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Tuesday, March 21, 2023

Only Government Intervention Can Save Nigerian Aviation Industry from Bankruptcy

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Another round of travel bans to curb the new strain of the coronavirus which spreads faster and more fatal puts the aviation industry in a precarious situation and only government stimulus can avert looming bankruptcies.

The Federal Government says it may impose a travel ban to and from certain parts of the world as a new strain of covid-19 is manifesting itself in various countries including the United Kingdom.

The aviation industry is hardest hit from the Covid-19 crisis that led to the government imposing a lockdown that left airports shuttered as airlines cut hundreds of thousands of jobs.

A recent report by Air Transport Action Group (ATAG), a Geneva-based coalition of aviation industry organizations, said the crisis caused by the coronavirus pandemic could wipe out 46 million jobs worldwide.

African airlines have lost nearly $5 billion in revenue following the spread of coronavirus on the continent due to low passenger demand, according to a report from the International Air Transport Association (IATA).

Before the virus snaked out of the Wuhan City of China to cause unprecedented destruction, the Nigerian aviation industry had been reeling from severe foreign currency shortages that prevented local airlines from getting jet fuel. Also, companies were struggling to pay pilots and staff as foreign exchange reserves were under pressure due to the precipitous drop in crude oil price of mid-2014.

In 2019-during its glory days- the sector was the fastest growing sector in the country, surging higher by 13.2 percent year on year(y/y).

However, in the last third quarter (Q3) of the 2020 GDP report, the sector contracted by a staggering 38.9 percent. Noteworthy to mention that the sector also dipped by 57.4 percent in the second quarter Q2 2020.

“In our opinion, while the aviation sector does not contribute a huge percentage to overall GDP, we note that it has systemic importance for the conduct of trade and other economic activities in the country,” said analysts at CSL Stockbroker Limited.

“As Nigeria considers another travel ban, there is need for more government stimulus intervention in the aviation sector to save the industry from bankruptcy. Thus, we think the FG may need to support the sector more as it gets out of the deep recession,” said the analysts.

At the beginning of November 2020, the Federal Government finally approved a N4.0bn bailout fund for airlines.

Companies in the industry have seen earnings wiped out by the depression, and perhaps more worrisome is that they do not have the cash flow to cover rising borrowing costs.

Medview Airline, the largest listed airline in Africa’s largest economy is technically insolvent as its total assets of N17.02 billion as at December 2019 are lower than N19.69 billion total liabilities, which led to negative shareholders’ fund of N2.67 billion.

The company has been recording more losses than profit throughout its existence as it has accumulated losses of N7.55 billion and net loss of N3 billion.

While Medview airline has not released results for 2020, it is crystal clear that the disappointing performance will continue or gather steam even into 2021.

Even without the ban in place, growth in the sector will be depressed in the short to medium term as the difficult business environment and lack of transformation policy on the part of the government do not support economic recovery.

There has been pressure on the external reserve on the back of dwindling oil price and capital outflows.

The external reserves have been oscillating around $33-39 billion for the past 11 months.  At the beginning of the year, the country’s foreign reserves stood at $38.5 billion and fell to $35.36 billion as of 23 December 2020.

Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weighed on output.

The International Monetary Fund (IMF) has forecast that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.

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