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Flying at a low altitude

Proshare

Wednesday, November 2, 2016 9:18 AM / FBNQuest Research

There has been a general slowdown in growth across all sectors of the economy, and the airline industry is no exception.

Based on the national accounts series for Q2 2016 released by the NBS, airline transport contracted by -2.6% y/y, and so considerably worse than the non–oil economy as a whole (-0.4%). The sector expanded by 2.2% y/y in the preceding quarter.

We are seeing again the slowdown in consumers’ purchasing power, which has resulted in squeezed household demand.

The country’s macroeconomic challenges are weighing heavily on domestic airline operators. Given the fx sourcing issues, the cost of importing jet fuel has surged and has had a negative impact on profit margins.

The fx illiquidity has made it difficult for airlines to secure imported spare parts. More than one foreign airline has withdrawn its service, and others have scaled down their operations due to delays in repatriating naira ticket sales.

In September, Aero Contractors indefinitely suspended its operations. In addition to operational challenges amid the economic downturn, local newswires report that the airline is indebted to AMCON and banks to the tune of N30bn.

However, Arik Air (another domestic airline) has recently announced plans to create new routes. The airline currently has 28 aircraft, and over the next ten years the number is expected to double. It has also announced plans for a private share placement and a possible IPO.



Last month the CBN resolved to intervene in the inter-bank FX market through its Special Secondary Market Intervention Sales (SMIS) in a bid to reduce the backlog of specific fx obligations, those of airlines included.

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