Airline Business: A Symbol Of Bad Investment

Arik

It is no secret, world over, that the worst investment is in commercial aviation— airline. It is even super risky to engage in airline business in Nigeria because of the unstable government policies; cost of funds, and the general operating environment. Nigeria is the only country in the world whereby a draconian government policy aimed at changing the operating culture of such an expensive business can become effective, almost immediately, without a reasonable timeline.

This country is the most expensive society to practise aviation business, as quasi aviation experts constantly mislead the authority, all for self-aggrandisement. The worst aspect of airline business in Nigeria is the uncontrollable interference of political office holders with little or no consultation with the Nigerian Civil Aviation Authority (NCAA).

The overall result is the unlimited number of airline bankruptcies since the explosion of airline industry in the 1980s in Nigeria. I can count beyond 30 airlines that have gone out of businesssince 1981, and many more are on the verge of going under. What makes this scenario precarious and dangerous is the amount of good money invested by hard- working people, who are constantly misled into this low-margin return on investment sector.

Funny enough, even in the most aviation friendly countries, bankruptcy never ceases to hang on airline doors. It is quite a tragic business, yet people see only the glamour, which glitters like gold, but it is far from gold.

There are new policies in the offing to force airlines to increase their share capital to N2 billion from the current level of N1 billion; terminal navigational charges will be increased, and so forth. These policies will naturally truncate industry growth.

According to Greg McFarlane, It’s one of the most enduring folk wisdom dicta in all of commerce. “The airline industry, in its history, has never made money.” If we restrict ourselves to passenger airlines, and ignore the first few decades of flight (when airlines were spawned and folded as quickly as the planes could fly), the profitability of the industry as a whole has been somewhat variable. Until 1930 or so, flight was mostly a way to drop insecticide or deliver mail. At first, it didn’t make economic sense to ship people.

Technological advancement, especially in the areas of speed and airliner capacity, created so much demand that passenger travel was eventually seen as nearly a public utility – something to be preserved and maintained through down periods, even at taxpayers’ expense if necessary.

The landmark event in U.S. commercial aviation history – as important as the incorporation of sound was to motion pictures, or the forward pass was to football – was the Airline Deregulation Act of 1978. Prior to its passage, the United States government set rates, fares and schedules, guaranteeing profitability to each oligopolistic airline but doing its best to thwart innovation. Since the law’s passage, prices have dropped about 40 per cent and ridership has increased dramatically. Complaining about flight delays and waiting-room inertia has become a rich mine of material for uninventive comedians and everyday kvetchers, but the alternative would be a world in which the cheapest flight from when airlines became subject to competition, the industry necessarily underwent transition. Some airlines folded (Pan Am, Eastern), others were subsumed by larger competitors (TWA, Piedmont), and still others advanced from regional or nonexistent into positions of national importance.

In the decade from 2002 to 2011, the three largest United States legacy airlines – American, United,and Delta– each filed for bankruptcy. Not only that, but each has or had merged with another large carrier – US Airways, Continental and Northwest respectively – that had also sought legal protection from creditors. The official reasons given ranged from the dubious (increased fuel prices, which would seem to affect every player in the industry equally) to the more candid (competition from low-fare rivals.)

In Nigeria, airlines like Okada, ADC, Savannah, Zenith, Air Nigeria, just to name a few have gone bankrupted. The existing struggling airlines like Arik, Aero, Dana and discovery are submerged in financial debts that will ultimately put them in their coffin.

Bankruptcies have become a way of life for carriers in the aviation industry, every major one having to reorganise in recent years. And yes, it’s true that large-carrier losses have more than offset newer-carrier profits in recent years. However, it’s no longer even accurate to use the term “large-carrier” in reference to the legacy airlines.

You don’t need to graduate with honors from Harvard University to know that your average business would prefer guaranteed profits to ones that it has to fight for in the marketplace. Former American Airlines CEO Bob Crandall, who ran the airline until 1998, even admitted as much:

“The consequences of deregulation have been very adverse. Our airlines, once world leaders, are now laggards in every category… market forces alone cannot and will not produce a satisfactory airline industry, which clearly needs some help to solve its pricing, cost, and operating problems.”

Three years later, Crandall’s former employer announced it was seeking bankruptcy protection. That’s what’ll happen when a corporation loses $2 billion one year, and $2 billion in the previous 2 years, to say nothing of $2 billion in the subsequent year. Fuel indeed got more expensive during that time, but not certainly enough to explain such staggering losses.

The airline industry remains subject to profound change, even after decades of growth and consolidation, especially, abroad. In Nigeria, many airlines will keep going under because there are no incentive to growth as aviation ministers will keep getting ill-advice from the so-called aviation experts that obviously require more knowledge of the industry.