Merger, financial regulation panacea for airlines’ survival


Aviation industry stakeholders advocate merger and a speedy commencement of strict financial regulation to forestall the collapse of Nigeria’s domestic airlines

By Ime Akpan

At a recent quarterly breakfast meeting of the Aviation Round Table (ART) held in Lagos, the former managing director of the Federal Airports Authority of Nigeria (FAAN), Mr. Richard Aisuebeogun set the tone for discussion with a firm statement of the need for Nigeria’s domestic carriers to consider the merger option as well as the need for the Nigerian Civil Aviation Authority (NCAA) to ensure strict financial regulation for the survival of the airlines.

Aisuebeogun who spoke on ‘Economic regulation and compliance of airlines in Nigeria’ declared unequivocally: “The Nigerian domestic aviation industry is tethering on the brink today– probably facing its own Great Depression. And it will require a New Deal to save it from collapse and spur it on to new growth.”

He said airlines facing financial exigencies often resort to various cost-saving or cost-cutting measures; and where such measures impinge on aircraft operations or related personnel (such as staff reduction and outsourcing of certain operational activity), they could have a potential negative effect on the safety standards and security of operations of airlines.

Aisuebeogun described as a “colossal failure” the decline in the number of airlines in the country.

Taking a trip down memory lane, Aisuebeogun said: “In 2010 alone, Nigerian airlines owed a combined $59.5 million to Federal Airport Authority of Nigeria (FAAN) as at when the Central Bank of Nigeria (CBN) announced a $1.2 billion bail-out for domestic carriers.

“In 2011, the airlines owed $66.7 million (N10b) to Nigerian aviation agencies. Of the 150 active Nigerian airlines in 2001, the number declined to 19 in 2011 mainly due to financial mismanagement and airlines’ failure to meet industry policies. Only eight scheduled airlines are on the register of the NCAA as at March 2017,” he said.

He said the volatile nature of the airline business can be better appreciated in the light of financial distress, rising cost that is, cost of funds, cost of living (gross domestic product versus disposable income), cost of operation, re-organization, acquisition, liquidation and exit which brings shivers to the spines of would-be investors.

He advised: “Domestic airlines should consider mergers and acquisitions, which will enable them to spread risks, sustain their operations, provide better access to the international capital market and provide employment opportunities for the industry.

Aisuebeogun said most of the airlines failed because they were unable to meet the stringent regulatory requirements.

Even with the ouster of a great legion of operators, he said the industry is still weakened by inadequate capitalization, and poor corporate governance that could further undermine its long term prospects and also affect passenger safety.

The Civil Aviation Act 2006 states: “All Nigerian licensed airlines shall submit to the NCAA on a monthly basis, all financial data and records on their operations in the form and manner as may be prescribed by the NCAA.

“The NCAA shall evaluate the financial returns and make available a copy of the report of the financial health assessment to the Management of the airline which may make a representation to the Authority.”

Aisuebeogun argued that while the Civil Aviation Act has made enough provisions for the financial regulation of the airlines, NCAA had failed to enforce those provisions.

He cited the recent collapse of Aero and Arik Air and their subsequent takeover by Asset Management Corporation of Nigeria (AMCON) as cases that prove that poor financial management rather than adherence to safety processes was at the root of the demise of most local airlines.

“AMCON’s acquisition of both Aero and Arik is as a result of the failure of these airlines to meet obligations to their providers of finance – which in this case are the banks.

“But we have to note how the banking regulators like the Central Bank of Nigeria (CBN) and AMCON, unlike the NCAA, are always quick to step in and intervene just to ensure that the financial institutions that grant these credits to the airlines don’t collapse,” he said.

Aisuebeogun said the new deal that stakeholders in the industry must agree to working towards is the enforcement of financial regulations laws by the NCAA without any interface from the airlines or the government.

He however said the extent of compliance of Nigerian airlines to economic regulation in terms of regularity and timeliness of reporting is a crucial element in assessing continued survivability of an airline.

According to him, past findings reveal serious inconsistencies in the timeliness of financial reporting by local airlines.

He said many airlines in the past demonstrated a complete non-adherence to NCAA economic regulation adding that only few financial audits had been filled since the inception of the Nigerian industry.

Aisuebeogun said findings reveal that only a few airlines comply with the economic regulation requirement to retire the financial health return forms and those that comply are not consistent in terms of regularity and timeliness.

“It is paramount to ascertain the adequacy and effectiveness of the NCAA economic regulation framework in detecting, mitigating, preventing and remedying these situations,” he stressed.

In his contribution, the president of ART, Mr. Gbenga Olowo expressed disappointment that the domestic airlines had been going down.

“We are worried that the Nigerian airline industry is failing and this is the same thing with the Nigerian airports which are not functioning optimally. Like the airlines, the airports are also financial failures. We have to do something, to act fast to save the industry and the jobs of Nigerians,” he added.

In an earlier interview, the chief executive of Centurion Securities, Group Capt. John Ojikutu said NCAA “has not lived up to expectation as the regulator of the aviation industry.”

Ojikutu described the agency as “inefficient” stressing “What we are always talking about is CAT 1 and we are happy. There is nothing in CAT 1; it is a mere paper.”

“I hold NCAA responsible for security breaches. You have failed in your responsibility. If NCAA is hamstrung, then there is something wrong,” said Ojikutu.

Similarly, the former managing director of Skyway Aviation Handling Company (SAHCOL), Mr. Olu Owolabi blamed NCAA for what has been happening to the domestic airlines.

Commenting specifically on the AMCON takeover of Arik Air, Owolabi said airline creditors update NCAA with their financial dealings with the airlines and wondered why the agency did not take action when it was evident that Arik had challenges including inability to pay its staff.

“Every month airlines’ service providers, for example, demand for their money. When they write to the airlines, they also copy NCAA. Every month, NCAA receives update on financial indebtedness of the airlines to the service providers.

“They do so to inform NCAA because any action they take to recover their money, will affect the operations of the airline(s). So, it is mandatory that when you demand for your money you copy NCAA. So they (NCAA) are well aware.

“NCAA is to blame for not acting promptly. NCAA knew that the airline was having problems, why did it not act? NCAA should be asked some questions. When Aero was having problems, NCAA was aware but what did they do?

“NCAA knows some of the airlines are having problems. NCAA’s duty is not only to regulate and ensure safety of aircraft; the welfare of workers and passengers is also paramount. NCAA should be asked questions about the fall of Arik Air,” he said.

Aisuebeogun therefore called on NCAA to ascertain the financial position of Nigerian airlines and their abilities to sustain future operations; determine the extent of the effectiveness of economic regulations in the airline industry; determine the extent of airline compliance and inclusiveness in financial auditing; fill the gap in terms of the adequacy of the existing economic regulation framework by recommending an appropriate model based on best international best practices and above all enforce its economic regulations mechanism irrespective of third party agreements of airlines and other service providers.




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