Airline Business: Effect Of Devaluation Of The Naira by Capt. Daniel Omale

ArikAn unstable currency is a precursor to airline failure. Even in a stable economy, airline business is virtually unprofitable, or has very low return on investment.

Since October 2014, our currency, the naira, has been on a decline against the strength/value of the U.S. dollar. While the fading price of crude oil in the international market appears to be the major cause of naira’s low value, it’s clearly visible that government’s fiscal and monetary policies seem to contribute more to the waning value of the currency.

Fiscal policy and monetary policy are the two tools used by the government to achieve its macroeconomic objectives. While for many countries the main objective of fiscal policy is to increase the aggregate output of the economy, the main objective of monetary policy is to control the interest and inflation rates. The IS/LM model is one of the models used to depict the effect of policy interactions on aggregate output and interest rates. The fiscal policies have a direct impact on the goods market while the monetary policies have direct impact on the asset markets. Since the two markets are connected to each other via the two macro variables output and interest rates, the policies interact while influencing output and interest rates.

Since the two interwoven policies in Nigeria currently have negative impact on the industry, the big question here is how will the majority of our airlines cope in the immediate future since they are heavily submerged in debts?

The majority of scheduled and unscheduled aircraft operators face tough government policies aimed at sucking the lives of aircraft operators. With terminal navigational and landing charges at a constant, it is needless to say that Nigeria is about the most expensive country in Africa to engage in airline business.

I have always said in this column that aviation is about safety and competition. Right from its inception, the industry has always witnessed intense costly safety initiatives in addition to stiff competition.

The notion that the Wright Brothers were credited with being the pioneer of powered flight is currently being challenged- again. Another aviation enthusiast, Gustave Whitehead, claimed to have achieved the same before the Wright Brothers ever took to the air in Kitty Hawk.

These intrigues never seem to get detached from the industry. Therefore, competition is the absolute middle name of aviation. But what is most important in this constantly evolving business is how a national government supports or interferes with the industry’s growth.

Of late, we have been bombarded with the word “reform”, which does not necessarily encourage competition. Very few aircraft owners will be interested in keeping their airplanes in the country henceforth if negative policies designed to discourage the progressive growth of the sector remain unchallenged or unchanged.

There are always cynics in the industry who, without understanding the governing Act of the sector, seem to constantly want the system changed to pave way for them. I can guaranty that even if a single airline is licensed to operate in our national airspace, it will naturally fail. Airlines are basically catalyst of economic growth. They enhance profitability of other businesses, but are, themselves, unprofitable.

The rapid expansion and growth of Emirates Airlines to become a dominant force in aviation business can be attributed to two factors: (1) tenacious government support, and (2) promotion of tourism for its native country, United Arab Emirate (UAE). With the government of UAE behind this fast growing airline, there is every reason for its long -term survival. In addition, the country’s currency is stable, with a conducive operating environment. Any hurdle to growth and development of the business is promptly brought to the attention of the regulatory authority, and swift decision to eliminate such an impediment is enforced. The result is what the world sees today— a fast growing airline with great financial leverage.

Despite its enormous prosperity, Emirate’s Profit margin is still below six per cent of its overall revenues. For example, last year, the airline’s gross revenues were in excess of $23bn, yet net income was around $1 billion. But Emirate Airlines is purely a catalyst for the booming tourism industry of UAE. With an annual inflow of over 60 million tourists, and most of them flying the flag carrier of the country, the benefits derived from such huge airline business warrant unrelenting government support.

The reverse seems to be the case in our country. Unfortunately, our business attitude, whereby everyone must be the star, added to ‘kill competition’ syndrome, will not foster aviation and national development. At every stage of our aviation industry, someone is aggrieved; he must find his way to encourage government to stop others from existing despite the visible anti-competition motive.

The dwindling value of the naira will surely hurt every industry in Nigeria, but airline business will bear the brunt as politicians seem to do nothing about how best to revive the economy.

The reality here is that those who financed their aircraft from abroad have severe unstable exchange rates to deal with, while those with local currency loans must contend with high interest rates. Neither is easy to deal with in an unstable economy. These challenges will create negative impact, and surely, many airlines with go burst again.

When former President Umaru Yar’Adua created the earmarked aviation intervention fund of N300 billion, it was applauded with hope. That was the first and last time every stakeholder believed that government was positively moving towards alleviating airlines’ plight. Less than six years after, the money is nowhere to be found; those who benefitted from that soft loan scheme have disappeared, and again, the airline industry is faced with insurmountable debts that will plunge every operator into dungeon of bankruptcy.

Airline business is tough, unprofitable, and heavily regulated. It is even more over- regulated in this country because of (1) the aggregate differences between the Nigerian Civil Aviation Authority (NCAA) regulations, and the adverse policies issued by the ministry of aviation. Also, the calibre of unknowledgeable players in the sector who keep misdirecting government on how the industry should be governed will contribute to the inevitable demise of the sector.

My advice to those who wish to remain in airline business is this: know that if profitability is your drive towards buying a business aircraft for charter, or an airliner for schedule operation, the economy of Nigeria, as of today, cannot support your dream. You will surely lose your money.

But if the glamour of the industry is your ultimate fancy, then aviation is for you; a place where you can keep burning all your money to elevate your ego.

The dwindling value of the naira will not help; it surely will hurt all investors.


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