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BusinessDay
Nigeria's leading finance and market intelligence news report.

Airlines squeezed as foreign exchange, COVID-19 impacts continue to bite

...flight delays, cancellations persist over aircraft shortage

As airlines deploy various strategies to stay afloat, the pandemic is still taking a toll on airlines’ operations as prompt return of airplanes taken offshore for checks is made almost impossible by lockdowns occasioned by the COVID-19 pandemic in those countries.

The absence of Maintenance Repair Overhaul, (MRO) in Nigeria has since forced airlines to take their aircraft to other countries for maintenance every 18 months and some of these countries are still under lockdowns, making it difficult for operators to get their planes back as and when due.

This difficulty is however compounded by the airline’s inability to access foreign exchange to meet timely payment obligations and when the airlines push their way through to access foreign exchange, the rates are extremely high, causing carriers to run operations at a loss.

BusinessDay’s checks show that while new airlines appear insulated for now because their planes are not due for checks until after 18 months, those feeling the hit are the old carriers who have had their aircraft parked for several months during the lockdown with zero revenues, yet had to take them out for mandatory checks after the lockdown. These checks run into millions of dollars.

Impact of pandemic and forex on operations

Ado Sanusi, former managing director/CEO of Aero Contractors, had told BusinessDay that the access to foreign exchange has continued to constitute a huge challenge to airlines’ operations.

“When we were in lockdown due to COVID-19, we had parked our aircraft and after the lockdown, most of these aircraft were due for checks. Apart from this eating deep into our cash reserve, getting dollars to carry out maintenance was a problem.

“As we started opening up and began to realise the effect of COVID-19 and the economy on our operations, we also realised that there has been an increase in the cost of spare parts, aircraft lease, Passenger Service Charge, (PSC) and services generally provided by service providers,” Sanusi explained.

Seyi Adewale, chief executive officer – Mainstream Cargo Limited told BusinessDay that some Nigerian airlines had audacious fleet maintenance and management programs that have been tamed by the pandemic.

“The forex is another challenge to airlines in many ways. Firstly, airlines charge in Naira and procure spare parts and equipment in USD. So this can be tagged currency exchange risk. The naira at the parallel market has moved from N360 to now N480 to a dollar in less than a year.

“Would it be easy to pass down this cost to the passengers? Even the Central Bank of Nigeria, (CBN) adjusted the dollars; likewise customs exchange rate. We know and appreciate the fact that CBN is trying its best to make USD available to airlines as much as possible despite what appears to be rationing,” Adewale explained.

A source who craved anonymity told BusinessDay that Aero still has some of its aircraft abroad on maintenance for the same challenges but is gradually bringing its aircraft back. Dana Air also had its aircraft abroad on maintenance for a period of time which was only delivered a few weeks back.

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BusinessDay’s checks show that Air Peace being the biggest domestic carrier bears a big chunk of this problem. Lockdowns in several countries and access to foreign exchange is also causing the delay in the delivery of Air Peace new planes even as the airline hopes to take delivery of three additional planes this month and in June and July to normalise its operations. The airline will also be receiving its second Embraer 195-E2 on Thursday, March 18, 2021.

Sadly, this situation which is beyond the control of the airlines has in recent times continued to cause flight delays and cancellations because airlines are faced with shortage of fleet to feed scheduled routes as operators are forced to ration route services.

Need to support carriers to survive

Stakeholders have therefore called on the public and the government to support these carriers, who have been mostly hit by the impact of COVID especially at a time when it is most difficult for airlines to run seamless operations not only in Nigeria but across the world.

“Sincerely, the industry players need to have some sympathy and not be too critical of our carriers. We need to support them to get it right and not hit them at every point they have issues. Sometime in December 2020, an airline had an issue and a passenger went berserk.

“AirPeace was there for us during the pandemic and for me, we should consider that the foreign exchange constraint at this period can affect those who have aircraft outside for maintenance and checks. Most airlines have depleting fleets because of this,” Olumide Ohunayo, an aviation analyst, told BusinessDay.

Ohunayo hinted that operations are easier for airline operators who are just starting because they may not have their aircraft due for checks till after 18 months and they are currently getting leased and new aircraft at cheaper prices but for those who already own aircraft, they are disadvantaged by the pandemic.

