Disquiet in aviation sector over AMCON takeover of airlines

THESE are not the best of times for operators and players in the aviation sector. In quick succession, the Federal Government, through the Asset Management Corporation of Nigeria (AMCON) took over two leading airlines – Aero Contractors and Arik Air.

The takeover followed the airlines huge indebtedness to some banks. The loans, classified as toxic to some distressed banks, were bought by AMCOM several interventions that never yielded the desired results by way recovering the funds injected into the airlines.
The development, which unsettled players in the aviation sector, triggered a debate on the rationale or otherwise behind government action. Many expressed shock that AMCOM, which had not shown justification for taking over the management of Aero Contractors, went ahead add Arik Air to its list of acquired distressed companies.
Not a few claimed Aero Contractors’ fortunes continue to dwindle under AMCON’s management.
According to a school of thought, the AMCON intervention may after all not bring about the expected revival of the aviation sector, now embroiled in turmoil.
Yet, some experts argued that AMCON’s action was the best option for government to keep the carrier in the air.
Investigations reveal that Arik Air owes over N300 billion. Its creditors include, aviation fuel suppliers, aircraft lessors, insurance companies and aviation agencies, among others.
A former Chairman, Nigerian Aviation Safety Initiative (NASI), Captain Dung Rwang Pam, described AMCON’s action on Arik Air as the best decision by government. According to him, the airlines’ ousted management did not demonstrate corporate governance in the day to day running of the business.
Pam said the decision could not have been taken at a better time than now, so as not to compromise the airline’ safety record. Arik Air, he alleged, failed to meet up with its obligations in many areas.
He, however, blamed the rot in the aviation sector on poor oversight duties of the Nigerian Civil Aviation Authority (NCAA) at ensuring rigorous economic audit.
President of Aviation Roundtable, Mr. Gbenga Olowo, who confirmed the challenges of domestic carriers, said the hurdles should not have forced their management to taking wrong steps capable of leading to the collapse of such airlines.
Supporting AMCON’s decision, Olowo said the industry’s safety group had seen early signs of possible collapse if government did not take over the airline.
But, former Secretary Operators of Nigeria (AON), Captain Mohammed Joji, faulted the takeover the airline saying such “brash” steps could serve as disincentive to foreign investors.
Rather than outright takeover, Joji said that AMCON should have collaborated with former Arik Air’s management team to find a way out of the crisis, which he said was not peculiar to the affected airlines.
Joji said: “The decision to take over Arik Air by AMCON, an agency of government, may not be in the best interest of the industry. As the largest carrier in the industry that has been around for a long time, there is need for the government to rally round it instead of taking over.
“The other businesses, outside the aviation sector that AMCON has taken over, what has happened to them?”
The Nation learnt that before the February 9, 2017 takeover of Arik Air, AMCON had been working with the airline since 2011, when it sent some of its officials to collaborate with the airline to recover its huge debts.
Ironically, while taking over the airline last month, AMCON said it was part of measures to save the industry. The takeover, AMCON explained, underscored government’s decision to instill sanity in the aviation sector.
It said the decision was also to prevent a major catastrophe and preserve Arik Airl as a going concern.
AMCON said in a statement: “From all indications, respite may have come the way of Arik Air currently immersed in heavy financial debt burden that is threatening to permanently ground the airline.
“For some time now, the airline, which carries about 55 per cent of the load in the country, has been going through difficult times that are attributable to its bad corporate governance, erratic operational challenges, inability to pay staff salaries and heavy debt burden among other issues, which led to the call for authorities in the country to intervene before Arik goes under like many before it.”
Explaining the rationale for the latest intervention, the Minister of State for Aviation, Hadi Sirika said: “We believe that this intervention is timely and will stabilise the operations of the airline. This will enhance the long term economic value of Arik Air and revitalise the airline’s ailing operations as well as sustain safety standards, in view of Arik Air’s pivotal role in the Nigerian aviation sector.”
The minister assured that the government would support the new management of the strategic carrier by taking necessary steps to avoid undue disruption on airline’s regular operations or activities of other stakeholders, on account of the recent changes in its leadership and management.
Sirika said: “As a matter of fact, Arik Air has been in a precarious situation largely attributable to its heavy financial debt burden, bad corporate governance, erratic operational challenges and other issues, that required immediate intervention in order to guarantee the continued survival of the airline.
“The myriad of issues confronting Arik Air of late, ranges from confiscation of aircraft due to non-payment of leases, frequent flight delays, constant fracas between Arik staff and irate passengers at both local and international airports.”
The airline’s former management however faulted the takeover, alleging step as a ploy by the government to demonise the carrier to pave the way to acquiring it as a national carrier.
The management’s claim stemmed from a raging rumour within the aviation sector of an alleged plan by the government to merge Arik Air and Aero Contractors into a national carrier.
But AMCON has consistently clarified that it took over the two carriers to return them to stability in the interest of effective air transportation.
