Airlines’ N800b debt stirs fear of more aviation crises

By Wole Shadare (The Guardian)

WITH a debt profile of about $5 billion (N800 billion) hanging over the aviation sector, the fear of more crises stalks the industry. This indebtedness has rendered current efforts to salvage the industry from crises such as crashes as only half-hearted measures.
The financial crisis of the industry is reflected in the point being canvassed in some quarters that none of the nation’s airlines would scale an economic audit by the Nigerian Civil Aviation Authority of Nigeria (NCAA). Many of the airlines are heavily indebted to banks, service providers, aircraft lessors and aviation fuel marketers. A big airline alone was hugely indebted to the Asset Management Company (AMCOM) to the tune of N85 billion as at May this year.
Their debts are staggering. Even the over N87 billion out of the N300 billion total package of bail-out fund given to the carriers by the Federal Government through the Central Bank of Nigeria has put them more in crisis rather than assist them.
The government made the cash available following complaints by the major airlines that the global economic recession was having adverse effects on their operations as they were being bogged down by debts. Also, there were high interest rates, low working capital, absence of medium/long-term funding, high custom duties, VAT, other taxes and high cost of maintenance.
The carriers are usually confronted with huge challenges each time their aircraft are due for comprehensive checks like the D and A checks. The C-Check is performed approximately every 15 to 21 months or a specific amount of actual Flight Hours (FH) as defined by the manufacturer.
This maintenance check is much more extensive than a B Check, as pretty much the whole aircraft is inspected. This check puts the aircraft out of service and until it is completed, the aircraft must not leave the maintenance site and it costs about $1 million for a B737 and more than $1.5 million on B767, B777, A330 and A340 aircraft types.
The D-Check is - by far - the most comprehensive and demanding check for an airplane. It is also known as a Heavy Maintenance Visit (HMV). This check occurs approximately every 5 to 6 years. It is a check that, more or less, takes the entire airplane apart for inspection and overhaul. Also, if required, the paint may need to be completely removed for further inspection on the fuselage metal skin. Such a check will usually demand around 40,000 man-hours and it can generally take up to two months to complete, depending on the aircraft and the number of technicians involved. The cost of this check ranges between $2 million and $2.5 million according to aircraft maintenance engineers.
Experts have argued that the insolvency of the airlines has led to insinuations of corner-cutting in the maintenance of their aircraft.
Sources said that the NCAA as constituted, after the 2005 and 2006 crashes involving Bellview, Sosoliso and ADC Airlines made the regulatory authorities to focus on safety without necessarily regulating the financial health of the operators.
Just last week, Air Nigeria was grounded for alleged bankruptcy after the outcome of the financial audit carried out on the carrier by the aviation regulator. More airlines are expected to receive the same pill following disclosure from a source in NCAA that, “many of the airlines are in a financial bad shape.’’
“The result of the audit revealed that Air Nigeria and many other airlines are indebted to aviation agencies and marketers. We cannot overlook the result of the audit because what we discovered showed that Air Nigeria is insolvent. There are many others like that. We don’t want the airline to start cutting corners and endanger the safety of passengers,” the source said.
President, Sabre Network, West Africa, a United States (U.S.)-based airline global distribution system, Gbenga Olowo, said not a single Nigerian airline was liquid, stressing that working capital was permanently inadequate.
He disclosed that they had advocated intervention funds, but that the response to this came so belatedly and the funds were absolutely wrongly applied.
According to him: “Indebtedness to banks was addressed rather than continued healthy operations of the airlines that will conveniently service rescheduled debts. We also advocated debt forgiveness on some user charges and single digit interest rate. No action as we speak along this direction.”
On factors that have made the carriers insolvent, Olowo listed uncontrollable high fuel cost (up to 30 per cent) of earnings, too high user charges including Ticket Sales Charge (TSC), Passenger Service Charge (PSC), landing, parking, rent, over-flight charges and Value Added Tax (VAT), which he stated, was up to about 20 per cent of gross earnings.
“There is no VAT in other means of transport except domestic aviation. Simply put, airlines are revenue collectors and a cash cow without pay,” he said.
He carpeted the carriers for simply doing the same things by operating to wrong routes with wrong equipment and charging uneconomic tariffs.
On the way forward, the former Executive Director of Bellview Airlines advocated merger so that the operators could put resources together, harmonize schedules, deploy scientific revenue management tools, global distribution, modern reservation technique, interlining and global alliance, joint fuel negotiation and hedging.
“Nigeria does not need more than four flag carriers (private or otherwise). Membership of IATA must be voluntarily compulsory. IATA airlines are self- regulated and operate above minimum equipment list required by any Civil Aviation Authority (CAA). Policy in this direction remains the necessary and sufficient condition for strong Nigeria airlines.”
In the same vein, aviation analyst, Olumide Ohunayo, said the NCAA had been a bit flexible with the economic auditing considering the malaise that cut across almost all the carriers.
“The solution is not a one-shop thing. It borders on capital injection which could be external or internal, to galvanise this capital. There must be some sort of protection in the industry.
“AERO’s unblemished safety record, Arik’s young fleet and Air Nigeria IOASA certification and the International Air Transport Association (IATA) membership were not enough for the government to use to negotiate with foreign airlines,” he said.
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