Examining the impact of the Covid-19 pandemic, on Nigeria’s aviation sector. drawing lessons from other jurisdictions by Captain Evarest Nnaji
Flight Restrictions, Plummeting Revenues and Cash Flow Insolvencies
The restriction of domestic flights to curb the spread of Covid-19, has paralysed Nigeria’s aviation sector, exposing firms to huge financial losses. The International Air Transport Association (IATA) claims that 22,200 jobs are at risk, and $434 million in revenues may be lost. The Airline Operators of Nigeria claim that, Nigerian-based airlines have lost N360 billion. Nigeria’s Minister of Aviation, Hadi Sirika, has stated that the aviation sector is losing N21 billion monthly, and “many airlines will not come out” of the crisis. The actual financial damage on Nigeria’s aviation industry may not be immediately ascertainable, due to the rapidly evolving nature of the pandemic.
The Covid-19 pandemic will inevitably, compound the pre-pandemic financial problems of some aviation firms in Nigeria. Parallels may be drawn between airlines with pre-pandemic financial problems and Covid-19 patients with serious underlying ailments. In both cases, the affected entities are more vulnerable. This has been the plight of Europe’s largest regional airline, Flybe; Mauritian flag carrier, Air Mauritius; Latin America’s second largest carrier, Avianca; Dublin-based Cityjet; four of Norwegian Air’s staffing companies; Thai Airways; German-based Luftfahrtgesellschaft Walter and Thomas Cook Aviation. These firms had pre-pandemic financial difficulties, and have all commenced formal insolvency processes.
Firms which were financially stable before the pandemic, are by no means immune. Latin America’s largest airline, Latam, was financially healthy before the pandemic. However, Latam and its affiliates in Chile, Peru, Colombia, Ecuador and the U.S. have filed for bankruptcy protection, due to the effect of the pandemic.
Aviation firms across the world are feeling the brunt of the Covid-19 pandemic. Aviation analytics firm, Cirium, claims that 16,000 passenger planes had been grounded worldwide. Many airlines are implementing unprecedented job and pay cuts. There have been torrents of gloomy forecasts. Airports Council International forecasts that more than 4.6 million passengers and $97 billion in revenue, will be lost by airports globally in 2020. IATA has predicted that if restrictions are in place for three months, loss of passenger revenues globally could hit $252 billion. Centre for Asia Pacific Aviation has stated that, most airlines are likely to become insolvent by the end of May 2020.
A Case for Non-discriminatory Financial Relief
There is the tendency to narrowly focus on airlines, when assessing the impact of the pandemic on the aviation sector. The aviation sector is an ecosystem with interdependent and interconnected actors, and airlines do not operate in isolation. Other critical actors in the aviation industry such as concessionaires and ground handling firms, have also been scourged by the pandemic. Any financial relief to compensate the aviation industry, should encompass all critical actors. It would be difficult, if not impossible, for airlines to operate profitably when other actors in the aviation ecosystem are struggling financially.
Worthy of mention is Bi-Courtney Limited (BCL), the concessionaire of Murtala Mohammed Airport 2, Lagos (MMA2). BCL expended over N39 billion in constructing MMA2 in the first ever design, build, operate and transfer public private partnership project of its kind in Africa. The funds were privately sourced, from a syndicate of banks. MMA2 is presently the best designed, and most well-operated domestic airport terminal in Nigeria. It is also a critical national infrastructure. Under the concession agreement, all domestic flights to and from Lagos State are to operate from MMA2.
The Covid-19 pandemic, is having a torturous impact on MMA2. MMA2’s primary sources of revenue are aeronautical services (including passenger service charges, aircraft parking charge, terminal rentals etc.) and non-aeronautical services (including car parking, advertising, retail spaces etc.). The Federal Government’s restriction of air travel, has disabled these revenue sources. Worse still, although MMA2 is not generating revenue, it is still grappling with operating expenses including personnel costs, utilities, power etc. MMA2 also has capital expenses to contend with, given that its operations are significantly asset-intensive with high fixed costs for maintenance, even when not in use.
Industry-specific, Targeted and Controlled Financial Relief
The aviation sector, is a vital economic growth enabler. Data from the Nigerian Bureau of Statics shows that, the sector contributed N149.35 billion to Nigeria’s gross domestic product in 2019. The sector will serve as an enabler in the processes of national reintegration and the rebooting of Nigeria’s economy, post-Covid-19 crisis. It will be the primary and fastest means of mobility, for the major actors that will be involved in the reintegration and rebuilding processes. Offering financial relief to critical actors in the sector, will save thousands of jobs. The loss of these jobs would put more strain on Nigeria’s economy. Government’s financial relief, will also preserve primary sources of revenues of Government aviation agencies.
