The crisis in Nigerian aviation industry reminds one of the global aviation crisis of 2008 when airlines were grounded due to economic recession. As at then, Latin America has had the lowest losses worldwide which ended the year of 2008 on a positive trend and Asian market had the most surprising decline. Europe was affected from west to east so that the first ads of the crisis had to report a drop in the traffic both on the intra-European and other routes with a sharp decrease of the transatlantic ones to North America. The European Union countries can be observed at a large difference between some countries which were very affected and some which have not yet felt the effects of the crisis. This, the countries which had a large decrease in the number of passengers were United Kingdom especially concerning the connections with the U.S., Spain – the country which is dependent on tourism and with decreased number of passengers.
The Nigeria aviation industry is facing tough times as combined effects of the ongoing recession, poor funding, indebtedness, fuel scarcity, low passenger rates and government policies threatens to force many of them out of business. The airlines have lost billions of naira owing to flight cancellations and high operational costs.
For instance, sometimes in last year about three major airlines which include Arik Air, First Nation and Aero suspended operations within three weeks, citing operational difficulties. They have all been forced to make the difficult decisions of shutting down. While Arik resumed after 24 hours, First Nation and Aero remain grounded. Cancellation of Arik flights from Abuja-Lagos cost the airline about N45 million in revenue. First Nation and Aero have been out of operations since and both have cancelled dozens of flights.
Just recently, the Asset Management Corporation of Nigeria (AMCON) announced the takeover of one of Nigeria’s largest carrier, Arik Air, with a claim that it wanted to save the airline from collapsing and to ensure that over 3000 workforce in the company did not lose their jobs. The action was predicated on a court order which gave AMCON the power to do so, considering the huge debts Arik Air owed the federal government agency, put at around N135 billion.
Justifying the takeover, AMCON said that Arik Air has been in a precarious situation largely attributable to its heavy financial debt burden, bad corporate governance, erratic operational challenges and other issues that required immediate intervention in order to guarantee the continued survival of the Airline. But many analysts have misgivings about the action of AMCON for several critical reasons.
For these analysts, AMCON has a reputation for ruining all the businesses it has taken over. Example is Aero Contractors, which has about nine aircraft when it was taken over in 2012, but which now has only three aircraft that are airworthy. Besides, government has never run a successful airline in Nigeria, so using Arik to establish a national carrier may not be in the interest of the airline and the Nigerian public, as long as government has substantial shareholding in it.
According to them, the forceful takeover of Arik is more as a disincentive to private investment in the country. It was reported that Deloitte of London five years ago placed Arik assets at $4.3 billion; but all the debts owed by Arik is still less than 50 per cent of its assets and therefore the forceful takeover of the airline could be described as illegal. So what was expected is for all the creditors, including AMCON to sit at a table to decide the way forward for the airline, rather than the current approach that could end up killing the airline.
Arik Air operates about 120 flights per day across its destinations with about 8,400 passengers with an average passenger rate of 70 passengers per flight. At an average of N30,000 per seat, the airline have lost about N252 million on Tuesday, when it grounded its operations because of insurance-related issues. According to Captain Ado Sanusi, the Senior Vice President (Operations) and Deputy Managing Director of Arik Air, “We have fly to 31 routes. Thirteen are international and eighteen are local, while we have twenty six planes.”
Arik Air’s safety certification included European Aviation Safety Agency (EASA) which enabled it to fly to any country in Europe; advanced level of the International Air Transport Association (IATA) Operational Safety Audit (IOSA), known as Enhanced IOSA, which enabled it to code-share or interline with any airline in the world. It is also the only Nigerian airline that has Part 129, which allowed the airline to fly to the US with Nigerian registered aircraft. Stakeholders posited that, such goodwill will be lost with the action AMCON has taken.
Another issue stakeholders expresses concern over is that, the International Air Transport Association (IATA) has suspended the airline membership; which means it cannot use Billing and Settlement Plan, which is a payment platform for airlines that provide network and facilitates payment from any part of the world. By suspending Arik, IATA has indicated that the action AMCON has taken may not be in the best interest of the airline and possibly, the association may be seeing a bleak future for the domestic carrier, which was once a beckon of hope for Nigerians.
Still expressing their worries, the stakeholders said that it is an open secret that the plan to take over Arik Air by the federal government was hatched about a year ago at a period some officials were toying with the idea of establishing a national airline. Although AMCON said the action was a move to save the airline, which held about 60 per cent of the domestic passenger traffic, there are questions as to whether this was the best option for the federal government.
Economic Confidential checks show that the crisis has predicted a bleak future for the aviation industry and that the market would remain just as powerful state companies. Like in abroad sometimes ago when Alitalia entered bankruptcy because of losses on certain routes, and other smaller companies for low cost or which exercised niche flight either on business segments or seasonal type charter, went bankrupt as at that period.
Speaking on this issue, ChuksIwelemo, an expert in the aviation sector told economic confidential that; “in times like this, for some of the companies to survive, there will be need for alliances, consolidation and niche players – a further concentration movement, with a risk of resulting in market dominance and abuse of market power.”
According to him, “trend will persist and the consolidation and risk of abuse of market power; new market entries and increasing aggressiveness – risk of predatory pricing, i.e. entry deterring strategies that work by reducing the profitability of rivals and extreme volatility of the airfreight market with the risk of a complete restructuring of the airfreight market. To be able to come out of crisis, there would be need to follow some of the future trends such as; reshaping the development of multiple airport systems in metropolitan areas and of niche airports; commercialization of business management in a market economy, economic performance and efficiency must become salient criteria for design.”
While it is believe in some quarters that the step AMCON has taken is a welcome development, others suggest AMCON sit down with the management of Arik airlines to fashion the way forward. That would be a better option than using military tactics to take over a going business concern owned by a private investor, no matter the justification.
