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Aviation: Why Airlines are failing in Nigeria

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In quick succession last week, two airlines, Aero Contractors and First Nation Airways, announced the suspension of their scheduled flight operations. The decision triggered anxiety in the aviation sector, especially among employees of the troubled carriers. In the wake of soaring exchange rate and rising operational costs, more domestic airlines are gasping for breath. The hash economy is forcing them to trim their workforce. Experts say the regulatory authority must wake up to its responsibility, to ensure viable, safe and reliable air transportation, KELVIN OSA OKUNBOR reports.

These are not the best of times for the aviation sector. Airline operators are not insulated from the harsh economic climate that has forced many players out of business.
So intense is the crisis in the industry that some carriers are closing shops. Just last week, two carriers: Aero Contractors and First Nation Airways announced the suspension of their scheduled flight operations. Investigations reveal that more carriers may soon tow similar path.

The two airlines list soaring exchange rate, unfriendly operational environment as part of the reasons for their decisions.

The ‘temporary’ exit of Aero Contractors and First Nation Airways from the local airspace has left six airlines to operate local flights. They are: Arik Air, Medview, Dana Air, Overland Airways, Air Peace and AZMAN Air.

As the economy takes its toll on the aviation sector, regulators and operators are locked in accusation and counter accusation over multiple taxation and other charges, thus making the returns on investment in aviation business unattractive.

In the last ten years, the number of domestic airlines has been on the decline. The casualties include: Okada Air; Albarka Airlines; Oriental Airlines; Savannah Airlines; Freedom Air Services; Skyline Airlines; DASAB Airlines; Capital Airlines; Spaceworld International Airlines; EAS Airlines; NICON Airways; Capital Airlines; Bellview Airlines; ADC Airlines; Sosoliso Airlines; Fresh Air; Afrijet Airlines; Slok Air; Air Nigeria; Associated Aviation; Discovery Air and IRS Airlines among others.

According to experts, the identified carriers went under because of faulty business plans, wrong operational models, incompetent management, harsh business environment and policy instability.
It is no longer at ease for surviving carriers who are operating with borrowed aircraft as the lessors have served notices to repossess their equipment over the failure by the domestic operators to adhere to the agreed repayment plans.

The soaring operational costs, prohibitive cost of offshore aircraft maintenance, increasing exchange rate, double taxation, lowering passenger traffic, huge overhead costs and other costs associated with aircraft maintenance have become burdensome for airline operators.

The exit of Aero Contractors and First Nation Airways has exposed the underbelly of the industry. To stakeholders, the development has the unhealthy state of domestic carriers as many airlines can no longer meet up with regular payment of salaries.

Besides, investigations show that the airlines are indebted to aviation agencies for aeronautical and handling services and to aviation fuel suppliers, caterers and other third party suppliers.

Before the bubble burst last week, Aero Contractors – arguably the oldest local airline – was owing arrears of workers’ salaries and unable to meet other obligations to service providers and aviation agencies.

But aviation unions and the management have been trying to manage the crisis, until it the lid blew off.

Brief history
For more than five decades, Aero Contractors navigated the twists and turns of air transportation. When it was formed in 1959 and registered a year later, it was a wholly owned by Schreiner Airways B.V. of the Netherlands.

It operated helicopter services, fixed wing domestic and international scheduled passenger services, air charter and third party aircraft operations, largely in support of the oil and gas industry.

The airline became a company with initially 40 per cent Nigerian holding in 1973 and subsequently 60 per cent in 1976 in line with the requirements of the Nigerian Enterprises Promotion Decree of 1977 (Indigenisation Decree).

In January 2004, Schreiner Airways was bought by CHC Helicopter (CHC), which acquired a 40 per cent holding of its shares. The 60 per cent majority share remained with the Ibru family. It became a scheduled flights operator in 2000.

On July 1, 2010, CHC sold its interests in the company and the Ibru family became the sole owner. For many years, the airline dominated business, making inroad into routes in West and Central Africa.

But, over the year, its crisis started and the airline withdrew its services from some viable routes.

