Huge airline investments amid un-profitability
Perpetual cry
It is one of the most enduring folk wisdom dicta in all of commerce. “The airline industry, in its history, has never made money.”
It’s been almost 30 years since the Nigerian airline industry was deregulated.
Since then it has been perpetual cry that the carriers are not making profit. Nobody can actually put a figure to their losses which are said to be in the region of over N30 billion annually.
Poor record keeping
It becomes difficult to know the balance sheets of many Nigerian airlines because their operations are shrouded in secrecy, possibly because of their penchant to evade taxes.
There is no accountability either to the public or to the aviation regulatory body that is not sophisticated enough to accurately give losses and profits.
More instructively is that many business men keep lining up to start airline business because it is a high profile romantic business. It tends to satisfy social and ego needs of some businessmen wanting to become famous at international level. Airline CEO/owners get far more public attention than other businessmen.
Naivety
It appears highly profitable to naive businessmen. Businessmen having no relevant experience / knowledge of its dynamics enter into the business to become billionaire from a millionaire, whereas the probability of it happening exactly opposite is very high.
The vested interests in the industry, particularly people seeking high profile jobs in the start-up airline, also fuel the delusional thoughts of the naïve businessmen.
There are success stories, after all, in the airline industry but unsuccessful ones are far more than them.
The difference
Aside Medview Airlines Plc that is quoted on the Nigeria Stock Exchange NSE, no other airline in Nigeria has taken that step since the demise of ADC and Albarka.
The decision to go to the stock market makes the carrier’s financials transparent and gives the liberty to operate professionally and not the way other airlines have carried on.
Most Nigerian airlines are run as family business. That has equally exposed and leave them to manipulation by the owners or directors; a situation that has led to the extinction of over 50 carriers in ten years.
The financial statement released by Medview Airlines for its 2015/2016 and the third quarter report for 2016/2017 on gross earnings approved by the Nigerian Civil Aviation Authority (NCAA) has exposed the under-declared earnings of airlines operating in Nigeria, New Telegraph had exclusively reported.
Med-View Airline Plc had reported that it posted a profit after tax of N1.197 billion for the third quarter ended September 30, 2017.
The airline, in a filing with the Nigerian Stock Exchange (NSE), said it posted profit after tax of N1.197 billion during the nine months as against a N1.274 billion reported in 2016, representing a drop of six per cent.
The airline’s profit before tax stood at N1.362 billion during the period under review as against a profit before tax of N1.450 billion posted in 2016. The airline said revenue rose by 47.98 per cent from N19.442 billion in 2016 to N28.772 billion in 2017.
No fault of theirs
Without putting so much blame on the carriers, there are several other factors outside their own self-destruct that have conspired to hinder them from profitability and done incalculable damage to their operations.
Descriptive statistics suggest that high taxes have been at most a minor factor and fuel costs shocks played a role only in the last few years. Major drivers seem to be the severe demand downturn occasioned by lack of purchasing power among many Nigerians.
Fuel costs increases have certainly been a significant component of losses in some years, most obviously in in the last few years.
In the larger aviation world like in the United States and Europe, it is almost a similar swansong.
If we restrict ourselves to passenger airlines, and ignore the first few decades of flight when airlines were spawned and folded as quickly as the planes could fly, the profitability of the industry as a whole has been somewhat variable. Until 1930 or so, flight was mostly a way to drop insecticide or deliver mail. At first, it didn’t make economic sense to fly people.
Reputation for hassles, poor services
Long lines due to security procedures at check-in, cramped seating; inconvenient schedules, poor service, the list of airline travellers’ complaints are a lengthy one.
The perception that air travel is an ordeal makes it very difficult for airlines to charge the higher prices that are necessary to return to profitability. Social media has propelled a number of what can only be described as PR disasters recently, and undoubtedly caused harm to the industry.
The bottom line
Airlines provide a vital service, but factors including the continuing existence of loss-making carriers, bloated cost structure, vulnerability to exogenous events and a reputation for poor service combine to present a huge impediment to profitability. While a handful of low-cost airlines have successfully managed to post consistent profits, by and large, profitable airlines are few and far between.
Capital intensive
The price of a new single aisle 150-180 seat aircraft is between $ 70 to 80 million. Start-up airlines, therefore, tend to lease required number of aircraft. Even this arrangement requires substantial capital. The security deposit usually demanded by the lessor is up to $ 2 million per aircraft for a period of 3-5 years. Hence a start-up airline would require between $ 6-10 million to lease a fleet of 3-5 medium sized aircraft.
It is riskiest business
Airline business is the riskiest because empty seats are perishable. Diversion to other airports due to bad weather at destination airport may double the trip cost besides upsetting other operations planned for this particular aircraft.
Holding in the air because of traffic sequencing costs between $ 100 to 150 per minute. Breaking out of viral diseases such as SARs & Zika virus, adversely affect demand for air travel bringing seat factor for months in a particular market. War or warlike situation such as Gulf war also affect demand and cost of operations as insurance cost tends to go up. Unpredictable oil prices also affect the bottom line.
Expert’s view
Speaking at the just concluded International Air Transport Association (IATA) Global Day in Geneva, Switzerland last week, Director-General of IATA, Alexandre de Juniac said, “For most of our history, our financial performance has not matched the value that we create. But in the last years, airlines have dramatically improved profitability.”
Last line
Airlines collectively have been in the black since 2010. In the last three years, airlines have made an aggregate industry profit in excess of our cost of capital-something that has never happened before.
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