Over-trading: Airlines’ Achilles’ Heels?
They bite more than they can chew. That is one of the major problems of Nigerian carriers. Could this be the reason for their poor performance, leaving passengers dry? WOLE SHADARE asks
Rapid growth
Is your business suddenly short of cash? Maybe you are overtrading. When a business expands too quickly and is making fantastic profits, it can find itself in this situation. It is like the Gimli Glider*, everything is going well, then, suddenly, you are short of fuel or money.
Overtrading means selling more than you can handle as a business. It means you might have an order backlog longer than a B777, but there is no fuel (money) to fund the orders and you are, figuratively, stuck on the ramp. This will only last until your creditors take legal action to get their money.
You probably have no fixed assets that you can sell or raise loans against, as they are probably already being used as security for your overdraft. If you sell the machinery, you can’t stay in business and, in any event, you will not realise much in a forced sale.
Real life scenario
Let’s take a couple of real-life examples to see how easy it is to overtrade inadvertently. You repair containers for airlines. To do this you need to buy aluminium. The aluminium you need is not available in your country so you have to import it. You get a rush order to repair six containers, which you do and deliver to your customer together with the invoice.
But you have used most of your supply of aluminium and need to order more, which you do. Your customer is happy with your work and sends you more containers for repair. Suddenly the exchange rate moves against you and you haven’t got the money to pay for the aluminium. To add to your problems, your customer has not yet paid for the first lot of repairs.
The aforementioned typically describes the predicaments of Nigerian airlines that are guilty of overtrading. The Managing Director of Arik Air, Capt. Roy Ilogbodu admitted that much when President, Institute of Chartered Accountants of Nigeria (ICAN), Alhaji Razak Jaiyeola paid him a visit in his office in Lagos last week.
Ilegbodu described over trading as one of the problems of Nigerian airlines that are driving them into extinction and by extension, poor service delivery in the aviation industry. He said virtually all Nigerian carriers engage in over trading where they sell more than they can handle as a business.
Lack of capacity
Most times, they overbook flights, sell tickets more than they can handle or operate to many routes beyond their capacity and capability.
Many of Nigerian carriers might have an order backlog longer than a B777, but there is no fuel (money) to fund the orders and they are figuratively, stuck on the ramp.
This situation contributed to some of the problems of the airline, leading to flight delays, cancellations and poor customer service.
Not satisfied with the local market, the airline ventured into international routes such as New York, Johannesburg and London when it was obvious it already had more than it could chew, leading to quick exit from the routes.
The airline left huge debts in London, Johannesburg and New York. Its leased airplanes were re-possessed when it was obvious it could not meet its financial obligation to lessors and service providers.
The same situation is happening to Nigeria’s leading airline (name withheld), as it is engaging in over trading, leading to cancelled, delayed flights and poor services on many of the routes it operates.
Failure
There are several issues that cause airlines’ failure in Nigeria and one of them is the poor utilization of capacity. This is either because the aircraft are old and inefficient or because of multiple delays.
When airlines are involved in multiple routes and expand beyond their capacity, their passengers get into a whole lot of trouble when their fleets cannot match passengers’ overwhelming demands when these airplanes are withdrawn for maintenance.
The operating airlines really don’t understand the full implication of aircraft maintenance, which is why a lot of them park the airplanes when it is time to do C-checks.
A Boeing 737 aircraft, the stable aircraft in the industry right now, has a flight-cycle flight-hour ratio (which is, how many hours you fly it in relation to when you start the engine and switched it off at the other end) of 1.5 hours. Which means if you fly your aircraft for one and a half hours, your maintenance reserve cost, when C-check is due, is about $500 per hour. But when your flight-cycle flight-hour ratio drops to 0.6 or 40 minutes flight, your maintenance reserve cost goes up from $500 to almost $1000 per hour. So your cost has doubled.
Expert’s view
An aviation expert, Capt. Dapo Olumide said: “So, while we fly 737 on 50 minutes routes or delaying them most times, we are not utilizing them properly and your maintenance cost is doubled compare to what your competitors are paying.” Olumide added that the figures from NCAA were quite disturbing and suggested that the sector is not rendering services. He added that it was high time the regulator adopt severe sanction to make the operators more responsive to the plight of Nigerian consumers.
“There are consumer rights that are not exercised here. In European Union for example, if you delay between one to two hours, you serve refreshments. If it is two to three hours of delay, you pay N53,000. And for three to four hours, it is N105,000 compensation per- person.
“Let us say that a delayed flight coming from Abuja to Lagos has a 100 seats and the flight delayed for two hours, it means that the airlines, if the passengers exercise their rights, would pay compensation of about N5.3 million. If the delay were up to four hours, they (passengers) would collectively claim N10.5 million. That will bankrupt an airline in a week and next week, they will start going on time.
A new path
Many of these restructuring initiatives are clearly valuable and necessary, but they will likely not prove to be enough. Core airline operations need to become competitive. The steps Nigerian airlines have taken so far do not address the fundamental productivity differences between themselves and their counterparts outside the shores of this country. Traditional airlines will not achieve a competitive cost structure if they do not tackle the fundamental cost penalties associated with their business models. But they must do so without compromising the services, service quality, and coverage that distinguish them from their new rivals.
Last line
With aircraft ready to take off more quickly, airlines could schedule more flights and provide more attractive timetables for passengers.
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