A N34 billion debt owed a first generation bank may have contributed to the shutting down of Air Nigeria’s operations as announced by its management on Tuesday.
The airline, formerly known as Virgin Nigeria, was acquired from British millionaire Richard Branson and other Nigerian investors, on June 2,2010 by a local businessman Jimoh Ibrahim, for N37 billion (about $250 million). The N34 billion debt is a legacy debt inherited by Ibrahim, when he bought Virgin Nigeria.
On Tuesday, a statement from Ibrahim aides said Air Nigeria was suspending all its local, regional and international operations with effect from Monday, September 10, 2012. The airline said the suspension was largely due to staff disloyalty and environmental tension, “which are not conducive for business in the aviation sector.”
The statement which said only 50 out of Air Nigeria’s workforce were retained to fashion out modalities for its resumption of operations, added that flight operations would resume within 12 months.
The N34 billion owed a local bank (name withheld) sources in the aviation sector said last night, coupled with fears of a forced merger being muted by the Federal Government, could have contributed immensely to the sudden suspension of Air Nigeria’s entire operations. The Federal Government, it was learnt, is planning to force local airlines in the country to undertake mergers to form the kind of synergy needed to provide safe and quality airlines that could compete with European and American airlines which are making fortunes on Nigerian routes.
Air Nigeria’s domestic and regional routes were suspended in June this year, first by the airline’s management, when its pilots went on strike, and later by the Nigerian Civil Aviation Authority (NCAA).
This followed concerns about safety and service standards of local airlines, after the Dana Air plane crash of June 3rd. The international routes (Lagos-London and Lagos-Johannesburg) will operate till September 10.
Analysts at Renaissance Capital, commenting on the development, said: the bank’s “NPL ratio at 1H12 was 2.5 percent with absolute NPLs of NGN17.9bn. If we include the full amount for this loan, it would have raised the 1H12 NPLs to NGN52.9bn and the ratio to 7.2 percent. Assuming some value to the collateral – let’s conservatively say 50 percent - would mean that provisions increase by NGN17bn.
If we use these assumptions to adjust our FY12 forecasts, our provision forecasts rise from NGN27bn to NGN44bn and our cost of risk rises from 80bps to 310bps. Our net profits forecasts fall from NGN38bn to about NGN25bn – a 34 percent reduction. We see this as a worst-case scenario, not necessarily the one with the highest probability, too early to tell.
We highlight that management is confident that a worst case scenario would see (the bank) taking a haircut of up to 20 percent (versus our 50 percent assumption) if it sells to AMCON, due to the BOI nature of the loan”.
Aviation analysts told BusinesDay in Lagos that the airline risks losing passengers’ confidence with its start - jerk - and – stop operations.
The NCAA too, they said, could weild the hammer by suspending the airline’s air operator’s licence. This might make it difficult for Air Nigeria to return to operation when it is ready in 12 months time.
Sources close to the airline also hinted on the fears of its proprietor, that the Federal Government was going to engage local airlines on forced mergers, a fear which contributed to the suspension of the airline’s operations. Air Nigeria alluded to this in one of its “wrap-around adverts” published earlier in the year.
Many local airlines are opposed to the idea of mergers, primarily because they do not want to lose their positions as owner-managers.
No local airline is currently operating at a profit, an analyst told BusinessDay in Lagos, adding, “the issue of merger is a pill that they (airlines) must swallow to survive”.
The Central Bank of Nigeria (CBN) had earlier given a lifeline of N300 billion to local airlines, in form of bailout, while the Asset Management Corporation of Nigeria (AMCON) bought over N135 billion debts from them.
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