Three years after, AMCON stabilizes Arik Air despite COVID-19, economic impacts

As airlines continue to feel the impact of COVID-19 which impacted their revenues and operations by way of reduced passenger traffic and depleting fleet size, few airlines have been able to operate without hitches while managing cost implications.

However, worthy of note is how Arik which carried the burden of huge debts and underlying economic issues is still able to operate at a time when airlines across the world are shutting down as a result of the impact of COVID-19.

It will be recalled that AMCON, in the exercise of its powers under the AMCON Act 2010 (as amended) had placed Arik Air in receivership in February 2017 following the gross failure of the company to honour its debt obligations.

AMCON took over the airline’s assets over alleged mismanagement and debt in excess of N300 billion by its former owners. Before the intervention, staff pensions were not being paid, vendors including fuel suppliers spare suppliers, leasing companies, maintenance repair organisations, aviation agencies and staff salaries, among others were being owed. Customer service was at its lowest ebb; OTP was in the 20s, flight cancellations and delays were rife and staff morale was abysmal.

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The previous management of Arik had bought two A340 planes for $260m (N91b), only to later discover that the planes were commercially obsolete within two years. So, even with that huge capital outlay, the two planes were not able to operate to generate the money to service the huge debt, not to talk of making profits.

Further dry lease decisions to support its international operations were not any better. The company rakes losses while its domestic operations suffered under weak governance structures. Arik was indebted to aircraft lessors, local Nigerian banks, vendors and foreign institutional lenders; hence aviation fuel suppliers cut-off credit lines, while some maintenance repair companies suspended support services, making the company become largely beleaguered.

So, there were indeed huge issues brought to the table of AMCON to address within a limited space of time.

Experts had raised concerns as to whether AMCON could still keep the airline running. Three years after, AMCON has proven beyond reasonable doubts that there was still hope for an airline which had an almost closed shop before its intervention.

Receivership period

AMCON was created to be a key stabilizing and re-vitalizing tool, established to revive the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.

No doubt, respite came the way of Arik Airlines, which was immersed in a heavy financial debt burden that threatened to permanently ground the airline when AMCON appointed a receiver-manager and restructured the operations of the airline.

Except for the COVID-19 period, over the last 46 months, salaries and pension were being paid regularly. Currently, staff on furlough receive 20% of their salaries while awaiting periodic re-absorption as revenue improves. In the past three years, during the receivership period, customer service has improved, with Arik being one of the leading domestic airlines achieving the highest OTP over the last 46 months.

Vendors are being paid regularly while other trade creditors are being engaged with favourable dispositions. Staff morale has remarkably improved, aviation agencies are being paid and aircraft maintenance and leases equally being prioritized.

Seyi Adewale, the chief executive officer of Mainstream Cargo Limited told BusinessDay that the objectives of Arik Air managed by its prior owners and Arik Air under AMCON receivership are completely different.

“Under the prior owners, it was purely profit biased and thus ‘extracted’ value to its principal shareholders by all means necessary. However, Arik Air under AMCON management is rather to stabilize, repackage the airline for a potential sale, and ensure fair redistribution of earnings in order to balance the needs of other stakeholders such as staff, vendors and this would need an injection of new funds to assure stability in the long run,” Adewale said.

He hinted that AMCON surely would have developed and created a financial and operating model that will ensure its break-even in the nearest term; it would have renegotiated the debts, inject new funds for stability, and develop a growth and efficiency pathway towards sustainability.

He regretted that this pathway has been disrupted by COVID-19 related issues such as no flights or bookings for over three months.

COVID-19 impact

While AMCON’s plans were being rolled out, COVID-19 took all sectors especially the aviation sector by surprise as aeroplanes and other equipment were parked for three months. The Nigerian aviation industry which is totally denominated in foreign exchange has been badly hit by the pandemic, high cost of foreign exchange and shortage of aircraft.

Hadi Sirika, minister of aviation, had said that the aviation sector is the most hit by the coronavirus pandemic, saying many airlines won’t survive the crisis.

BusinessDay’s checks show that airlines operating in the country have since parked 120 airplanes and have lost an aggregated N10 billion monthly as a result of the pandemic. This implies that in four months, airlines have lost N40 billion as a result of the airport closure

Further checks show that domestic airlines, on average, pay about 35 percent to 40 percent of a ticket cost as taxes and charges that come under the guise of statutory levies in addition to other charges.

These include five percent Ticket Sales Charge, five percent Cargo Sales Charge, five percent Value Added Tax (VAT), Passenger Service Charge, Charter Sales Charge, Aircraft Inspection Fees, Simulator Inspection Fees, Landing Charges and Parking Charges.

Others are terminal navigation charge, en route charge, fuel surcharge, airport space rent, electricity charges, and apron pass, ramp access charges, ODC and a newly imposed Registration Fee, all of which are paid to government agencies.

Many of these taxes and charges amount to double taxation such that any incentive seemingly provided by the government to airlines is taken back by the agencies.

According to IATA, this pandemic risks 124,000 Nigerian aviation jobs, which would see the country lose up to $900 million in GDP, (N352.8 billion using N392 to a dollar).

No doubt, all global airlines and aviation companies have been negatively impacted with major losses, hundreds of thousands of furloughs, liquidations and outright failures, thousands of aircraft are still idling away over low passenger traffic. Nigeria’s macroeconomic challenges and #EndSars also come with their own challenges.

As a result of the devastating impact of the COVID-19 pandemic, the management of Arik Air (In Receivership) had to declare 300 staff members redundant to its current level of operations.

Adebanji Ola, head of communications of Arik Air in a statement said the leadership of the impacted unions have been contacted to negotiate a redundancy package for the affected staff.

Over 50 percent of Arik Air’s workforce of over 1,600 staff have been on furlough in the past six months on a base allowance of 20% of their salaries. The airline said decisions to let go of staff is naturally a difficult decision.

Despite these challenges faced by airlines, some of which have forced Arik and other airlines to lay off staff, the aviation unions became insensitive to the challenges of the airline, making unreasonable demands for reabsorption and new conditions of service, and started disrupting the airline’s operations, thereby affecting customer confidence and revenue.

The impact of Covid-19 is global phenomena and Arik is not an exception. Every airline is facing challenges of depleted revenues and higher operating costs. Arik’s case, just like other domestic carriers has been made worse by the scarcity of foreign exchange and the devaluation of the naira.

Hundreds of thousands of jobs had been lost the world over as airlines strategize and restructure to face the challenges of the business.

The Arik management had been faithful to the staff since the inception of the receivership with prompt payment of salaries, an increase of salaries and regular payment of pensions and remittance of the payee.

Many industry analysts believe that the staff need to support Arik at this critical time for the benefits of both parties. The airline is a major domestic carrier and its failure will leave a big hole in the Nigerian market which cannot be easily filled immediately, while thousands of families will be affected.

It is therefore important for all stakeholders, particularly the unions to engage with the management with a longer-term perspective that will ensure the survival of the carrier. Otherwise it will be unfortunate if AMCON is pushed further to liquidate the airline through unreasonable demands.