Genesis of the crisis
According to investigations, trouble started for the airline following financial intervention by the Asset Management Corporation (AMCON), a Federal Government agency established to take over the management of loan-defaulting companies. Under the arrangement, 60 per cent equity of the airline was taken over by AMCON.

In March, 2013, an industrial dispute over outsourcing and retrenchment crippled flights for 18 days. The March 13 to March 28, 2013 strike grounded the airline’s active fleet of nine aircraft. By the time the dust settled, the airline was reported to have lost at least N10 billion in ticket sales.

There were speculations in 2013 on a plan by the Federal Government to adopt the airline as a national carrier and rename it Nigerian Eagle Airlines. It would have kicked off operation before the end of 2013.

Rescue missions
A Senior Advocate of Nigeria (SAN), Mr. Adeniyi Adegbomire, was appointed by AMCON as a Receiver Manager in February. The aim was to turn around the fortune of the airline.

Since AMCON’s intervention in Aero Contractors in 2011, it has provided support for the airline to meet working capital requirements and fleet expansion. This was to ensure that the airline remained in business, servicing its clients and the general public.
Earlier in the year, The Nation learnt that if Aero Airlines must survive, its managers must reduce prune its workforce from 1,453 to 700.

Apart from the 51 per cent job cut, a source said the airline needed serious surgical intervention including fleet enhancement to accommodate the lease of eight aircraft and route expansion in the West and Central African routes in addition to some domestic routes.

The Nation investigation revealed that the airline’s failure to financially restructure to enable it pay its suppliers as promised may sound the death knell for the hitherto solid carrier.

A source hinted that if the airline had carried out the restructuring, the benefits would have become manifest within years.

It was learnt that the airline took a loan of more than N120 million from AMCON to stop its aircraft lessors from repossessing some of the planes in its fleet.
The airline, investigation further reveal, did not get additional loan from AMCON without further rationalisation of its workforce.
A few months ago, Aero operated two Boeing 737 and additional two Dash 8 aircraft with a staff strength of 1, 453.

The over bloated staff strength, according to industry analysts, puts the ratio to the four aircraft at 363 workers per airplane, a figure experts say is too high for an airline battling to survive.

A few months ago, AMCON appointed a former Director- General of Nigerian Civil Aviation Authority (NCAA), Capt Fola Akinkuotu, to turn around the airline.
Akinkuotu said he was pleased to be given the opportunity to turn around Aero Contractors.
He said: “AMCON has given us a lifeline which is an opportunity for us to succeed. This option is a huge opportunity we must take as there’s no other option. I believe we can make Aero Contractors a success story.

“Aero is a premium Nigerian legacy brand, and, I am determined to ensure that this airline continues to serve the Nigerian market efficiently, reliably and with its safety record intact.”

In April, the management began the initial phase of restructuring by erasing some jobs, an action that was challenged by aviation unions. It was discovered that the victims of the rationalisation were those whose services were no longer required.

AMCON had earlier this year dissolved the airline’s board and appointed a manager to oversee its affairs. The corporation also hired an accounting firm to forensically audit the airline’s accounts in the last five years.

A statement issued by the public relations firm handling the airline, SY&T, explained that the takeover of the airline by AMCON is in furtherance of the statutory responsibility of acquiring eligible bank assets and putting them to economic use in a profitable manner.
The statement reads: “AMCON has also engaged a reputable accounting firm to undertake a forensic audit of the airline’s accounts over the last five years. AMCON is both the majority shareholder and creditor of Aero.

“An Industry based management team will be put in place to provide the highest level of professional competence which would ensure a quick repositioning of the company.
“The management of AMCON decided to make changes in the management of the airline to protect the brand heritage of the airline.

“AMCON also maintains that its intervention is in the public interest to sustain and improve the robust and premium quality service which Aero is known for in the country.
“AMCON would like to assure the regulatory authorities, the traveling public and key stakeholders that the airline will continue to operate on the solid foundation of safety and security with excellent customer service.”

Undercurrents for failure
A huge debt overhang, running into N20 billion, heavy overhead cost and depleting fleet size were responsible for the temporary shutdown of Aero Contractors, sources said.
One of the sources claimed the carrier could not have continued operations with its huge trade debts owed lessors, banks, handling companies and aviation agencies.

