The Asset Management Company of Nigeria’s (AMCON) belated rescue operation of Arik Air and Aero contractors will have very little effect on the survival prognosis of the two airlines. It is a known fact that getting an airline out of insolvency is the hardest feat in financial algorithm.

The cost of getting either Arik or Aero out of their present lifeless state, will be higher than floating a fresh airline. And, AMCON has two choices: (1) to sell the carriers at their present peanut- market values, or (2) inject, at least, N10b into each company to stimulate operational growth. Arik needs the funds to offset most of its external debts; and prevent multiple domestic creditors’ encumbrances of its assets, including most of the aircraft. On the other hand, Aero will require more than five serviceable airplanes to bounce back to business, sustain its brand, and or, attain a feeble breakeven -point— at best, gain nominal profitability.

Feeble breakeven

In reality, it doesn’t make any sense for the Asset Management Company that is currently undergoing stern financial restructuring to source and pump funds into entities that will, naturally, not stop bleeding profusely. It is uncertain at this point what AMCON intends to do, although there are rumours that foreign and local investors are bidding to buy each of the carriers. There is no magic to it: once the asset valuation of each airline is computed, it will clearly show the immense rot of its skeleton.

Arik Air’s indebtedness to AMCON and other service providers exceeds N300b; ten times its current market value. Therefore, any attempt to inject more funds into the airline without clearing its liabilities will end up in futility. Such a wishful thinking will instantly sink the investor(s). There is no single- savvy -businessman today that will take such a colossal risk— but of course— our federal government can render social services to clean Arik’s ledger.  This is a far-fetched tale. The only solution at this stage is to sell the carrier at its current market valuation of less than $100m, if there is a prospective buyer.

On the other hand, Aero’s debts are in excess of N26b, and with just 1.5 serviceable aircraft in its inventory. Direct liquidation of the company seems more rational than a further rescue attempt through infusion of extra funds. But if the Ibrus are financially healthy enough to cough out reasonable liquid cash to buy -back the carrier, AMCON should be encouraged to renegotiate the terms with them.  The asset management company must desist from acquiring airline debts, or it will surely crash like its debtors.

I have a huge sympathy for Sir Ararumi Johnson, the owner of Arik Air. He invested over N20b of his  personal liquid assets to start the airline, with very little knowledge of the danger he would meet in the cause of managing the most complicated and, equally, the most unprofitable business in the world.

When I saw, two years ago, at Murtala Mohammed International Airport, Lagos, the sorrowful state of an Arik Air Airbus 340 aircraft, which had been cannibalized and left to rot under the vagaries of the hot sun, and the relentless dust, I immediately realized that the Airline was in a chronic coma. How could such a young $225m airplane be converted to spare parts for its sister ship?  In my investigation, I was told that the airline bought two A340-200series, operated them for a few months, only for the management of Arik Air to denounce their usefulness and, tagged them fuel guzzlers. The two A340s were grounded, and the management opted to lease two A330 variants, at a lease rate of $1m per aircraft per month. This decision to acquire and ground the two aircraft, instead of selling or leasing them out, must have cost Arik Air, at least, $450m. As at the time of writing this piece, one of them is still left as carcass in the same location.

Selling Arik to the   Federal Government 

Sometime last year, in one of the dailies, I made a suggestion to the Chairman of Arik Air to sell the airline to the Federal government, recoup his initial investment, and run fast from the scene of any commercial aviation.  Unfortunately, he didn’t take it kindly with me. He was very wrong; he knows better now.

Airline business is virtually unprofitable; it is susceptible to any spike in oil prices; associated cost of maintenance, arbitrary charges, and draconian government policies. An airline makes profits for others, but itself.  Aircraft manufacturers; Fuel companies; Federal Airports Authority, the Nigerian Airspace Management Agency, catering companies, employees, Federal Inland Revenue, and other ancillary businesses gain enormously from the few struggling airlines in this country.

In 2015, Ethiopian airlines’ revenues were $2.1b, while net profit was a mere $154m(just about 7% of turnover). Last year, American airlines, the world’s largest airline by fleet size (930 airplanes) grossed about $10b, but profit after tax was only $289m.

Inherent venom in airline operation

The analysis above relates to airlines in countries with favourable cost of funds, and less draconian government policies. Ethiopian’s debt portfolio of  $32  billion dollars attracts just 4% interest rate. American airlines’ interest rates are even much lower.

It is, therefore,  absolutely impossible for any airline in Nigeria that borrows from a Nigerian bank at 30% interest rate, to smell survival or sustain operations for more than 8 years—the average life span of most of the airlines here.

Aero contractors is the oldest existing private commercial aviation company in the country, but it won’t be long for its eulogy to be read, with various obituary messages.

Again, it is unnecessary to recall Aero was mismanaged by  its former owners, the Ibru family, after the exit of the Canadian Helicopter company (CHC ), its major investor.

The same sorry story goes for Arik: The management  underestimated the precarious nature of commercial air transportation. It is senseless for anyone to deride or admonish it, and the pure ignorance exhibited by its management. Other extinct operators, similarly, burnt their fingers before realizing the inherent venom in airline operation.

By Daniel Omale

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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.