The Explainer: This is what is going on with the aviation industry

Arik, Nigeria’s largest airline, blamed the cancellation of all of its flights last week to a delay in getting insurance documentation as a result of the Sallah break. This left hundreds of people stranded. The documentation was sorted out though, and flights resumed on Wednesday.

That was not the only reason put forward for their difficulty, however. There were several reports that Arik could not meet its obligations to suppliers of aviation fuel, and that those suppliers have withdrawn their services. For its part, Arik has vehemently denied owing anyone and insists its credit lines are healthy.

There is no doubt that the operating environment for airlines right now is that much tougher than it used to be. Aviation fuel is one of the major costs for airlines, and the cost of it in Nigeria has doubled in recent weeks as a result of the ongoing scarcity of dollars. Importers now have to bring in the product using the much higher parallel market rate, passing on the cost to the airlines.

Ghana’s aviation authorities have taken advantage of this situation and reduced the price of their own aviation fuel as well as providing other incentives for international airlines to fly in. If this continues, the centre of gravity in West Africa’s aviation space could move there.

The high cost of dollars has other drawbacks. Most of the things airlines need to operate like equipment, maintenance, and new aircraft, are sourced from abroad, and the exchange rate matters. The current situation has eaten into already thin profits, leading to the airlines passing on the costs to consumers in the form of higher fares. Also, foreign airlines have found it increasingly difficult to repatriate those profits to their home countries, resulting in United Airlines and Iberia stopping flights into Nigeria.

Combine this with a recession when fewer people can afford to fly, and it becomes clear that a vicious cycle can take hold: higher costs, higher air fares, fewer people flying, less revenue.

Before now, Nigeria’s airline industry has had problems. Schedule integrity is hard to find, with flights delayed sometimes for hours, disrupting businesses and lives.

Then there is the bad management. Aero Contractors, wholly owned by the Ibru family from 2010 until it suspended operations indefinitely a few weeks ago, got into its present state chiefly because of bad management. It is the same with many of the other airlines, who are businesses without the necessary structure to thrive in a very competitive business like aviation, where there is little room for mistakes. On top of this, profits from the business are frequently diverted to personal purposes.

Late President Umaru Musa Yar’Adua approved a bailout for airlines to the tune of N500 billion, but quite a number of the airlines that got the bailout funds, like Air Nigeria, IRS and Chanchangi, have folded up altogether. Essentially, many of them took government money, paid off their creditors and exited the business. No talk of repaying the loans at all.

Now, there is a push for another bailout, 5 years or so after the last one was disbursed. With government revenues taking a big hit, there should be no appetite for another round of bailouts that will probably end up just like the last one did.

What the government needs to do is improve the operating environment by borrowing to ease the forex crisis, reduce the taxes paid by the airlines, and any other measures that can reduce the cost of aviation fuel. Another bailout will merely be a repeat of 2010 when N500 billion of government funds that could have been applied to other purposes, was simply hoovered up by a small group of people.

Things should be done differently this time.

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