Nigerian Airlines Struggle Under Heavy Debt Burden
Nigeria's airline industry owes banks and the government as much as $2 billion after funding rapid expansion with short-term loans, leaving some firms struggling, industry and financial sources say.
The airline industry in Africa's most populous nation has seen explosive growth in recent years, with older domestic names such as Aero, Chanchangi and IRS fighting competition from new players like Arik, Dana and the recently renamed Virgin Nigeria.
The expansion has given Nigerians a wider choice of airlines, many of them flying with new and recently refurbished aircraft, and helped reverse the country's dismal reputation for air safety in the wake of a spate of crashes five years ago.
But as rivals fought to win market share while credit was easy to secure before the global financial crisis, some used short-term bank loans to buy and order aircraft, funds they have borrowed at very high rates, industry sources said.
"It's a high cost business, highly leveraged and susceptible to sudden shocks," Central Bank Governor Lamido Sanusi told Reuters earlier this month, days after extending an intervention fund to help airlines restructure loans.
"Many airlines in Nigeria have borrowed money from Nigerian banks at very high rates of interest and for relatively short tenors, compounding other problems they have," he said.
Sanusi said the extension of the 500 billion naira fund, originally meant to stimulate credit to the manufacturing and power sectors, was as much to protect the country's lenders by helping them refinance some of their airline exposure.
Nigeria's banking industry is itself still recovering from a $4 billion bailout last year.
"One particular airline owes a single bank 117 billion naira. That's a lot. If it crystallizes it would wipe out the capital of that bank," Sanusi said.
"The loan is performing, but if this airline were to default, I'd have to come and bail out this bank."
Industry sources said the sector owed banks and government agencies -- to whom carriers pay taxes, landing and overnight parking charges -- around 300 billion naira.
The Economic and Financial Crimes Commission (EFCC), Nigeria's anti-corruption agency, said it was investigating the non-payment of more than 4 billion naira in charges owed to the government by domestic airlines.
"We are looking at infractions on why these airlines have failed to remit due charges collected from their passengers to the government," EFCC spokesman Femi Babafemi said, adding one airline alone owed 80-90 percent of the money.
CHEAP SEATS, SMALLER PROFITS
One of Nigeria's newest airlines, Dana Air, which is part of a conglomerate and has funded its development from the cashflow of other businesses, estimates it takes two years from start-up to break even in Nigeria.
The airline, which launched 19 months ago and has no significant bank debts, said it was on track with that target but said high fuel and maintenance costs were among the challenges for the industry.
"In Nigeria we don't have enough maintenance facilities so we have to do our routine checks abroad, which costs a lot of money," Tony Usidamen, Dana Air's communication manager said.
"We experienced some very low periods, while the costs of maintenance and of jet fuel have gone up," Usidamen said.
Local passenger traffic in sub-Saharan Africa's second biggest economy rose 21 percent in 2009, according to the Nigerian Civil Aviation Authority.
But sales promotions -- which have reduced fares to as low as 5,000 naira from around 25,000 naira for a 45-minute flight between the capital Abuja and commercial hub Lagos, the busiest domestic route -- have eaten into profits.
Airlines routinely offer heavy discounts for passengers booking weeks in advance, relying on those sales to maintain cashflow while eroding the profit per seat.
"People are still travelling. But lots of promotions are used to lure customers at the expense of profitability. If the airline is overbooked or you come late, they'll say you missed your flight and you have to upgrade," one airline source said.
Analysts say the airlines' debt and funding profiles are symptomatic of a wider problem in the financing of new businesses in sub-Saharan Africa's second-biggest economy.
Lot of indigenous businesses -- from oil firms to cement, telecoms and hotels -- which are capital intensive and long-term in nature rely on short-term loans to start off their projects and then struggle to pay interest from the first day.