Dana Air Crash and the Financial Impact

Proshare

Wednesday, June 06, 2012 / Proshare

 

The question was asked – what is the effect (if any) on market activities from the tragic and ill-fated plane crash of Dana airline on Sunday?

 

Truth be told, we are still in mourning, as we have been all year over the rising incidence of deaths and unusual disasters in the country. This however was different. It involved a non-terrorist action and it was personal to the last man on the street – it brought out our best qualities as a people. The personal stories that have come out touch even the tough minded amongst us; and reminds us all of what binds us as a nation and why we have to start taking actions that fixes things.

 

We all hurt and must learn a new way to handle this cycle of pain that threatens to envelope our society.

 

Here, we believe we can contribute by doing what we do best and dedicate time and resource to ensuring we deal with the hard issues that confronts the aviation sector and indeed, our mobility and logistics sector.

 

It is pertinent therefore to start with appraising the likely financial impact of the crash on the markets, nay the economy.

 

Fundamental to this must be the acknowledgement that the ability of free markets to supply product safety will remain controversial for years (even as we admit that there exist a shift in how the issue should be approached). The key issue however is whether companies selling ‘unsafe products’ should suffer profit losses from adverse consumer reaction, which in turn would create an incentive to supply safety.

 

While there are emotional reactions to the subject of safety, empirical evidence would confirm that using traditional models, safety is costly. This is often times tied to governments diminishing role in a free market economy and the widening gap in the private sector’s ability to fund capital intensive activities such as the aviation business.

 

Companies are thus by default faced with the resolution of profit motives over investments in safety, especially where the regulatory structure is skewed towards self-sufficiency and premises its earnings/funding from the activities of these same companies. We see examples of this in the capital market and now, a more compelling case of this disconnect between a regulator earning from operators is laid bare by the aviation sector.

 

The questions here bother on how a sovereign chooses to apply the principles of free markets, its fiscal policies (taxation, fees, etc) and its management of contradictions in its public mandate. This is a matter for a major treatise.

 

Deriving from the initial premise however, the resolution of the apparent gaps between PROFIT V. SAFETY objectives in a free market is important for the formulation of public policy.

 

It would appear apparent that if market forces discipline firms then the need for regulatory oversight is reduced and perhaps eliminated. This is however not always the case.

 

The airline industry and indeed the recent Dana Air Crash provides a unique opportunity for the government (this time) to demonstrate this belief.

 

Empirical work in the last four decades globally established that serious commercial air crashes cause the involved airlines to lose market value. However, the reason for the loss of market value remains unclear. Yet we do not need more crashes to allow the markets to self correct. Human lives must count but much more is the psychological damage that this crashes causes.

 

Immediately after such crashes, the government gives all the right sound bites, regulators promise investigations and the people all wail and cry. Yet, soon enough we settle back to the new normal – a culture of ineptitude and the shying away of taking the hard decisions we require to make the skies safer.

 

The loss of market value for the firms is the most obvious and this is driven by such issues as the expectations of adverse consumer reaction, increased regulatory surveillance, and/or higher insurance premiums. Yet, the few previous attempts to distinguish among these alternatives yielded ambiguous results. So how does this impact the markets?

 

In the case of the Dana air crash, and given our previous experiences, the stock market is not affected as neither Dana nor all the airlines operating our airspace is listed on the bourse and as such there can not be an immediate gauge of the impact in market value. From a money market perspective, the cost to the industry will be unaffected as there will be no new long term credits under terms suited to the industry that will be available based on the financial models we run.

 

Having said that aside, what other impacts can we expect?

 

We would ordinarily expect that consumers would respond by switching to rival airlines and/or flying less. The latter is more plausible but what are the alternatives – to travel through the death trap roads? That is a more certain safety issue in itself.

 

For other airlines – direct competitors, they should not get too exited about the benefits of air travelers switching; as the public perception is that they offer no service or safety records better than that of DANA.

 

Hear an aviation consumer, Adewunmi, respond – “I fly to Abuja every fortnight and trust me I will not be flying locally anytime soon – Arik, Air Nigeria , First nation or whatever. Why? Because I have lost faith in the industry, if the powers that be allow DANA to fly sub-standard planes in our airspace then trust me the other airlines are flying such death traps. It’s a no brainer really!”

 

Another consumer, Adeola, reacts thus –“no one really has any business in Abuja but for government business. I am not aware of a civilized country that requires you to fly for government business in today’s tech driven world. Let's sit up and sort out our roads and alternative transport system. People granted concessions and contracts that are non-performing should be indicted. Safe roads and alternative transportation should be a priority; as many of us would like the CHOICE of driving to Abuja or wherever should we decide.”

 

These may be initial reactions or early day blues (perhaps even tagged as knee jerked); yet we are convinced that we face existential concerns for human life given the state of our aviation sector based on the structure, model and the practices.

 

Having said that, we have heard that the liability claim could be close to between N2.5billion – N4.5billion considering the right decision by government (not an independent decision of the regulators which indicates their limited relevance and independence within the polity) to withdraw/suspend the license of the airline. This will be followed by the loss of revenue, goodwill and other damages that is expected to arise; which will be quite significant. It could also lead to the demise of the airline in an environment like ours – recall Bellview, EAS etc.

 

The industry is pervaded by corruption, inefficiency, cost-cutting, spin-off effect of graft in other sectors, the high cost of fees from regulators, increasing cost of ramp and other services and a general volume problem along the local routes.

 

The only upside in all these, at this time; is to ensure that the lives lost is not in vain.

 

We can do this by taking the tough decisions needed to overhaul the regulatory framework and institutional capacity (especially the Aviation Ministry, NCAA, FAAN etc) to ensure that not only do these airlines maintain safety standards, we equally take steps to ensure that we make it financial viable for them to do so and this would prove the most unsettling part of the discourse.

 

The era of a privately owned airline in Nigeria , Africa is over! It is an unsustainable model that compromises the essential ingredient in air travels – safety. They are incapable of existing as silos. That may be a good starting point.

 

 

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