FINANCE - 24 SEP 2017

Gridlock in Nigerian Skies

Gridlock in Nigerian Skies
Nigeria's aviation sector remains hampered by recurrent government interference.

This article is part of an Aviation Series. Read Part II here.

Nigeria’s aviation sector has a rough past, coupled with what looks like a cliff at the end of the runway. The industry is a hyperactive one, with slim profit margins forcing carriers to focus on both cost reduction and revenue growth while improving customer service. This becomes even more challenging with government interference.

The sector has underperformed for over two decades, owing to government negligence and limited oversight. Consequently, it has continually drained foreign reserves as foreign airlines, thriving in the absence of strong domestic carriers, repatriate their profits and exert pressure on the naira.

 

The Virgin Experience

It is plausible to mention that some airlines have had their vision dampened by government bureaucracy. One notable case is that of Virgin Nigeria Airways.

In 2005, Virgin Nigeria Airways had a clear vision for Nigeria; to build the country into the aviation capital of Africa, similar to what Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates, accomplished in Dubai.

The airline swooped in strong, obtaining the IOSA/IATA operational safety audit accreditation ahead of other airlines in West Africa, en route to expanding into six other countries. Moreover, Virgin invested over $3m in employee training and commissioned pilot programmes in the country.

Even at inception, the biggest challenge was interference. The earliest sign came when the government insisted that the airline’s first route would be Lagos-London, as a statement. With insufficient time to market this highly competitive route and amid strong customer loyalty to legacy airlines, the company posted losses on the route. In contrast, domestic and regional routes were more profitable.

Meanwhile, Nigerian aviation officials granted additional prime-time landing slots at the Lagos airport to foreign airlines. All the while, the ministry provided little support to domestic airlines’ requests for reciprocal slots at major international airports. Till today, Nigerian airlines suffer from unfavourable landing slots around the world.  

In that time, the operating environment became equally harsh and deterring. For example, the Aviation Minister would personally allocate check-in counters to airlines at the Murtala Mohammed International Airport – a function statutorily under the Federal Airports Authority of Nigeria (FAAN). In a similar vein, aviation ministry officials reportedly refused to start scheduled meetings with airline CEOS if local representatives of some foreign airlines were not present. 

Virgin also had to deal with government officials’ steady requests for free flights, with the cost of refusal implicit but high. Imagine a situation where approval for implementation of clauses under the Memorandum of Mutual Understanding (MMU) granted by a serving Aviation Minister is revoked by a successor even when the MMU between the Nigerian government and Virgin Group was still valid and active.

That was the Virgin Nigeria Airways experience.

 

The story never ends

In just three decades, 25 airlines have become moribund in Nigeria with an average lifespan of 8 years. The issues remain the same, even with the recent case of Arik Air imitating the flight of Icarus. The troubles of this striving domestic aviation giant magnify the rut in the sector.

For Arik, the reasons for failure were obvious; ownership structure and corporate governance that hampered operational professionalism, excessive spending on expert expatriates, and inefficient fleet management. The company was arguably tipped over the edge by financial recklessness which led to indebtedness and a loss of credibility.

The airline owed its technical partners, staff, and was in perpetual default on lease payments and insurance premiums, leading to poor customer service and interrupted flights. The airline completely lost business integrity while its debt burden kept rising until a takeover was inevitable. At that point, Arik was neck-deep in ₦300 billion worth of debt.

Arik Air, which once accounted for 55% of Nigeria’s air traffic now operates with 9 aircraft out of a 30-carriage fleet. So, 21 have either been grounded, withdrawn by creditors, or gone for C-check in Europe. During the decline, the company could barely afford aviation fuel for its operational aircrafts, with few marketers willing to sell to them without cash on the table. How did Arik get this far into a huge mess? Simply put, the exchange rate went haywire, and the company’s management was corrupt.

 

The Beacon

Nigeria’s aviation industry faces the challenges of poor infrastructure, multiple taxation, foreign exchange volatility, irregular fuel supply, and a disconnect between operators and policymakers. The first step in addressing these is via timely policy response such as the one witnessed to ensure air safety following a spate of air crashes in 2005/06.

Are we on that path? Well, the current administration made bold promises to deliver a national carrier, build “maintenance, repair and overhaul” facilities, and concession major airports. So far, the appointment of transaction advisers is the only significant milestone.

The Nigerian economy looks set to take off, though still recovering from the 2016 recession. Stories such as Virgins’ and Ariks’ remind us to remain cautious of sustainable economic growth in Nigeria and echo a common refrain: without a more favourable business environment, economic growth will come with the usual turbulence.

 

This article is part of an Aviation Series. Read Part II here.

Follow this Writer ologunkoree on Twitter. Subscribe to read more articles here.

Korede Ologun

Korede Ologun

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