Nigeria’s aviation sector, requires Government’s urgent financial relief. Commendably, the Central Bank of Nigeria has established a N50 billion facility for households and businesses affected by the Covid-19 pandemic. However, this fund is not exclusive to aviation firms. It is for the benefit of individuals and businesses in diverse sectors, affected by the pandemic. To ensure meaningful impact, Government’s palliative to the aviation sector should be bespoke and industry-specific. This is the trend in many countries. In Switzerland, the aviation sector is receiving $1.97 billion in financial aid. Belgium is deferring payment of concession fees, by operators of Charleroi and Liege airports. Australia has established a $430 million fund, for its aviation industry.
Other countries have specifically aimed financial support at airlines. The United States of America has extended a $58 billion bailout package to airlines. Germany has offered $9.8 billion and $600 million rescue aids to Lufthansa and Condor Flugdienst, respectively. Sweden has a $497 million guarantee-scheme to support airlines. Two State-owned Korean banks are providing $1.4 billion and $971 million financial aid to Asiana Air and Korean Air, respectively. Latvia has provided $270 million to AirBaltic. Finland is supporting Finnair with $658 million. Norway has extended $320 million to Norwegian Air. New Zealand has offered a financial aid worth $514 million New Zealand Air. France and Holland have pledged $9 billion to Air France-KLM. Singaporean State-owned Temasek Holdings has extended $13.27 billion in financial aid to Singapore Airlines.
A low-hanging fruit or palliative for Nigeria’s aviation sector, would be granting relief from certain taxes and charges. Multiple taxation and charges has been a perennial challenge in Nigeria’s airline industry. There are presently more than thirty taxes and charges, levied on airlines. They astronomically increase the cost of doing business in the sector.
In 2008, President Muhammadu Buhari issued an Executive Order removing Value Added Tax (VAT) from all forms of transportation in Nigeria. However, airlines are still being levied VAT. Suspending some taxes and charges, will greatly palliate aviation sector actors. In particular, Government may (i) grant rebates on payroll taxes, (ii) suspend or waive taxes/charges, (iii) suspend payment of concession fees, (iv) subsidise the cost of aviation fuel etc. Given the plight of airport operators, it is imperative that charges levied by private operators are not interfered with in any manner.
The above measures alone, may not solve the cash flow difficulties of aviation firms. It is imperative for the Federal Government to extend financial support to aviation firms, by way of loan guarantees and long-term loans with single digit interest rates and reasonable moratorium period. The financial support should be controlled and targeted at specifically identified aspects of the recipients’ businesses, which have been affected by the pandemic. This would ensure efficient and prudent application of the financial aid. The targeted aspects of businesses could include payroll support, capital costs or operating expenses, foreign-denominated insurance premiums, aircraft lease rentals, maintenance and repairs etc.
Government’s financial support should be structured in a manner that would be mutually beneficial to the recipients, and Nigerians generally. Accordingly, the financial support must have reasonable strings attached to it. Conditionalities may include, strict application of the funds on pre-agreed aspects of recipients’ businesses, moratorium on laying off or furloughing employees, moratorium on pay cuts, restrictions on bonuses/payouts, undertaking to remain in business etc.
The actors in Nigeria’s aviation sector would have to brace themselves for the challenge of low passenger traffic, when operations resume. The President of Emirates and Chief Executive Officer of Etihad have recently, in a joint statement, expressed the view that passenger demand will not return to pre-crisis levels until 2023. There have also been several instances of carriers flying virtually empty airplanes, notoriously coined “ghost planes”. Increasing agoraphobia, fuelled by health concerns, may drive passengers into exploring alternatives to commercial flights. These alternatives will range from private jets, road trips to virtual meetings.
The sector would need to explore innovative ways of restoring confidence in air travel, which appears to be at an all-time low. Instructively, airlines around the world are taking steps to assuage health concerns. For instance, some airlines including Emirates, United Airlines, Delta Airlines and Easyjet have resolved to temporarily leave the “unappealing” middle seats in airplanes empty. Some airports and airlines now mandatorily require
passengers and cabin crew, to use face masks. Delta Airlines has commenced passenger-boarding from the rear of aircraft, to minimise person-to-person contacts. Emirates has started conducting pre-boarding on-sight tests on passengers, with results available within ten minutes.
IATA has suggested other measures such as, pre-boarding temperature screening, banning washroom/convenience lineups in aircraft, pre-packaged meals or stopping in-flight catering and frequent deep-cleaning of cabin. Some of these measures will attract additional costs, which may cut the already thin profit margins of airlines. They may also complicate air travel, and prolong a return of passenger traffic to pre-pandemic levels.