Price War Rages Amidst Dwindling Fortunes in Nigerian Aviation Sector

These are battle times in the aviation industry as airlines operating in Nigeria, in a desperate bid to avoid flying half empty, with the danger it portends, now resort to price war to attract potential customers whose size have been grossly reduced by economic realities. Joseph Ekeng, in this piece, wonders if the battle is producing a winner.
Eka Idoho used to be the envy of other young ladies in her neighbourhood. She is young, pretty, well educated and married to an equally handsome hubby, an executive in one of the leading telecom companies in Nigeria! Each time she was driving in from work, the neighbourhood would hold its breath, with the youth particularly spinning necks in envy, while catching a glimpse of her dashing look. Idoho looked as if she was conceived and delivered with the Bellview Airlines cabin crew outfit.
But in the last three months, Idoho, who used to spend the better part of the week crisscrossing the globe, now seems to spend time on house arrest; she spends all her days at home. The scowl on her face betrays the plight of her once thriving career. Realities have compelled her to jettison her trademark flamboyant lifestyle. She has drastically cut down on her expenses. Her rent is in arrears for three months running! “I barely go to work these days. I just visit the office when I like because of the problems in my office,” she laments.
Idoho is just one of the about 2000 staff of Bellview Airline that have been made jobless after the airline became grounded as it could no longer cope with the challenges of the industry. Capital Airline and Afrijet are the other two airlines in Nigeria that have been rendered comatose by harsh economic realities. From all indications, more airlines may follow any moment, unless drastic measures are taken to save the aviation industry.
Walking into the departure terminal of MM2, one is easily impressed by the beauty of the environment; it looks and feels world class and passengers are more elated about the frequent price slash that have become a portent bullet in the arsenal of airlines battling for patronage. “It is good for us as well as the airlines since it is a win-win situation for both the airlines and passengers,” one passenger says.
But such sentiments are far from reality because, while the passengers savour the glory of the airport premises and celebrate the sliding prices, operators are groaning under huge daily losses. Over many months, airline operators have watched with pains as patronage continue to plunge week in week out. The tremor caused by the global recession which undermines the capacity of banks to support businesses with credit left a hole in the pocket of many flyers.
“The fact is that passenger traffic is a function of the economy and individual’s purchasing power. When the economy is bad, as it is in Nigeria currently, travellers consider other options of transportation. Today, road transport has stolen passengers that would have ordinarily flown,” Dele Olawale, an analyst, volunteers. At the moment the most lucrative travel path in the local air travel business is the Lagos-Abuja route which averagely sells for N16, 000. Airlines, in a bid to catch up on the buzz, run two or three Lagos-Abuja flights daily. However, when the figures are in and the account books are compiled, they end up in a the red.
Yet, in a bid to retain passengers and get more passengers, airlines have considered several options including acquiring new aircrafts, cutting down on capacity and crashing fares. Arik, Aero and Dana are airlines known to have crashed fares on various routes in recent times. As a matter of fact, Aero crashed its fares to a ridiculous N5000 for a one hour flight provided a passenger books and pays online at least two weeks before the day of departure. The promo was part of the airline’s 50th anniversary.
The promo shook the industry as the airline has a reputation for charging the highest fare in the industry. The other airlines, not wanting to be outdone, soon followed suit, by lowering their fares by 25 percent. The fare has dropped from N21, 000 to between N13, 500 and N16, 000 for an hour flight.
Arik, with its new aircrafts, has increased the frequency of its flight on the domestic route, coupled with a fare drop from N21000 to N15500 on the domestic one-hour flight. But the strategy didn’t turn out as good as operators expected. Bismark Rewane, Chief Executive Officer of Financial Derivatives blew the whistle on the implications of the price war at the airports at a recent presentation at the Lagos Business School Executive Breakfast Meeting when he said that even the perceived lucrative Lagos-Abuja route is operated at a loss. The “producers are offering products at below the marginal cost on some of the routes, especially Lagos-Abuja. Aero, which kicked off the forward discount booking war is not benefitting from a stronger forward booking profile and the cash flow benefits. The yield calculations do not justify the discount. The average forward booking, compared with spot, is approximately 10-14 days. The 14-21 day cost of funds does not compensate for the 60 per cent discount from the spot price,” he says.
The Minister of Aviation, Babatunde Omotoba, also had reservations about the promos, saying that it is not in the interest of the industry.
Shortly before the promos started pouring in, Afrijet, now grounded, offered the lowest fare rate on the Abuja route – N28, 000 for a round trip. Arik’s fare went for N39000; Dana charged N32, 400; Chanchangi charged N38, 000; while Virgin Nigeria (now Nigerian Eagle) charged N30000. Even at those rates, operators grumbled at high cost of operation.
The airline industry in Nigeria has long been plagued with problems. A former Executive Director of the now grounded Bellview Airlines, Gbenga Olowo, made allusion to the crisis last year when he raised an alarm about the high air tariff offered by the airlines, arguing that it “cannot guarantee profit.” He added that if airlines were to sell all their seats, having 100 per cent load factor, the current fare being charged is far below anything that can offer profit.
