Mitigating Nigerian airlines’ insolvency post COVID-19
Nigerian airlines are gearing up to bounce back from the huge effects of COVID-19.WOLE SHADARE takes a look at how the carriers can survive the effects of three months hiatus
Uncertainty
The airlines are bleeding. It is not yet known how they intend to come back to profitability even after resumption of flight operations that is tentatively scheduled to start June 21, 2020.
According to the Airline Operators of Nigeria (AON), indigenous operators have lost N360 billion (approximately $1 billion) since the suspension of flights started. The impact of this hit is already being felt, as one of the leading airlines in Nigeria recently announced that 90 per cent of its staff had proceeded on indefinite leave without pay whilst the remaining 10 per cent would took 80 per cent pay cut on their salaries/wages.
Insolvency fears
Beyond loss of profit, however, there is arguably a risk of insolvency for many Nigerian airlines, as they struggle to meet their financial obligations to financiers, lessors, employees and other contractual partners.
Ultimately, the survival of Nigerian airlines may not depend entirely on what help or stimulus packages are available from governments but also on what steps they are taking now to remain afloat.
Presently, not much help seems to be available from the Nigerian government to businesses in the aviation sector. Hence, in addition to exploring any government lifeline, airlines must be resilient, innovative and dynamic to survive.
Loan, leases, contract review
This appears to be the immediate step airlines must take. Operating an airline invariably entails several contractual relationships. These could be either financial contracts––example with lessors and financiers––or operating contracts––e.g. with the airport authorities (FAAN, NAMA, NIMET etc) and service providers.
Because airlines typically operate on low margins, they tend to look to external sources to raise funding to acquire new aircraft to replenish their fleet or they resort to leasing.
In respect of loans, where there is default in repayment, the financiers will usually want to enforce their security by taking possession of and possibly selling the aircraft used as collateral. And for leases, any default in paying rent as and when due would typically entitle the lessors to repossess the aircraft.
In both cases, the airline depends on the proceeds realized from its operations to meet its obligations. It appears imperative, therefore, for airlines to approach their contracting parties––whether lessors or financiers––for a review or renegotiation of the agreements with a view to arriving at terms that take the present crisis into consideration.
At a minimum, airlines may be able to secure a postponement of the obligations to pay rent or loan-repayment moratorium.
Stimulus package advantage
The airlines could take advantage of any stimulus package made available by government. Countries all over the world are providing interventions in the form of bailouts to airline companies.
For example, the United States rolled out $50 billion bailout fund which the airlines can access to fund cash grants for airline workers, and to ensure their business stability, among other things. More than 200 airlines applied for this fund and many are receiving allocations.
Other countries like the United Kingdom, Italy, Australia and Singapore have introduced several bailout interventions for the airlines operating in their respective territories. There is, at the moment, no intervention specific to the aviation industry in Nigeria.
However, in view of the adverse effect of COVID-19 pandemic on businesses generally, the Central Bank of Nigeria (CBN) introduced a N50 billion Targeted Credit Facility (TCF) as a stimulus package to support households and micro, small and medium enterprises (MSMEs) affected by the COVID-19 pandemic.
While airlines are at it, it is also incumbent on the Nigerian government to step up intervention efforts in the aviation industry. Nigerian airlines have an infamous history of not standing the test of time. Government will do well to ensure that yet another such unenviable history is not repeated in these extraordinary times.
Stakeholders’ views
Recently, the Chairman of the House of Representatives Committee on Aviation called for a single digit interest loan for indigenous airline operators. If this call is heeded by the relevant authorities, it would be a significant boost in ameliorating the pandemic-induced liquidity challenges of Nigerian airlines. It is a development that the Nigerian airlines will want to look out for, and take benefit of, if and when it materializes.
Former Secretary General of African Civil Aviation Commission (AFCAC), Iyabo Sosina advocated for a policy that could see airlines in Nigeria reduced to not more than four in Nigeria with maximum of between ten and 20 aircraft.
The aviation industry in Nigeria and elsewhere is cut throat, meaning if they don’t have a critical mass in terms of size, in term of good management, in terms of fleet, in terms of good network, it is very hard for them to succeed.
Sosina also noted that more than ever before, there’s a need for airlines to initiate collaborative ways of doing business just as she admitted that mergers can’t be forced.
Her words, “I advise that airlines in Nigeria should be reduced to not more than four. These airlines must be able to boast of between 10-20 aircraft each. More than ever before, there’s a need for airlines to initiate collaborative ways of doing business as mergers can’t be forced”.
Cost cutting
Nigerian airlines, unfortunately, must make tough decisions to cut cost. This would include cancellation or postponement of capital expenditure. They may also need to reach an agreement with staff which may involve, among other things, pay cuts, minimum staffing, and shift work to ensure that only essential services continue for as long as possible amid the crisis of the pandemic. Maintenance contracts should be reviewed or renegotiated to obtain terms that are cost effective without compromising safety, taking into account the present financial constraints.
A quick restart
Looking forward, IATA has predicted that when the pandemic is over, domestic markets will be the first to recover. So, Nigerian airlines will do well to position themselves now for a quick restart. A key element for a quick restart is the restoration of passenger confidence. Given the dormancy of several planes occasioned by the pandemic induced restrictions on commercial passenger flights for long periods, passengers must be assured of their safety in two material respects–– their health and the airworthiness of their fleet.
Last line
The COVID-19 pandemic is dealing a tough blow on the world economy and the aviation industry is one of the most hit. There is no one-size-fits-all solution to the problem.
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