Arik Air: The Case for Vibrancy

In this report, Henry Osazuwa takes a critical look at the recent takeover of Arik Air by the Asset Management Corporation of Nigeria and the imperative for a viable financial market in Nigeria

AMCON alleges reckless corporate governance as one of the reasons a receivership was appointed, but any keen observer will hardly be surprised at Arik’s debt burden first, because of the Nigeria harsh investment environment, high volatility in FX rates, unpredictability in government positions

Arik Air is an indigenous airline in Nigeria with highest domestic flights, and fledging international air traffic. In 2016, the airline industry was rift with speculations that Arik was in financial crisis but in September, in an interview with CNNMONEY, the CEO of Arik Mr. Michael Arumemi-Ikhide refuted the speculation of financial crisis, claiming rather that Arik group made profit of $6-$7million in 2015, purporting that the Company is solvent. A few months later, March 2017 to be specific, AMCON lend credence to the speculation, when its appointment of receivership over Arik hit the national news.

Official allegation for the receivership was that Arik Air could no longer pay staff and creditors. In Nigeria, when a Company’s debt burden outweighs its asset to the extent it can no longer meet debt obligations, that Company is said to be insolvent. A state of Insolvency leads to the appointment of a receiver or receiver manager under the Company and Allied Matters Act (CAMA).

The appointment of a receivership under CAMA is either through the court of law or by operation of contract between the parties. The primary duty of a receiver or receiver manager is to take over business on appointment; and either wind up operations and apply assets in paying creditors or manage business in the interest of the company and creditors. The twist in Arik’s case is that AMCON is statute body claiming statutory powers to interfere and take private businesses on grounds unrelated with violation of the law, thus about the 3rd of March, 2017, it announced the receivership and takeover of Arik Air on grounds of “heavy financial debt burden” and “reckless corporate governance.”

It is doubtful whether the State has the right to take over an entirely private property on grounds of insolvency, but for national economic interest, an intervention was a necessary move to keep Arik from grinding down, assuming it was actually insolvent. A rescue may have come from financial market activities if a viable market existed in Nigeria, unfortunately what seems to be in existence has no viability.

The economic reasons that prompts an intervention in a situation like this is first, that the Nigeria international air route is highly viable according to the World Bank on International air traffic, ticket purchases to and from Nigeria in 2015 was approximately $3.3billion; absence of a Nigeria carrier or Nigeria indigenous airline denies Nigeria of the economic benefit of this market created by them.

Though this size represents 0.48% of world’s air transportation revenue to global GDP, it constitutes a sizable market in Nigeria currently enjoyed by foreign international airlines. Not to intervene leaves the entire opportunity to foreign benefit whereas the question of intervention would have been a non issue considering the air traffic business viability, if there was a viable financial market in Nigeria.

The other reason is that the demise of Arik will increase the high unemployment currently in the Country, and further depreciate contributions to the national GDP. The presence of a national carrier or an indigenous airline should serve the economy well and contribute to poverty alleviation.

Any intervention serves the purpose of preventing a grinding down, although in- tervention other than government’s, would have occurred in a negotiated process but the absence of a viable financial market in Nigeria makes it doubtful that there would be an investment into a potentially insolvent Company in the absence of Mechanisms of trade allowable by legal instrumentations to advance trade by permitting investments in circumstances that are otherwise precarious.

The government intervention is a recent phenomenon known as government bailout, and does occur to forestall liquidation of an enterprise critical to the economy. Government bailout does not takeover businesses, but could enforce regulatory policy. Bailout as a trend started with globalisation, as nations equate their share in global opportunities with contributions they make to global market growth. Thus intervention secures a country’s comparative advantage and not otherwise. Hopefully AMCON will not take over Arik because to do so will be counter intuitive and begs the question of the protection it seeks to accomplish.

Arik air has the largest local airline handling more than 50% of domestic traffic, its International traffic which has more potential for profit, and access to direct foreign exchange, is still a fledgling upstart. And it won’t be surprising that Arik was already investing and researching on strategies to constantly adjust itself to a position of maximum benefit from its international operations. To achieve that position requires vision, effective competitiveness, research and development, all of which entails risk that only the entrepreneurs or investors should sanction. A receivership is not by the nature of its appointment prepared for the risk, neither should the risk be taken under receivership, unless the Receiver is combining rules as investor/receiver which is not possible in Nigeria because of the laws.

AMCON alleges reckless corporate governance as one of the reasons a receivership was appointed, but any keen observer will hardly be surprised at Arik’s debt burden first, because of the Nigeria harsh investment environment, high volatility in FX rates, unpredictability in government positions. Further, the recession can have a debilitating effect on cash flow that a business focused on international competi- tion can grind under the weight of cash insufficiency. To make matters worse, Arik, and probably, other enterprises with similar challenges have no means of mitigating the environmental impact that a viable financial market would have provided.

It could be argued that as an international airline, Arik should have sought international hedge to protect its exposure to a volatile market like Nigeria, but that argument is mute, and only academic because the same absence of structure in Nigeria will discourage any speculative investment that Arik would have entered to cover the volatility. Arik was stocked in its plight!

Assuming, for the sake of argument that Arik air was shoddy with corporate governance, its shoddiness may only have exposed its ownership to a takeover bid that investors may already have started to target (considering the airline market viability) through tender offers, arbitrages, speculation etc. Or the Internal dynamics of Arik could play to instigate restructure or reformation.

The hallmark of a viable financial market is its fungible power and predictable environment which give impetus to investment and creativity, and in the process the market becomes liquid absorbing trends and offering opportunities like those that could come off of Arik’s supposed reckless corporate governance.

Government’s interference in business is highly objectionable, and counter intuitive, except to the extent of handing a life-support to a submerging business entity often as loan; therefore it is imperative that the interest of AMCON does not go beyond stabilising a rocking Arik Air.

Management under receivership may owe Arik and its creditors a fiduciary obligation, its circumstance of appointment divest the receivership of the burden of commitment a risk venture may demand of its investors. The most burden, under the circumstances of a receivership is a liability for gross negligence.