation is largely dependent on effective regulation, surveillance, training and manpower… Read more »

Copyright © 2017 This Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 900 reports a day from more than 140 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.