Last week, investigations revealed that the Asset Management Corporation of Nigeria (AMCON) has scaled down Arik Air operations to below 30 per cent.
The airline, which at peak periods operated 120 flights daily, was forced to scale down its operations to about 15 flights due to low load factor.
Out of the 28 aircraft in its fleet, only eight are now operational. They include: two Bombardier, CRJ 900, one Bombardier Q400 and five Boeing 737. The Q400 is in a dedicated service with Chevron. So, the airline has seven operating aircraft.
The situation forced the airline to reduce its domestic and regional operations before the suspension of international flights immediately after the AMCON takeover.
A source said that Arik Air’s international financiers and other creditors have concluded plans to sue the Federal Government after 30 days of AMCON management for the airline’s failure to honour its international obligations.
Before its takeover, Arik was the only Nigerian airline operating on the Dakar, Senegal, Abidjan, Code’Ivoire, Luanda, Angola and Libreville and Gabon route.
Amid raging allegations and counter allegations between AMCON and the former management of the airline, the government, two weeks ago, appointed KPMG to forensically audit the books of the airline to ascertain it true financial status.
The audit will among other objectives, cover the position and utilisation of assets and liabilities; recording and utilisation of loans; propriety of third party transactions; fraud controls over Procure to Pay (‘PtP’), agents and business partners.
It will also cover Financial Reporting and Arik Airl’s financial position as at January 31. The audit firm has 12 weeks to turn in its report.
AMCON’s spokesman Simon Tumba said the audit was appointment to verify facts on what went wrong with the airline’s operations.
He said: “The whole intention is to identify what went wrong with Arik to enable the new management to bring it back to full operations.”
It was learnt that team appointed by AMCON has started shopping for investors for the airline.
Tumba said: “AMCON is talking to people to see how they can acquire the airline. They came, but when they saw the records of what was on ground, they decided to suspend everything, pending when we will resolve some of the issues bedeviling it.
“We have deployed people there to manage it, pending when we can stabilise it and then bring in investors to take over. We discovered that out of the 30 aircraft of the airline, only about 10 were functional. Some of them were not in Nigeria. They have refused to meet all their obligations, even the insurance payment. They did not even have money to buy aviation fuel.
“What they did was that they collected money from passengers and then quickly use the monies realised to buy fuel. This is how they have been running the place and these were some of the things we met on ground.
“The first thing we did when we moved in was to address the payment of staff salaries. Remember, some of them were owed for up to seven months. The staff members are very pleased with what we have done.
“We are hopeful that with an annual profit of about N7 billion and if the monies are not laundered, I think we can pay back the loans in time. AMCON debt is about N147 billion. There are local banks which Arik Air is owing about N165 billion. These banks collect all the monies they make.
“The issue of converting the airline to a national carrier is not on the table. Arik is too complicated to make a national carrier. The total asset worth of the airline right now is less than N40 billion.
“The government does not have plans to do that. The interest of government is that we must continue to fly and people must work. They have about over 2,000 employees.
“They do not need more than N10 billion to stabilise their operations. Within the next three months, they will be able to pay back what we have put in right now. In national interest, Arik Air should be allowed to fly.
“We are thinking of suspending international flights. Arik Air needs about N1.6 billion to buy fuel for international routes. We cannot do that right now. By the time we manage it for about six months, the airline can now survive and then, we can sit down and talk about where to go from there.
“Based on what we have achieved in just one week, we are hopeful that in the next three weeks, the issue of delayed or cancelled flights will be things of the past.
“We are carrying everybody along. At the end of the day, we want to return it to profitability. We need to emphasise one fact – that the only way we can recover our debts is for Arik Air to continue to fly. The banks have come to realise that this is important.
“The government has a responsibility to ensure that it intervenes whenever there is any threat to national interest. Within the next 30 days, we will be going to places we have not been to in the last three years.”
Observers said that a lot of positive developments have returned to the airline barely two weeks after AMCON took over Arik Air’s management.
The challenges created by the airline’s former management, have been surmounted the Capt. Roy Ukpebo Ilegbodu management, under the receivership of Mr. Oluseye Opasanya.
Tumba said: “Nigerian banks that hitherto turned their backs to Arik are now cooperating and supporting the new management; engagement with international and local creditors have also been successful; just as discussions with critical service providers and industry stakeholders have yielded the much desired positive results.
“Arik Air has also paid the insurance premium, which was on the verge of expiry had AMCON not taken over on February 9. The airline has also commenced the payment of outstanding salaries, which has greatly boosted staff morale as well as performance.
“The airline is also in discussion with different creditors and stakeholders to recall a good number of aircraft into the fleet as soon as possible, which will increase the number of daily flights.
“Aside from that, a good number of affected passengers have been refunded and efforts are on to reach out to those yet to get their refund as a result of suspension of flights to some routes.
“As a result of these positive developments, customers of Arik Air, especially from the corporate circle, are gradually coming back with assurances of stable and professional management with improving performance record within a short period, which is buoyed by the fact that the airline has an unparalleled safety record that speaks for itself in the history of aviation in the country.
