Arik, Aero takeover exposes management lapses in private sector
by John Omachonu & Ifeoma Okeke
February 21, 2017 | 1:18 am| | | Start Conversation
The takeover of the nation’s biggest airlines, Arik and Aero airlines by the undertaker, the Asset Management Corporation of Nigeria (AMCON) may have exposed some management lapses in the private sector.
Some analysts say subsequent revelations of misapplication of resources by the two airlines in the country suggest supervisory laxity which has led to the failure of the private sector, hitherto regarded as relatively reliable.
Ken Iwelumo, chairman CKX Partners Ltd says that “both Arik Air and Aero were established by very autocratic and hands on founders who in the case of Arik Air made horrible mistakes early on in the history of the airline and in the case of Aero a series of missteps along the way.”
Iwelumo, former vice president of Merrylinch Bank of America, further said, “Arik blew a fantastic opportunity to reach the levels of Ethiopian, Egyptian, Royal Air Maroc, South African and Kenyan. Even Rwanda and Air Ivoire have recently surpassed it in their regional and international route network. Nigeria with 180 million people and the largest number of middle class people in Africa, is the biggest aviation market in Africa not supported by tourism or a large migrant workforce.”
He listed some of Arik’s missteps to include “starting off its international services with the gas guzzling ultra long range Airbus A340-500s literally guaranteeing losses on its relatively short range services to London, South Africa, New York and Dubai. It also bought 10 of the relatively cost inefficient Boeing 737-700s used mostly by short haul, low cost airlines like Southwest Airlines. It only has four of the more efficient and versatile Boeing 737-800s suitable for high capacity routes such as Lagos to Abuja and Lagos to Port Harcourt, as well as regional routes to West and Central Africa.”
He also blamed Arik for failing to “expand its network and efficiently manage its fleet of aircraft. It delved into ventures like Arik Air International and Air Niger, had a very high turnover of pilots and crew, and did not build their planned Maintenance Repair Overhaul (MRO) early on.”
However, by the time “Aero got its act together, setting up Nigeria’s first MRO facilities in Lagos approved to do A, B and C checks on older Boeing 737s, it had run out of funds,” he said.
The financial expert sees AMCON’s takeover of the airlines as “the first correct step if not politicised. The next phase is to merge the two airlines. Sell off Aero’s old planes, keep its MRO business. Get international experts to draw up a comprehensive short to midterm business plan, bring in Ethiopian, inject fresh capital, aggressively grow the airline and do an initial public offering within two to three years in which the Federal Government (AMCON) can get out of the airline business.”
Bolade Agbola, executive director, Cashcraft asset management limited
said, “The takeover of Arik Air and Aero Contractors by AMCON is a reflection of the weakness of our financial system and the economy .The airlines were over leveraged .It’s unfortunate that the economy had not fully recovered from the impact of the 2007/8 global financial crisis and the way we responded in 2009 which till today still hurts our capital markets .How come the airlines cannot raise equity from the Stock Market or even Private Equity to refinance most of their debts which are short term and prohibitively expensive.
The economy on its part, has not been supportive of domestic airlines because while all their cost elements had been rising in response to the surging inflation ,the revenue from ticketing had remained sticky, going up in relation to the escalating expenses . The history of failures in the aviation industry is alarming, even when it was privatised and the National Carrier cannibalized to pave way for these private operators.
It’s time for us to examine the ease of doing business in Nigeria, the onerous activities of regulators who may not be supportive enough and the way these oligarchies who own the businesses manage them.”
BusinessDay’s checks show that the actual asset of Arik Air before the takeover was N40billion but the airline owes over N300billion to its service providers. AMCON had in 2010 invested N15billion in Aero and later injected N5billion, bringing their total financial exposure to N20billion.
Experts say that if there were no timely interventions, these debts would have been difficult for the airlines to offset, thereby leading to compulsory shut down of operations, causing staff lose their jobs.
“Most of Arik and Aero’s aircraft are on lease purchase and they owed almost everyone servicing their airline. If the creditors had gone to court, these airlines’ property would be frozen and the airlines would have gone under.
“They owed about seven months salaries, their insurance expired on the 12th of February 2017 and they didn’t have the money to pay the insurance. What would have happened is that the workers would have gone on strike and operations would have been grounded, just like what happened to Virgin Nigeria,” Dong Pam, Chairman, Governing Board of the Nigerian Aviation Safety Initiative (NASI) told BusinessDay.
However, Ethiopian Airline has rejected the offer made by AMCON, to invest in the biggest domestic airline in Nigeria, Arik Airline.
Joseph Arumemi-Ikhide, founder of the biggest carrier, confirmed the development, adding that the plan by government to invite Ethiopian Airlines to manage Arik had failed.
Ayodeji Ebo, Head of Research at Afrinvest (West Africa) Limited, Research Division, told BusinessDay that he sees prospects in the takeover of the two airlines, adding that with proper management, the two airlines can be transformed to become more profitable.
“The takeover by AMCON will not necessarily lead to job losses if properly managed; it will further strengthen the organisation, such that they can increase capacity and even hire more. If you look at the trend, in terms of business, in the past three month, businesses have dropped, a lot of customers have moved to other airlines because of constant flight cancellations and delays.
“If the new management is properly structured, they will need to work on their brand and operations and make it more efficient and as a result, the passengers will increase,” Ebo added.
John Ojikutu, Security expert and the former Commandant of the Murtala Muhammed International Airport (MMIA), Lagos, also sees prospects in the proper management of the airline by AMCON. Ojikutu said for AMCON to succeed, each airline must start with a minimum of five aircraft and operate to not more than four airports with eight routes to only domestic airports.
“Considerations for further increase of routes and development to regional routes must depend on safety, security and economic performance on the eight routes. Approval for routes development to continental and intercontinental from regional routes, must ensure increase in the airlines’ fleet and must follow same process but must ensure that airlines are quoted in the capital market,” Ojikutu added.
A few weeks back, AMCON said it has discovered deep rooted rot at Arik Airlines, which would require over N10billion to fix before the largest local carrier would resume full and uninterrupted flight operations to its regular routes across the country and beyond.
The situation grew worse, as only nine aircraft out of the 30 in the fleet of the airlines are operational. Twenty-one of them have been grounded, or gone for C-check in Europe, among other forms of challenges. The airline does not have money to procure aviation fuel for the nine operational aircraft because no dealer wants to sell aviation fuel to, Arik if it is not on cash-and-carry basis.
Roy Ukpebo Ilegbodu, the new Chief Executive Officer of Arik Airlines, assured Nigerians that these issues; though daunting, would be gradually resolved to enable Arik Airlines, which carries about 55% of the load in the country recover the 21 aircraft.
According to him, once all the aircraft are back to the fleet, Arik Airlines would within the shortest possible time, regain its pride of place as a leader in the comity of airlines in Nigeria. He reiterated the fact that the intervention at Arik Airlines on February 9, clearly underscores government’s decision to instill sanity in the nation’s aviation sector, adding that the move also prevented a major disaster that would have befallen the airline.
AMCON on February 9 took over the management of Arik Air, over mounting debts that it (AMCON) claimed would have grounded the operations of the airline without the corporation’s intervention.
AMCON had put Arik’s total debt profile at more than N300 billion and accused the airline of lacking corporate governance.
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