Exclusives

Ignoring new global trend of M&A as antidote to crisis

by Editor

May 20, 2013 | 3:06 pm
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Nigerian and indeed African airlines which had for a long time, not appreciated the trend of mergers and acquisition are missing out on the benefits of such trend. Stakeholders say the problem in the sector may skyrocket if they fail to align with trends in the global aviation sector such as that of the Mergers and Acquisition (M&A).

Currently, airlines in the country grapple with high operational cost ranging from high cost of aviation fuel, custom duties on spares parts and aircraft importation, high insurance premium and leasing cost and managerial problems among others.

They are daily burdened with multiple industry charges by the Nigerian Civil Aviation Authority (NCAA), Nigerian Airspace Management Agency (NAMA), Federal Airports Authority of Nigeria (FAAN) and other sundry charges.

For instance, irked by high charges in African airports, the International Civil Aviation Organisation (ICAO) and the International Air Transport Association (IATA), two global aviation regulatory bodies, posited that multiple taxes and others levies are capable of killing the profitability of airlines on the continent.

Many airlines are in serious financial dire straits as occasioned by multiple taxes like passenger service charge (PSC), income tax, ticket sales tax, high VAT, and other airport charges. In Nigeria, airlines and aviation agencies have been at loggerheads over airport charges.

Airlines disapproved of the system because of the capital-intensive nature of the business, claiming that most of them will not survive under the multiple charges. But the authorities have continued to insist that they also depend on the money to provide navigational aids and airport infrastructure for safe flight operations.

IATA officials had at a programme in Lagos, insisted that the situation has seriously affected the balance sheets of most airlines and forced many out of business.

Operators’ perceived solution

At the peak of the crisis in 2009, Airline Operators of Nigeria (AON), an umbrella body for all domestic airlines, wrote to the Presidency and demanded a bailout to salvage the sector. Three of the airlines, Bellview, Afrijet and Capital airlines had shortly before then, halted operations due to lack of operational funds, resulting in dearth of aircraft and other operational facilities.

Led by Steve Mahonwu, chairman of the AON and Mohammed Joji, its general secretary, the body rose from a meeting of its representatives in the wake of the toll of the recession on airlines.

They complained about the high cost of aviation fuel, double taxation on spare parts, Value Added Tax on tickets, huge amount of money in foreign exchange on maintenance and other agency charges, which were impacting negatively on their operations. They asked government for urgent bailout plans and reduction or elimination of some charges that were perceived as unnecessary, some of which were not obtained in other countries.

In another instance, the operators were of the opinion that it is only in Nigeria that Jet-A1 (aviation fuel) are sold at higher prices than other commodities, adding that it is the cheapest in other countries where same aviation laws apply. At that, airlines were leaving the stage almost on a monthly basis due to the effect of the economic recession, coupled with Nigeria’s harsh operating environment.

A 10-man committee was however set up in October to analyse the demands of airlines and come up with recommendations on how to rescue the airlines from going under in the face of credit crunch.

Stella Oduah, Minister of Aviation

Failed Bailout

In 2010, government released some funds to the sector as bailout package. The airlines had been accused of mismanaging the funds sourced from the first intervention fund of N300 billion as many of them could not account for its purpose.

Shehul Iyal, senior special assistant to President Goodluck Jonathan on Aviation matters, who recently argued that it was wrong to accuse the Federal Government of failing to assist the operators, had disclosed during a public hearing on the cause of Dana crash that 10 airlines got N87 billion from the fund but regretted that ‘lack of cooperation from the agencies and supervising ministry, lack of transparency and accountability in funds management, dilapidated infrastructure and equipment; poor and inadequate facilities; and weak/compromising supervision by the supervising ministry’, contributed to the airlines’ woes.

A breakdown of the airline-by-airline chart, which was attached to Iyal’s submission to the National Assembly, indicated that the Air Nigeria got the highest share of N35.5billion as term loan, Aero Contractors followed with N14 billion as term loan and another N6 billion as working capital. Air Nigeria did not collect a working capital.

Current issues

Few months after, the airlines’ problems resurfaced and the sector became worse as travellers scamper for few available seats as a result of few functional airlines. At least, in the last eight months, the sector has been beleaguered with series of crises ranging from labour issues to lack of operational funds.

Air Nigeria, third largest commercial carrier, it would be recalled, stopped operations over insolvency. Chanchangi airlines fleet depleted from 10 to one aircraft; FirstNation Airways, a relatively new entrant and which people also relied upon at that time, operated for few months.

It was said that the operator has continued to ferry its two A320 aircraft for maintenance for over one year now without result. Aero, Nigeria’s second largest carrier had its share of the crisis which started from labour issues. The crisis crippled its operations for over two weeks, leading it to resorting to using fewer aircraft for operations after it resumed.

Dana, which came back to operations after the suspension over the crash, now operates with three aircraft, still reducing seats capacity in the sector.

Proffered solution?

Even though government has again indicated interest at bailing out the airline with 30 aircraft lifeline, analysts are of the view that they will continue to go around the same circle of problems unless they align with global trends in airline development.

“The ministry is not happy with the way the first intervention fund was disbursed and used. This time, the intervention fund which we have proposed and are now waiting for approval from the Presidency for is to the effect that when approved, the money will not be given to the airlines directly. They will not have access to it. Rather, the money will be given to aircraft manufacturers who will then deliver the brand new aircraft to Nigeria, where Nigerian airlines will have access to them.

