More troubles for airlines as trapped funds rise to $700m – Businessday

Ifeoma Okeke

The capital controls and unorthodox FX policies enacted by the Federal Government have continued to impact airline operators negatively, as their funds trapped in Nigeria rose to $700 million in April, from about $500 million in January.

The consequence of this is the restricted sale of cheap ticket classes in naira.

Experts say this development has caused customers to re-order their priorities by flying local carriers such as Arik Air and Medview , which ply some routes with international airlines.

“I usually take British Airways or Virgin Atlantic when I travel to the United States for business but ever since the increase in airfares which I am reliably informed is as a result of the shortage in forex, I decided to fly Arik Air because I cannot afford the fare of the foreign airlines,” Bimbo Ogungbe, a trader, told BusinessDay.

BusinessDay also reliably gathered that the situation is forcing travel agents to buy dollars at the Bureaux De Change

(BDCs) for passengers and sell in naira at exorbitant prices.

Nigerian businesses have been struggling with a shortage of dollars since the near 60 percent collapse in oil prices from their 2014 peak.

Nigeria’s Central Bank dollar reserves are down to about $27 billion with total forex sold by the apex bank in April amounting to $699m.

The naira traded flat at N321/$ at the parallel market in April and the gap between the official and parallel corridor remained at 62 percent.

Wole Shadare, an aviation industry analyst says this development may result in fewer investments and loss of jobs in the country’s aviation sector, as many airlines may be faced with the option of laying off staff since they are unable to pay overhead costs.

The National Union of Air Transport Employees, (NUATE) said last month that about 2,000 Nigerian aviation workers may be sacked by foreign airlines.

This is because workers are unable to transfer their earnings to their respective home countries in accordance with international rules because of the forex policies of the Nigerian government.

It is further feared that some airlines operating in Nigeria may resort to cutting corners in their maintenance schedules, as scarcity of forex makes it harder to buy and stock consumables for air craft in large quantities.

This is in view of the International Air Transport Association (IATA) rule that monies that are not repatriated within a period of two months should be considered as blocked.

Responding to the situation, British Airways now deploys the Boeing 777-200ER aircraft with 217 seat capacity on its Lagos-London route, downgrading from the Boeing 747 which has capacity for 406 passengers.

“Airline operators are required to change their tyres on a weekly basis, pay for wear and tear on a monthly basis and fix old engines when the need arises and this is often done outside the country and they require dollars to foot these bills,” Nogie Meggison, chairman, Airline Operators of Nigeria told BusinessDay.

Meggison said these routine activities are becoming tedious for the airlines because the hard currency is not made available.

Some airline operators told BusinessDay that the high exchange rate is taking a toll on domestic airline operations because major checks are carried out overseas and payment for such services are made in foreign currency, whereas they earn their revenue in naira.

The slide in the value of the naira has forced local airlines to vote more funds from their low margins for maintenance.

Meggison observed that airlines in Nigeria see the falling value of the naira negatively affecting margins, but since it is governed by the Central Bank of Nigeria (CBN) “they find themselves between a rock and a hard place”.

Meggison further explained that the airlines depend on the CBN to give them forex as the tickets are calculated in dollars, which have to translate to naira for people to pay.

“We cannot take the naira and go to the black market because the rates are high and it kills profits in any business. To get the hard currency for the proposed exchange rate is a very tough one, so we are depending on the CBN to review this policy,” Meggison told BusinessDay.

Analysts say airlines could increase fares to cushion declining sales and strains from the FX scarcity and observe that such a move could result in further decline in demand .

The naira has been all but fixed at N197-N199 per dollar in the official market, since early March last year, after the CBN restricted banks’ ability to buy foreign exchange.

About 15 million air travelers passed through Nigerian airports in 2015. The figure for 2014 was about 14million. Analysts say this number may reduce by up to 30 percent with the new foreign exchange policy, if it is not reviewed.

Nigeria has ten domestic airlines, which provide 6,538 seats to the traveling public daily. The airlines include Arik Air, Medview, Aero, First Nation, Discovery Air, Air Peace, Azman Air and Overland.

International airlines operating in Nigeria include Air France, Lufthansa, Region Air, Egypt Air, Sudan Airways, Middle East Airlines, British Airways, Egypt Air, and Ethiopian airlines.