According to the source, the revenues accruing from the lean operations from it few serviceable aircraft could not march the wage bill of about 1,500 employees.
The source hinted that many aircraft belonging to the airline are idle at maintenance facility overseas.

It listed shortage of aircraft, inability to bring back aircraft from C-Check as the major reasons the airline collapsed.

The airline, The Nation learnt, was indebted to between N18 billion and N20 billion in trade debts, AMCON (N14 billion), fuel marketers and other aviation agencies (about N15 billion).
Another source said: “The airline is not meeting its schedules and the service has been epileptic. It’s a painful decision for the airline to take. Aero has a high rate of high trade debt to lessors, banks, AMCON and others.

“The brand value has been eroded among air travellers despite the supports of AMCON. I am sure AMCON is seriously looking for a way to revitalise the place.

“The airline collapsed also because of the disagreement between the management and the unions because the workers insist on the regular payment of their salaries and kicked against the reduction in their wages.”

Decision to suspend operations
After failed attempts to convince aviation unions on the way out of the crisis, the airlines management said it had to take the bold decision to suspend scheduled operations to enable it restrategise.

While announcing the suspension, its Chief Executive Officer (CEO) Capt Fola Akinkuotu said: “Aero Contractors Airline will suspend its scheduled services from Thursday September 1, 2016. The development is part of the strategic business realignment to reposition the airline and return it to the part of profitability.

“This business decision, which is a result of the current economic situation in the country, has forced some other airlines to suspend operation or out rightly pull out of Nigeria. In the case of Aero, we have faced grave challenges in the past six months which impacted its business and by extension the scheduled services operations. These factors are both internal and external environmental factors that have made it difficult for the foremost airline to continue its scheduled services.

“During the period in review, Aero, which was hitherto revered for its safety, timeliness among other virtues witnessed epileptic operations and services to the external publics that are caused by non-alignment of fundamental issue of the business, which in some cases have been frustrating and embarrassing to all parties including staff, customers and indeed all stakeholders.

“Unfortunately, the operating environment within and outside the airline have hindered any possible progress especially in the last six months when the Naira depreciated against the dollar thus making it impossible for the airline to achieve its operational targets.

“With these realities coupled with protracted engagements with all relevant stakeholders, the Management of Aero has strenuously reviewed and assessed options and opportunities on ensuring viability, safety and sustainability of operations during the period with a lot of sacrifices.

“The impact of the external environment has been very harsh on our operational performance, hence management decision to suspend scheduled services operations indefinitely effective September 1, 2016 pending when the external opportunities and a robust sustainable and viable plan is in place for Aero Contractors to recommence its scheduled services.

“The implication of the suspension of scheduled services operations extends to all staff directly and indirectly involved in providing services as they are effectively to proceed on indefinite leave of absence during the period of non-services.

“We are aware of the impact this will have on our staff and our highly esteemed customers, hence we have initiated moves to ensure that we are able to return back to operations within the shortest possible time, offering reliable, safe and secure operations, which the airline is known for.”

Regulator’s intervention
To the Nigerian Civil Aviation Authority (NCAA), there was nothing suggestive that any of the domestic carriers have closed shop. According to the regulator, some carriers have only temporarily suspended their operations to enable them undertake certain operational overhaul and re-launch.

NCAA’s Director-General, Capt Muktar Usman said: “Domestic airlines are not folding up but merely suspending their operations temporarily. Aero Contractors at present has only one serviceable aircraft and this in contradiction to the Nigerian Civil Aviation Regulations (Nig.CARS) which stipulates that no airline operator shall carry out schedule commercial operation with only one aircraft. The minimum acceptable number is three aircraft.

“In other words, any airline with one aircraft is in contravention of the authority’s regulations therefore cannot be adjudged to be capable of providing safe operation. The only option available is to suspend your operations temporarily while other aircraft arrive in due course.”

He, however, stated that the regulations provide a window for such operator to embark on non-schedule operations in the interim.

Muktar disclosed that “First Nation Airways on its part is in the middle of an engine replacement programme for one of its aircraft, stressing that another aircraft is due for mandatory maintenance as allowed by the regulatory authority.

Source: thenationonlineng.net

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