The aviation analyst who encouraged the airlines to stay strong at this time stressed that this is only but a phase that will soon pass.

He opined that airlines should always communicate to the passengers and the public to intimate them of their problems and how they intend to take care of the passengers by offering some discounts, reschedules or other kind of succour.

“While the airlines are going through their issues due to the foreign exchange situation, capacity will be a constraint and passengers will feel the impact but airlines should communicate their problems to the passengers. The federal government and regulatory bodies should rally round the airlines and help them fix their problems and return their aircraft to the skies.

“It is time to stand by airlines and see how airlines can move forward and make a strong and viable industry. We cannot continue to fight our own. We need to resume the Lagos-Accra route and this time; we cannot start an unhealthy competition among ourselves. We need to prepare our airlines to compete with AWA on that route. The airlines need to cooperate commercially amongst themselves, so that the industry will move forward,” Ohunayo advised.

Way forward

Experts have called on the federal government to provide foreign exchange for airlines, some tax holiday and partner with investors to set up MRO for Airlines to cushion the effect of the pandemic on operations.

They also suggest the government help grow the capacity of Nigerian insurance companies to enable them handle aviation insurance completely, as insurance fees which are also paid in foreign exchange eat deeply into the revenues of airlines.

Mfon Udom, chief executive officer of Ibom Air said premiums paid by Nigerian airlines to foreign insurance companies keep rising because of presumed country risks. “The system at play now does not help the industry and the passengers are paying the price. Even the Nigerian economy is not benefiting from the current situation,” he said.

“No insurance company is able to completely insure a Nigerian airline. Then the reinsurance arrangements create 3rd parties and brokers that prevent efficient underwriting arrangements.”

Udom called on the government to force the insurance companies to scale their capacity and maybe tweak the law to allow airlines to deal directly with underwriters.

AirPeace records strides despite challenges

Despite these daunting challenges faced by the airlines, few airlines have continued to stand out and are making huge impacts in the sector.

One of these few airlines is AirPeace. Air Peace, the most stable of the airlines, accounts for about 45 percent of the total passengers on the local front.

Today Air Peace has over 3,000 direct employees and has created over 6,500 indirect jobs for Nigerians.

Two months ago, the airline recorded a milestone as the first airline in Africa to take delivery of the brand new E195-E2 Jet.

Air Peace is the launch customer in Africa for the E2, the newest, most efficient, and most comfortable aircraft in the segment. The airline is also the global launch customer for Embraer’s innovative premium staggered seating design.

Allen Onyema, the chairman and CEO of Air Peace, said the E195-E2 is the perfect aircraft to expand the airline’s domestic and regional operations.

“We are aware of the aircraft’s impressive economic performance as well as its unique configuration, the major reasons we placed an order for this aircraft. It is also a historic feat as Air Peace will be the first to operate this aircraft model in the whole of Africa.

“The E195-E2 aircraft will further help us actualise our ambition of connecting not just the whole of Nigeria, but the entire African continent while feeding long-haul flights from our Lagos hub. The acquisition will enable us to deliver on our ‘no-city-left-behind’ initiative, which is underpinned by our goal to reduce the air transportation burden of Africans, “Onyema said.

Air Peace placed a firm order for 10 brand new Embraer 195-E2 aircraft. The order comprises purchase rights for another 20 E195-E2 jets and 124-seater jet in dual class and 146-seater jet in single class configurations. With all purchase rights exercised, the contract is valued at N640.5 billion ($2.12 billion) based on current prices.

The carrier also ordered 10 brand new aircraft from Boeing, increasing its fleet size then to 37 aircraft. With the new order, Air Peace’s fleet size has increased to 67.

These fleets will be helping boost economic activities by facilitating movement of people from one state or one country to another.

In furtherance of its route expansion drive and vision to interconnect various cities, AirPeace launched new routes in February 2021. These routes are Enugu-Kano-Enugu, Enugu-Asaba-Enugu, PHC-Kano-PHC, PHC-Kaduna-PHC, Ilorin-Lagos-Ilorin, Ilorin-Abuja-Ilorin, and Ibadan-Abuja-Ibadan.

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