Conversely, passengers still grumbled that the fares were too high. Olowo, now the Managing Director of Sabre Network, a firm offering global distribution system for the airlines industry, is of the opinion that airlines need to go back to the basis by scientifically determining revenue-yielding tariffs.
Unfortunately, despite current low charges, passengers are yet to troop to the airports as aircrafts still fly with vacant seats and daily rake up losses that threaten the industry. Analysts are worried that the plight of the airlines is compounded by the global financial meltdown, the instability of the naira and the current bank crisis. The banks that hitherto provided a lifeline to airlines’ businesses, have withdrawn such assistance as they are also in a battle of survival, following stringent measures from the Central Bank of Nigeria under the present governor, Lamido Sanusi.
“It is now a cash and carry approach,” one airline agent says. So, behind the glamour of the airline officials, lie accumulated salary arrears, collapsing of routes, and huge debt profile. For now, three domestic operators have closed shops, others like Chanchangi, IRS, Aero, Associated, Overland and Arik are limping operationally speaking, analysts say. They are either deeply enmeshed in huge debts, or are being haunted by the Economic and Financial Crimes Commission (EFCC) over tax issues or loans that are non-performing.
Nigerian Eagle Airlines, formerly Virgin Nigeria, is equally not spared in the business crisis as it has a running legal battle with one of its creditor-banks, peeved that the airline has a huge debt to settle and yet is busy spending millions of naira rebranding and de-branding. The bank emphasized that identity change does not insulate it from the huge debt hanging on its neck. The airline, having dumped its former technical partner, Virgin Atlantic, also stopped its long haul services and some regional routes as well.
Perhaps the most frightening issue as regards the aviation crisis is the safety concerns. Analysts are worried that due to low profits airlines are very likely to compromise safety procedures. With that low passenger volume, the airline cannot even pay for its fuel, parking, landing and passenger processing charges, let alone dreaming of making profit. More so, if the traffic remains low, how will airlines carry out mandatory checks like C-Check? Analysts ask.
The C-Check, according aviation analysts, is evaluated to cost 1.8 million dollars per B737 aircraft on the average. That is about N300 million. With low passenger volume, it means some airlines will either defer it or may have to close shops after conducting the check.
And to ensure that safety is not mortgaged, the Nigerian Civil Aviation Authority is currently conducting the economic audit of airlines to ascertain their financial health status. The exercise is expected to detect the frail ones and weed them off, while leaving the strong ones on the scene. But analysts wonder if indeed there are really strong airline in Nigeria. “We are looking at some issues like defaulting in the payment of salaries, fuel, payment on insurance, and a lot of bad debts. The truth is that you can owe a fuel marketer. For instance, if you buy a N200 million worth of fuel everyday, you cannot pay that everyday; you already have a credit line with the marketer. If you are credit worthy, you can owe, but if you don’t service your credit, you don’t pay your debts, it shows that you are not credit worthy,” the Director General, Dr Harold Demuren, says.
As part of its survival strategies, apart from abandoning its long haul service, Nigerian Eagle now has a maintenance agreement with Ethiopian Airlines. It equally signed a code share and interlining agreement with Kenya Airways recently, to buoy its expansion programme. Aero has equally scaled down its regional operations and also withdrew some airplanes like the B737s as a way of cutting costs and maximizing yield. The company defended that having a lot of airplanes when the traffic is low is unnecessary with cost of maintenance being no easy task. It has also embarked on downsizing by sacking pilots and support workers. The only airline that appears to have limited problems is Dana Air.
Despite the problems the domestic aviation market grew 21 percent in the first six months of this year with a very strong showing from Dana Airlines which saw its market share doubling. The growth has come with a cheering drop in the average age of the flight of the domestic airlines. According to Rewane, the growing social and business life in Port Harcourt accounted for a significant part of the growth. In terms of capacity, Arik led with 34 percent capacity share, followed by Aero with 18 percent and Nigeria Eagle with 16 percent. Chanchangi came a close fourth with 14 percent; Dana Air has 10 percent of the capacity on the domestic route, while the balance of eight percent is held by a collection of other domestic carriers.
Stakeholders have cautiously applauded the development. They insist that for the industry to make a permanent recovery, government must take a cue from foreign countries and offer the industry a bailout. So far, government does not seem well disposed to that suggestion.
Omotoba, speaking recently, maintains that the aviation business remains the concern of the private sector with the government providing the enabling environment. His words: “The plan we have, I have already asked them to fix a meeting between me and the Airline Operators of Nigeria so that we will be able to sit down together and understand all the problems. It is only after that that we can make a statement. As at now, there is no plan for a bail out plan for airlines.”
That certainly is not the good news that Idoho and thousands of other jobless former airline staff of Bellview, Capital and Afrijet airline want to hear at the moment. Analyst reason that government needs to be more pragmatic and definite in its interventions, else more airlines are likely to go under in coming months.