Arik Air: How multiple taxes, harsh policies broke Wings of Nigeria

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Stories by Louis Ibah

The major casualties 

Like the proverbial bull in a China shop, the Asset Management Company of Nigeria (AMCON) appears to be bulldozing its way angrily through Nigeria’s aviation sector, knocking down boards and managements of distressed local airlines and appointing new ones to take charge.

AMCON’s intervention follows the huge indebtedness of the local airline industry estimated at over N500billion to banks, insurance firms, workers, airport and regulatory authorities, aircraft maintenance firms, and several other service providers.

Late last year, the bad banker’s hammer, first fell on Aero Contractors Airlines, whose operations itº suspended on September 1, 2017. And just when many never expected it, the asset management firm on Thursday February 9, 2017 sacked the board/management of Arik Air and took over the airline. Five days later, on Tuesday February 14, 2017, AMCON move a step further to take over Odengene Air Shuttle Services (OAS) Helicopters in Lagos armed with a court order. It was learnt that the company was among the airlines that received the Federal Government’s intervention fund during the tenure of President Goodluck Jonathan, but failed to pay back. “We had to go into these airlines to recover our money because we found out that left on their own, they wont take the right steps to pay us back,” a top official of AMCON told Daily Sun.

Why AMCON took over Arik Air

Citing debts estimated at over N300billion and a management that was not forthcoming with its responsibilities to creditors and staff, AMCON said it had to take over Arik  Air to avoid an imminent collapse of the airline with its attendant loss of Nigerian jobs.

“Arik Air has been in a precarious situation largely attributed to its heavy debt burden, bad corporate governance, erratic operational challenges, confiscation of aircraft due to non-payment of leases, frequent flight delays, constant fracas between Arik staff and irate passengers, among other issues that require immediate intervention in order to guarantee the continued survival of the airline,” AMCON said in a statement justifying the takeover.

“The airline has also not been remitting the taxes of its workers to relevant bodies thus also defrauding the country. Arik has also been in perpetual default in its lease payment and insurance premium, leading to regular and embarrassing reposition of its aircraft by lessors,” AMCON added.

AMCON thereafter announced that the airline would be managed by Captain Roy Ukpebo Illegbodu, a veteran aviation expert under the receivership of Mr. Oluseye Opasanyan (SAN).

Meanwhile four days into his tenure, the newly appointed Chief Executive Officer of Arik Airlines, Capt. Roy Ukpebo Ilegbodu, told journalists that the airline would require an injection of about N10billion to get it effectively resuscitated to operate all its schedule flights without hitches.

“AMCON has discovered deep rooted rot at Arik Airlines, which would require over N10billion to fix before the largest local carrier would resume full and uninterrupted flight operations to its regular routes across the country and beyond,” he said.                                                         “The situation is so bad that only nine aircrafts out of the 30 in the fleet of the airlines is operational. 21 of them have either been grounded, gone for C-check in Europe among other forms of challenges. As if these problems are not enough, the airline does not have money to procure aviation fuel for the nine operational aircrafts because no dealer wants to sale aviation fuel to Arik if it is not on cash-and-carry basis.

“This also calls for public understanding because flight schedules may be realigned based on the nine aircrafts that are available, technically sound and ready for flight operation. “Though the challenges are daunting, it would be gradually resolved to enable Arik Airlines, which carries about 55 per cent of the load in the country recover the 21 aircrafts,” added Ukpebo.

Dissenting stakeholders voices

“We all saw it coming to Arik Air and maybe others (local airlines) more than a year ago. But treating the Arik case in isolation will be to trivialize the magnitude of the problem,” screamed Gabriel Olowo, President of the Aviation Round Table (ART), on hearing that the airline had fallen under the receivership of the Asset Management Company of Nigeria (AMCON).

Olowo who has spent over four decades working in top management positions for both local and foreign airlines in Nigeria represents a new set of dissenting voices who feel the government ought carry the bulk of the blame for the misfortunes of the distressed airlines in the country. Indeed, in recent months, a growing number of stakeholders have become very critical of the existing fiscal polices governing investments in Nigeria’s local airline industry.   

“Essentially it is a Nigerian business environmental factor. Business and government are permanently at variance and cost is permanently higher than income,” said Olowo.

“Tax overburden and infrastructural deficit erode revenues steadily. Gazetted policies that will enhance performance are not implemented. Credit is not in the Nigeria business dictionary. Yet aviation is prone to the minutest situation in the economy ranging from weather to politics, and reckless holidays, among others,” he added.

