Wednesday 29th March, 2017
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Aviation sector struggles as recession took its toll in 2016

Aviation sector struggles as recession took its toll in 2016

The early part of the year was an uneasy calm in the Nigerian aviation sector as it struggled with recession attendant problems coupled with scarcity of foreign exchange and turbulent high price of oil impacting negatively on Jet A1 (aviation fuel).
 
The situation was made worse with the undue silence from the Ministry of Aviation until the Minister of State Aviation, Hadi Sirika broke the silence about middle of the year with stakeholders meetings proffering solution to the myriad problems in the sevtor with a road map.
 
Under performance was the order of the day with indigenous airlines, and a number of foreign airlines exiting the country because their forex was trapped in the Central Bank of Nigeria (CBN), while some reduced their frequency into Nigeria.
 
Four factors triggered the storm that caused underperformance of indigenous airlines this year: depreciation of the Naira, scarcity of foreign exchange, high cost/scarcity of fuel and a general decline in passenger traffic due to overpriced flight tickets.
 
Thus, the first and second quarters of 2016 at the peak of the forex demand indicated that passenger load factors reduced by 15 per cent and 20 per cent for international and domestic flights respectively, with no immediate palliatives to absorb the shock and that gave rise to various cost-saving measures by some foreign and indigenous airlines.
 
Since there was forex scarcity, it was impossible for the international carriers to repatriate their revenue. The scarcity of dollars, euros or pounds had trapped their revenue in Naira, rendering them essentially unusable to airlines not domiciled in the country.
 
While airlines like German Lufthansa and UAE’s Emirates reduced flight frequencies to Nigeria, others like Americas giant - United and Spanish Iberia could not bear the risk of operating without tangible income. They exited their Nigerian routes entirely in April and June respectively.
 
The forex situation gave birth to unwholesome activities in the parallel market where some airlines were compelled to buy foreign currencies at exorbitant rates, adding more pressure on the local currency, Naira. As a result the exchange rate between Naira and dollar, which is a major demand to foreigners, remained on a steady rise in favour of the dollar.
 
In addition, maintenance of fleet and acquisition of spare parts which are done in foreign exchange became a grave challenge for them culminating in delays and cancellation of flights as the required number of aircraft to carry out operations were not readily available some times. This was heightened by scarcity of aviation fuel which resulted in most local airlines to proceeding to Ghana for refuelling.
 
Also some international airlines lost a lot of revenue at the black-market rate, because they sold tickets in Naira and the conversion value in dollar shrank. For example, tickets sold at N250, 000, when converted at an interbank rate of N305 per dollar, the value was only $819, too little to cover their cost of operation, let alone make profit.
 
Now that the rate is climbing close to N500 per dollar, the airlines are also employing cost-saving measures by reducing frequencies to avoid huge loss at the conversion market. Some have tried forcing customers to pay for tickets in dollars by using their credit cards so the money would not get stuck at Nigerian banks.
 
During the second quarter, the International Air Transport Association (IATA) cried out that Nigeria owed foreign airlines over $591 million of non-repatriated revenue. The money was trapped at the CBN, until the apex bank with the pleas of Sirika came up with a Secondary Market Intervention Retail Sales in October tagged “Forex Concession” to alleviate the situation. Under the special forex intervention, about $600 million was expected to be made available to the airlines monthly under the aegis of Airlines Operators of Nigeria (AON) at the official exchange rate.
 
The intervention was a shock-absorber to the foreign airlines too, but just for a while. Although airlines got a share of the $1.48 billion forward contract settlement at the end of the third quarter, there is still an estimated $400 billion of blocked funds.
 
The forex shortage also led to scarcity of imported aviation fuel. Stakeholders time and again lamented on how oil suppliers take advantage of the forex situation to short-change airline operators by intentionally importing less oil than is needed so as to create artificial scarcity just to keep the price high.
 
Aviation fuel prices have been on a high swing of 100 per cent, higher than they were in the fourth quarter 2015. The results have been flight delays, cancellations, infringements on passengers’ rights and some indigenous airlines like Aero and FirstNation suspended operations, while others have been struggling to stay afloat. However, Aero on December 23, 2016 made move to resume flight operations.
 
Arik Air, referred to as the “Wings of Nigeria,” came under serious criticism as it violated its flight schedules with apparent impunity. According to a report issued by the Nigerian Civil Aviation Authority (NCAA) in second quarter, Arik Air topped the list of delayed and cancelled flights. Out of 8,478 recorded cases of delays, the airline had 2,801 with 99 cancellation cases, but the airline attributed the delays and cancellations on scarcity of aviation fuel.
 
In the first quarter of the year Discovery Air close shop and never returned to operations posing yet a doubt on the survival of airlines in the country, especially in the face of economic crises.
 
Other airlines like Bristow Helicopters, including Aero and FirstNation laid off some staffers at some point, but are still struggling with stability.
 
While international carriers are maintaining or improving their profit margins from other markets and have coped better in the present crisis, the smaller revenue base of domestic airlines has caused them to almost topple over. Thus, rising costs of commodities and spare parts, falling revenue due to static demand and unfriendly regulations with too much tax, have caused bleeding of their balance sheets in 2016.
 
Other top issues that dominated discussion in the industry were concession of airport infrastructure and revival of a viable national carrier to compete on international routes. All these are still in the pipeline.
 
Outlook to 2017, bearish or bullish?
 
The Federal Government must live up to its onus and commitment to revive the aviation industry with particular focus on airport infrastructure and loosening its grip on forex to ease importation of fuel and other aircraft parts for maintenance.
 
Sirika remarked that the industry needs N1 trillion to bounce back on its feet, which analysts in the sector have said is needful that the federal government rises to this responsibility with dispatch, adding that there should be no procrastination with the airport concession agenda to facelift the nation’s major airports before a national carrier is established.
 
They have also reiterated that the private airlines have been calling for tax holiday to ease their cost of operation and boost their profit margins. If this is granted according to them, the domestic market will improve based on the direction of global economic performance which is estimated to grow 3.4 per cent from 2017, higher than the 2011 to 2015 average of 2.61 per cent.
 
The airlines also look out for improved forex liquidity to which the CBN is committed to solve the repatriation crisis by keeping airlines as a top priority for forex allocation. What is needed is to maintain consistency at delivering forex to meet the needs of international carriers to boost investor confidence and attract more airlines to Nigerian routes.
 
They further said that since the Jet A1 is becoming more of a scarce commodity, the government should initiate measures for local production of the commodity by establishing refineries within Nigeria. It is also hoped that with the ongoing Dangote refinery project and revival of the Kaduna refinery, local refining of aviation fuel will come to fruition. A local refinery of aviation fuel, with high capacity and output, will solve the supply problem.
 
Stakeholders maintained that the industry needs sanctions and penalties to defaulters to ensure sanity and discipline, as was meted out on Arik Air for violating luggage policy, stating that this will curb delays and cancellations by airlines.
 
They stressed the need for the Nigeria Civil Aviation Authority (NCAA) which they earlier accused of oversight laxity during the Arik Air’s passenger right violation crises to step up its regulation in line with recommended practices of the International Civil Aviation Organisation (ICAO).

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