“The new management of the airline under the auspices of AMCON has held series of fruitful engagements with major suppliers of aviation fuel (ATK), and agreements reached for regular supplies of the product to Arik, which has guaranteed regular flights.
“They said that incompetent people are running the organisation, yet Arik Air has no financial account since 2015, has not paid taxes or remitted staff pension deductions for over two years and new debts are popping out every day. A clearer picture will come out after KPMG forensic audit report in the next 12 weeks.”

The beginning of the end

Arik Air sailed into trouble water for its failure to service the non-performing loans it acquired in 2011 from two distressed banks, which were taken over by AMCON.
The N85 billion loans were acquired include: N17 billion from Union Bank Plc and N14 billion from Keystone Bank Limited.
A source hinted about the airline’s exposure: “The facilities were granted to Arik Air for purchase of additional aircraft and to refinance existing term loans. The default in repayment by Sir Johnson Arumemi-Ikhide, the principal promoter of Arik Air posed systematic threat to the banks and indeed Nigerian economy.
“As a matter of fact, apart from AMCON, Arik Air is also currently indebted to other commercials including Standard Chartered, Zenith Bank, Ecobank and Access Bank to the tune of about N165 billion.
“Arik Air owes the federal aviation agencies and regulators N26 billion. $11 million is owed to European aviation agencies and service providers $20million owed to Lufthansa Technique.
“In September 2011, AMCON, in a bid to provide further support to Arik Air restructured its debt from N85 billion to N70 billion as a nine-year term loan, running at 12 per cent per annum. Other terms of the restructure include the following
• AMCON to appoint a resident monitoring manager who shall have the authority to call for any of Arik’s records for examination;
• Arik to provide three-year record of its remittances to FAAN.
“In all of these, Arik Air defaulted on the term of the restructure and failed to make the monthly repayment as agreed. Again in May 2013, AMCON sourced N26 billion of the Central Bank of Nigeria (CBN) Power Aviation Intervention Fund (PAIF) through the Bank of Industry (BoI) on behalf of Arik.
“AMCON disbursed N21.38 billion of the BoI loan to Arik as working capital. Out of this amount, N21.4 billion was meant for reconfiguration of two aircraft from passenger to cargo carriers.
“This was never done as the funds were diverted by Arik management and is now the subject of Economic and Financial Crimes Commission (EFCC) investigation. Both aircraft were abandoned in the United Kingdom (UK).
“In December 2015, due to accrued interest and unpaid principal, a second restructuring was proposed for Arik Air’s debt to reduce the debt from N138 billion to N90 billion, which is awaiting CBN approval.
“This was proposed based on the airline’s plan to do a private placement and subsequently do an IPO within a period of six months. Based on that, they were expecting N44 billion from Afrexim as a bridge. None of this happened as Arik Air could not comply with any of the conditions given for a peaceful resolution.
“In spite of the leniency, good will and good faith demonstrated by AMCON to support an indigenous strategic business; Arik Air, throughout the negotiations, refused, or neglected to adhere to the terms of amicable settlement.
“However, AMCON continued to bear the burden of repaying the Bank of Industry (BoI) loan at one per cent interest rate without any corresponding commitment from Arik. So far, AMCON has paid N9.05 billion on behalf of Arik.
“Arik Air vehemently refused to cooperate with the AMCON resident monitoring manager. It refused to disclose financial information to AMCON. Of all our investments in Arik, AMCON total recoveries from Arik till date is N4.6 billion, which is only 3.2 per cent of current exposure. The total repayment by Arik in the last 12 months is N50 million.
“As part of its support for the ailing aviation industry, AMCON opened fresh talks in January last year with the airline towards a new settlement agreement based on its planned recapitalisation. There was an agreement on new restructuring terms, subject to CBN approval.
Included in the terms are: N3.3 billion monthly payments from Arik Air sale; N13 billion Afrexim guaranteed loan; and N20.0 billion from Arik’s planned private placement.
“But Arik did not keep its end of the bargain with the conditions unfulfilled.”
Investigations showed an improvement has been recorded on the performance on Arik Air’s “Golden Triangle” routes of Lagos – Abuja – Port Harcourt.
According to statistics, on time performance on the airline’s other domestic routes and the West African Coast has improved by about 78 per cent in the last one week.
A source claimed that on time performance dwindled under the former management because of its inaccessibility to aviation fuel, arising from huge debts to all fuel marketers.
The source said alleged: “In the past, Arik Air flights were delayed because their managers’ indebtedness to fuel marketers, who were unwilling to supply on credit.
“There were no spare parts in the store. Insurance cover was almost expiring and workers’ salaries were unpaid. All these impacted on the operations of the airline.
“But, under the AMCON appointed management, the airline is running smoothly, we have secured the confidence of our suppliers and vendors and the airline is running better than when the old team was there.”