“In this time of economic hardship in the nation, It is unfortunate that domestic airlines have become a cheap target for the agencies that are putting additional pains and burden on operators through multiple taxes, charges and levies which they demand from airlines with impunity. It is rather unfortunate that airlines are now groaning under tax pressure and some are going bankrupt,” said the President of the Airlines Operators of Nigeria, Capt. Nogie Meggison. Nigeria has a long chain of failed airline dating to almost 40 years. Among them, government airline, Nigeria Airways; pioneer private airlines like Okada, Kabo Air, ADC Airline,  Bellview Airline, Chachangi, Sosoliso Oriental Airlines as well as Richard Branson Virgin Nigeria, and Air Nigeria.

“The lack of will to do things right by leadership is the undoing of Nigeria and ditto Nigerian airlines and businesses and given the same Nigeria operating environment the National carrier yet to be born will fail,” Olowo added.

Controversial taxes Killing local airlines

Although cost of fuel accounts for almost 45 per cent of overheads for airlines in Nigeria, it has however been revealed that taxes paid to regulatory and airport agencies is at present taking a much heavier toll on operators and making it difficult for them to run profitable airlines in the country.

“Ordinarily, airlines meet so many costly foreign exchange components on daily basis that account for 70 per cent  – 80 per cent of their direct operational cost such as Jet fuel, spare parts, insurance and simulator training among several others,” said Sir Nogie Meggison, Chairman of Airline Operators of Nigeria (AON).

Meggison said the AON has been screaming and complaining about the same issues over the years that have culminated in sending over 27 airlines under in the past 25 years.

“A case in point is the recent takeover of Arik Air and Aero Contractors by the Asset Management Corporation of Nigeria (AMCON) in the face of huge financial burdens that have shown themselves as fallout of the multiple and sometimes unfair charges, levies and taxes airlines are forced to grapple with on a daily basis,” noted Meggison.

For instance, domestic airlines, on the average, pay about 35 per cent to 40 per cent of a ticket cost as taxes and charges that come under the guise of statutory levies in addition to other charges. These include five per cent ticket sales charge; five per cent cargo sales charge; 5 per cent Value Added Tax (VAT); passenger service charge; charter sales charge, aircraft inspection fees; simulator inspection fees; landing charges; parking charges; terminal navigational charge; enroute charge, fuel surcharge, airport space rent, electricity charges;  apron pass and ramp access charges; and a newly imposed Registration Fee all of which are paid to government agencies.

Many of these taxes and charges amount to double taxation such that any incentive seemingly provided by government to airlines is taken back by the agencies.

For instance, the Nigerian Airspace Management Agency (NAMA) charges domestic airlines different kinds of navigational charges which they should ordinarily be exempted from in line with global best practice, except Nigeria. The implemented charges range from Terminal Navigational charges to enroute navigation charges, over-flight charges, clearance charges, and extension charges. Even foreign airlines don’t pay enroute charges or extension charges, which the local airlines are forced to pay.

In spite of all these charges, NAMA still gets 23 per cent taken from NCAA, five per cent Ticket Sales Charge (TSC) Account. also according to the existing Nigerian VAT Law, all forms of commercial transportation are exempted from VAT. Sadly, only Nigerian airlines are still subject to paying VAT as they are subjected to 5 per cent VAT contrary to the law. Road, Maritime and Rail transportation don’t pay VAT. Even foreign airlines operating in Nigeria don’t pay VAT.

But even with all these charges, many of the airports in the country do not have runway lights and navigational landing aids. This means such airports are only open between 7am and 6pm daily. To this end, airlines can’t fully utilise their airplanes for 24-hours operations. And because of the low disposable incomes of the majority of Nigerians, local airlines are wary of increasing airfares to match the reality on the ground given the various taxes they are made to pay. This indeed leaves little or no room for profits.

“In the light of the above, we therefore appeal to the Federal Government to assist the airlines by taking a critical look into this issue of multiple charges and come to the aid of airlines by having a single window, removing VAT from air transportation and reducing the heavy burden they currently face,” said Meggison.

“Government should grant  waivers of landing charges in the home-base of airlines while extending tax holidays for the first 10 years for qualifying airlines in order to cushion the impact of start-up to ensure the survival and growth of domestic airlines. Airlines provide a critical socio-economic services and should not be treated as a cash cow,” he added.

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