How the Recession is Affecting Passenger Traffic

For air transport operators, the year 2016 was their worst in recent memory, as the depletion of air travelers impacted negatively on airlines, Chinedu Eze writes

Discovery Air, which suspended operation in 2015, had planned to bounce back last year. The airline made several efforts to access credit facility from local and international financiers but the rate with which the naira was losing value made it difficult for the airline to succeed in getting the funds to recommence operation.

Aero Contractors, which maintained good operation over the years was forced to suspend schedule operation in September 2016 only to resume in December. Also in 2016, three airlines that had obtained Air Operator Certificate (AOC) to start operation suspended the plan because of the volatility of the naira and the high cost of aviation fuel. Aero explained that it was forced to suspend operation due to high cost of aviation and depreciating naira.

Aviation and Other Economic Sectors

The economic performance of companies outside the aviation sector in 2016 showed that it was the worst year for many sectors of the economy. For the first time, MTN declared losses; the same with Nestlé, which recorded major decline last year.

In the telecommunication sector industry analysts said 2016 was not a year to cheer because most of the telcos operated at a loss. There was massive drop in voice calls due to low purchasing power of Nigerians, but there was increased demand for data but not to be compared the previous years.

“The downturn of the economy in 2016 affected the telecom companies because some of them operated at a loss in the area of voice calls and there was drop in revenue. Recession occasioned by the low value of the naira affected them because most of the equipment they needed were purchased overseas with dollars so they have to spend huge resources to acquire the equipment but they could not transfer these additional funds to their customer by increasing charges in order not to lose them. Most of the companies made very little marginal gains last year. The penalty paid by MTN also affected their marginal gains last year,” a telecommunication industry analyst told THISDAY.

Industry experts say this was what also happened in the aviation sector. When the Central Bank of Nigeria (CBN) stopped its forex access window to oil marketers, they went to the parallel market to buy dollars to import aviation fuel, forcing the price of the product to skyrocket. This drastically affected the airlines, which could not pass the huge increase to their passengers through airfare hike. The matter was exacerbated by the fact that 75 percent of Nigerian airlines’ operational cost is done in foreign exchange; from aircraft maintenance to purchase of spares, insurance, training and even the payment of expatriate personnel. Now, they have to quadruple their earnings in order to meet the dollar demand but unfortunately there was low passenger traffic due to the economic recession. This drastically affected the operations of the airlines.

According to reports, there was marginal decline in the performance of companies in 2016 due to the recession. Companies that obtained foreign loans when the naira got depreciated had to earmark more than four times the amount in naira they used to service these debts.

“For example, if they were to pay $100 million in 2014 when dollar was about N170, by last year it rose between N350 to N500; they generated more naira to service these debts in foreign currency in 2016. That left them recording huge losses at the end of the day. They were paying more naira to service their foreign loans and because of recession most businesses were not getting high turnover and patronage,” the economic analyst said.

Failing Airlines

Because of the aviation industry high dependence on the dollar, it was hard hit and that may explain why only four airlines out of the existing eight on schedule service are effectively operating. Some have left their aircraft due for service on the tarmac because they do not have the funds to take them out for maintenance, some don’t have the funds to buy spares and some don’t even have funds to continue to purchase aviation fuel on pay as you go basis, which is the new policy of the oil marketing companies. The marketers insist that as they source dollars in the parallel market to import the product they could not afford to be owed by the airlines. However, according to industry observers, it is only in Nigeria that airlines are requested to pay before they purchase fuel. In other parts of the world, it takes days and weeks to process and reconcile accounts between the marketers and the airlines.

“If the airlines use their operational funds to purchase fuel, they may not be able to pay for the other urgent services. The tradition is that you buy fuel, airlift passengers and then pay the marketers,” an industry operator explained.

Inside sources said that if the prevailing situation continues it is highly likely that out of the eight operating airlines on schedule service, four may stop operation by the end of this year and the other four may continue till next year or two years and they would fold up.

“Don’t forget that initially there were 150 registered airlines in Nigeria. Now they are eight and out of that eight, four are already very sick and without government’s intervention if aviation fuel continues to sell at over N220 per litre, you can be sure that the four sick airlines cannot survive this year and the rest will hardly survive next two years. Those planning to come and join the market may not come because the industry has become highly volatile and precarious,” the source observed.

Forex Scarcity

The President of Sabre West Africa and Aviation Round Table (ART) told THISDAY in an interview that in addition to many other factors, non-availability of foreign exchange dealt death blow to the airlines in 2016.

He noted that whereas tickets are sold majorly in naira, bank loans with huge foreign exchange content posed a big challenge on debt repayment due to huge fall of the naira against the dollar.

“Tariffs are far below economic rate due to stiff competition. One hour on Jet in 1994 which was $100 equivalent (23 years ago) is today less than $ 50 despite astronomical increases in all costs. It is the same with fuel costs.

“Multiple taxes remain unaddressed. Airlines have become revenue collectors for government agencies. Policy remains inconsistent as the announcement of government midwifing national carrier is sending fear on the airlines spines. Also multiple entry points into Nigeria gateways continually to erode domestic travel. One can go on and on,” Olowo said.

He recommended that government through policy instrument should midwife consolidation of the airlines into two or three strong schedule airlines as it was done in the banking and telecom industry, using 5/20 rule. Olowo said there should be a policy that an airline that has operated for five years should have 20 aircraft, adding that there should be collaboration between the Nigerian Civil Aviation Authority (NCAA), Asset Management Corporation of Nigeria (AMCON) and the Nigeria Stock Exchange (NSE).

Olowo lamented that Nigeria is heading towards a stalemate in the aviation industry if there is no urgent intervention, stressing that the situation in the industry can threaten air safety if such urgent action were not taken.

He explained that there is a correlation between commercial airlines’ performance and safety “because where the economics is not right or strong enough, maintenance will be pushed to the very limit and or beyond, which will impact on safety.”

Unfavourable Government Policies

The Managing Director of Afrijet Airlines, Alhaji Mohammed Tukur said government must review some of its policies that are inimical to running profitable airline business in Nigeria. Tukur called on government to revisit the multiple taxation of the airlines, especially the issue of VAT, which only airlines in the transport industry pay, advising that the National Assembly should legislate over these charges, he noted that it is only when it has been legislated on that it would become law; otherwise, aviation agencies and the Federal Inland Revenue Service would continue to implement the policy of government beyond the pronouncement of a Minister of Permanent Secretary.

Tukur also suggested that government should give new airlines on start up tax holiday, at least in the first three months of thier operation.

He noted that it is a shame that Nigeria with its huge oil resources is not producing aviation fuel and other refined oil products locally, remarking that as far as Nigeria is importing aviation fuel, the prices would not be low enough that its prices would not dig hole in the coffers of the airlines.

“It will be difficult for Nigerian airlines to make profit at the present cost of aviation fuel. In fact, as long as Nigeria is importing the product, its cost will continue to be determined by the naira value in relation to the dollar and this is the product we can produce locally because we have the resources.

“We expect government to give new airlines tax holiday, even if it is for three months. This will help such airline to reposition itself financially before it will start paying those charges. But unfortunately, when you start operating today, you start paying those charges today. Government has not done anything whatsoever to encourage airline business in Nigeria. Just imagine that all these airlines are down today, it will just paralyse the economy,” Tukur said.

While government in the last one year has been dreaming on how to establish a national carrier, the schedule airline operation is being threatened by exigencies, which only government can solve.