“They will be given some criteria before they can access them, and we are working on those criteria. You know there has been a dearth of aircraft in the sector. This is the way we want to assist them this time around,” Joe Obi, special assistant to Aviation Minister said.

Given the current trends of airlines’ growth globally, analysts say Nigeria could also key into such practices as it is done outside the country. At the last count, over 10 mega airlines have been formed from mergers and acquisition while many of the airlines continued operations with their brands.

Such examples are AirFrance-KLM, British Airways-Iberia, American airline recently merged with U.S Airways, Delta Airline also merged with North East airlines. In Nigeria, the airlines are yet to key into this trend that have saved many jobs and stopped other companies from crashing.

Aduke Atiba, executive director of Landover Company Limited, at a one-day Aviation Summit by Sabre Travel Networks, posited that the growth of Nigeria’s economy does not reflect in the number of airlines in the nation’s domestic market adding that as long as they ignore global trends in aviation, the problem in the sector may skyrocket.

Atiba, who listed the benefits of such voluntary decision to include but not limited to growth and expansion; increase in market share; economies of scale and cost reduction; increase in credit worthiness and bargaining power, said such move will also have positive image and market perception.

She noted that mergers enhance the chance of the merged to take on bigger markets and helps to face competition, enhances research and development capabilities among others.

“In the past ten years, there has been an average of 10 domestic airlines in operation at any particular time with average fleet capacity of about 10. Today, there are only about 7 licensed airlines operating in Nigeria, these aircraft owned by Nigerian airlines put together do not add up to the fleet of individual airlines in the US, Europe or Asia,” she said.

She explained that mergers in the US started since 1930 with Western Air Express and there have been more than 45 mergers in the US since then, adding that Africa is yet to appreciate this trend.

“Kenya Airways/Precision Air; Kenya Airways has 49 percent of Precision Air; Ethiopian (ET)/ASKY; ET has 40 percent stake in ASKY and Ethiopian/Air Malawi: ET has 49 percent stake in Air Malawi. Nigeria also has no record of mergers till date. Closest examples of cooperation is the interline agreements, an attempt among now defunct airlines,” Atiba explained.

Atiba noted that one major reason why airlines on the continent have not been able to merge is the lack of trust for one another and fear of competition. According to her, the airlines also have to meet some of the pre-requisites for mergers adding that many of them currently cannot boast of such.

“There must be desire and ability to collaborate or share; inherent transparency and trust; there must sound business model and sound management and discipline. The airlines must have strong customer appreciation or be customer-centric as well as have strong governmental/regional support; mergers, consolidation, cooperation and synergies which are yet to be realized. They may be ideal given global trends. However, myriad of pre-conditions must be met to ensure they work effectively,” she added.

Also speaking, Gabriel Olowo, president of Sabre Networks, convener of the event, said that despite the fact that mergers and consolidation have gained grounds in global aviation industry, airlines in the continent and indeed, in Nigeria are still footdragging on the concept.

He emphasised that airlines in the region face serious trouble if they do not embrace mergers and consolidation. He explained that the revenues of the three biggest airlines in the continent, Kenyan Airways, Ethiopian and South African Airways, which he put at over $3bn is just about 35 percent of the annual revenue of Emirates Airlines.

He added that all efforts to ensure mergers and consolidation among the continent’s carriers had failed in the past, but stated that mergers or consolidation could not be achieved by government coercion.

He also lamented the precarious situation of the Nigerian airlines, saying that there are only 57 aircraft in the fleet of the carriers in the country while an airline like South African Airways has over 67 aircraft in its fleet.

“Nigerian airlines are at the bottom level of success. The six airlines that we have in operations are in the lowest rung of the ladder in terms of revenue, service delivery and good business model. Business climate is shifting from the West to Africa. When that shift comes, the continent’s carriers may be caught napping.”

Why M&A may not work

Some operators are of the opinion that the Nigerian environment may not be favourable to mergers as being proposed adding that its practicability in the country remains in doubt.

According to Chris Ndulue, Arik Air managing director, the solution is to first solve the problem that have reduced airlines to being merged adding that without this, mergers may not work.

“Experts discuss a lot of things but the practicality is a different thing altogether. It is possible for airlines to merge, there is nothing wrong in that; companies can merge but companies have not been merging in Nigeria. I have not seen airlines discussing mergers. But if you look at the number of airlines we have, I think with the right environment, they can run profitably and survive.

“Merger may not be the only option open to airlines because if the problems are there, even if you merge the airlines into one it still may not work. What we need to do is to solve the problems that have reduced these airlines to what you think should be merged, because if the problems are not there, there will not be need to think of merging. Let us solve the problems from the root, and those who want to merge can do so willingly because they want to have economies of scale.

“Airlines that have merged in other countries do not do so because they are doing badly, they merge because they see the benefits of the mergers and they discuss it and the shareholders willingly agree. We need to create the right working environment. Mergers should not be something that happens just because the environment is difficult because you want to lean on each other to stand but we need to tackle the problems headlong,” Ndulue added.

 

SADE WILLIAMS explores the situation.


by Editor

May 20, 2013 | 3:06 pm
12893  |   93   |   0  |   Start Conversation

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