COVID 19: Domestic airlines lose over N100m daily

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The devastating impact of COVID19 on local and global aviation industry has remained unprecedented as aviation around the world has vitually shut down with the travel and tours industry at a standstill. 

In  the process, cash reserves of many airlines around the world are gradually running dry. With several leading airlines grounding their jets like never seen before, a senior executive of one of Nigeria’s frontline aviation operators told Leakblast that no amount of planning or financial reserves can shield operators from hardship which will lead to huge lay-off.

Experts, weighing in on the development, described the period as the most uncertain period the aviation industry has ever witnessed and that the effects on both Nigeria and the global economy would be far reaching.

According to the Chief Executive Officer of Finnair, Topi Manner, it is the “largest crisis in aviation history and would be the survival of the fittest at the end of the day, adding that by the end of May, most of the airlines would be technically bankrupt.

The prediction is that it would take the industry a while to recover from the impact of the pandemic.

Already, almost all of Nigeria’s domestic airlines including –Air Peace, Arik Air, Azman Air, Aero Contractors, Dana Air, Max Air and Overland Airways have suspended their flight operations, following the closure of all the domestic airports. The skies are empty and airlines can only make money when they are on air and flying passengers around.

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Fixed and semi-fixed costs amount to nearly half an airline’s cost.  Semi-fixed costs (including crew costs) are expected to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.

Domestic airlines count losses

Leakblast spoke to a senior executive in one of the frontline domestic airlines, who preferred to remain anonymous, and he painted a gloomy picture of what the industry will go through when flights resume.

“The effect of this pandemic hasn’t started yet, but I can tell you that airlines are the worst hit.  On the average, the minimum amount that each domestic airline loses everyday that they don’t fly is N120 million in ticket sales and cargo operations. Do you know the number of staff that we have outside on training whom we are paying daily? The planes are on the ground and our engineers would have to be there servicing non flying planes.

“Airplanes are not built to be parked on the tarmac for long so we would have to carry out serious servicing upon resumption. We would pay the engineers and also pay for security. We are yet to receive bailout from the Federal Government and most airlines will definitely retrench. Most airlines will lose over N2.7 billion plus the low loads we have been experiencing since the social distancing thing started. Since the crisis started till date, each airline has lost not less than two billion and still counting.  I can’t say for a fact that the Federal Airport Authority of Nigeria (FAAN) is collecting parking fees; I will have to find out.

“Even if they are not collecting, airlines are still losing money because we are still paying the necessary fees, like maintenance allowance, staff training, security, etc. Nobody is going to say FAAN, Nigerian Civil Aviation Authority (NCAA) and other agencies should not charge us for the next six months after we resume so that we can stabilise. They will start collecting their fees immediately we resume flying.

The same airlines that have suffered from low passenger traffic and shut down would be expected to start paying charges immediately.  So far, the Federal Government hasn’t said anything and to save jobs, the government must act immediately. It should provide not less than N100 billion in bailout funds for airlines to assess.”

An aviation security expert and former commandant of Murtala Muhammed International Airport gave an insight into how much revenue the Federal Government generates from the industry and how domestic airlines also benefits.

“The NCAA has not recorded less than two million outbound international passengers in any year between 2015 and 2017. Now imagine each of the intercontinental passengers including first and business class passengers paying about N300,000; the earnings cannot be less than N600billion for international passengers alone without considering the earnings on domestic passengers, cargo freight charges and chartered flights. The five per cent charges on the intercontinental passengers tickets of N600billion cannot be less than N30billion.

“With this crisis, the earnings of the services providers from international carriers has dropped. Note that over 80 per cent of our earnings from aviation comes from the foreign airlines and to that extent too, it could affect the operations of the domestic airlines especially those that operate connecting flights for international passengers.

“Everyone is suffering; the passengers suffer cash crunch and from thence, the airlines, service providers, ground handlers, fuel marketers etc. Airlines do not necessarily retrench or absolutely retrench. They could start by reducing salary gradually; 25 per cent in the first month, 50 per cent in the second month, 75 per cent in the third month and 100 per cent in the fourth month and the staff could go on indefinite leave from there. When things become normal, they could be re-engaged gradually too in the same manner.”

Forecast by IATA

The International Air Transport Association (IATA) published new analysis this week, showing that airlines may burn through $61 billion of their cash reserves during the second quarter ending June 30, 2020, while posting a quarterly net loss of $39 billion. This analysis is based on the impact assessment IATA released last week, under a scenario in which severe travel restrictions last for three months. In this scenario, full-year demand falls by 38 per cent and full-year passenger revenues drop by $252 billion compared to 2019. The fall in demand would be the deepest in the second quarter with a 71 per cent drop.

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The impact will be severe, driven by the following factors: Revenues are expected to fall by 68 per cent. This is less than the expected 71 per cent fall in demand due to the continuation of cargo operations, albeit at reduced levels of activity. Variable costs are expected to drop sharply—by some 70 per cent in the second quarter—largely in line with the reduction of an expected 65 per cent cut in second quarter capacity. The price of jet fuel has also fallen sharply, although it is estimated that fuel hedging will limit the benefit to a 31 per cent.

Fixed and semi-fixed costs amount to nearly half an airline’s cost.  Semi-fixed costs (including crew costs) are expected to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.  These changes to revenues and costs result in an estimated net loss of $39 billion in the second quarter.

On top of unavoidable costs, airlines are faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel. The second quarter liability for these is a colossal $35 billion.  Cash burn will be severe. We estimate airlines could be burning through $61 billion of their cash balances in the second quarter.

“Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of $39 billion in the second quarter. The impact of that on cash burn will be amplified by a $35 billion liability for potential ticket refunds. Without relief, the industry’s cash position could deteriorate by $61 billion in the second quarter,” said Alexandre de Juniac, IATA’s Director General and CEO.

Bailout

Several governments are responding positively to the industry’s need for relief measures. Among countries providing specific financial or regulatory aid packages to the industry are Colombia, USA, Singapore, Australia, China, New Zealand and Norway. Most recently, Brazil, Canada, Colombia, and the Netherlands have relaxed regulations to allow airlines offer passengers travel vouchers in place of refunds.

“Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility. Canada, Colombia, and the Netherlands are giving a major boost to the sector’s stability by enabling airlines to offer vouchers in place of cash refunds. This is a vital time buffer so that the sector can continue to function. In turn, that will help preserve the sector’s ability to deliver the cargo shipments that are vital today and the long-term connectivity that travelers and economies will depend on in the recovery phase,” said de Juniac.

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Way forward

The chairman of Airline Operators of Nigeria (AON), Captain Nogie Meggison, said the Ministry of Aviation  should take steps to ensure that the airlines are carried along in the palliatives earmarked for the different sectors of the economy and the interest rates should be reduced from nine to five per cent. He also suggested that aviation agencies should cut down on the numerous charges to airlines in order to cushion the effect of the crisis.

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