Arik was ‘technically insolvent’ before AMCON intervention

BY TOMI OLAWEPO

Arik Air is in the news again; this time, it appears that the ongoing dispute between the initial owner, Johnson Arumemi-Ikhide, and the Asset Management Company of Nigeria (AMCON) is finding fresh fire. For any unsuspecting Nigeria, it is the usual AMCON vs older owner battle for the life of any company of national interest, but if you look closer, you can be sure there is more. 

For nearly a decade, Arik Air was the eagle of the Nigerian airway and the most dominant airline in the West African sub-region. The airline could boast 17 aircraft crisscrossing Lagos, Abuja, Kano, Accra, Dakar, London and many cities of interest to Nigeria. It laid claim to the aero-pride of the nation. So where did it all go wrong? Before or after AMCON? What should we believe in the press? Many questions with few answers. 

During the Goodluck Jonathan administration, Arumemi-Ikhide, who founded the airline, enjoyed numerous government benefits and protection. To any observer of the space, those benefits were on two counts: the friendship between the president and Arumemi-Ikhide himself and Arik’s service to the Nigerian people as the biggest airline in the country. 

If you recall, in 2013, Arumemi-Ikhide was commended by President Goodluck Jonathan for his service to Nigeria. At about the same time, Arik embarked on some sort of expansion, with the promise to explore some popular routes. Less than two years after this, Arik was at risk of going under. At this point, many outsiders began to wonder what had happened to once-upon-a-great-airline. 

However, many players within the industry knew exactly what had happened to Arik. According to multiple industry players, Arik was at the mercy of the mismanagement of its leaders. While Arumemi-Ikhide was arguing that Arik and other surviving airlines in Nigeria were doing the nation a service by its continued operations, others were asserting that the airline was only coming back to reality, after being shielded from the reality of the market by aid from the Jonathan government. 

Nearly a decade down the line, the controversy is still on and the most recent conversations are around who was responsible for the airline’s near-death experience. AMCON and its receiver manager claim that Arik was already insolvent as early as 2015, but Arumemi-Ikhide claims his company was fine before AMCON came on board.

WHAT DOES THE FACT SAY?

Since AMCON and Old Arik have got to a point where it’s “your word against mine”, I took the liberty to look into the books and the financial records to see who exactly has the facts on their side. 

Before AMCON took over in 2017, PwC was in charge of Arik’s financial audit. When AMCON came on board, there were plans to hire another big four, KPMG to audit the account. While the audit went on as planned, it made sense for PwC who had handled the airline’s account for years to maintain the records. Since then, PwC has published annual financial statements on the airline, with the results from 2015 to 2019 publicly available for anyone willing to scrutinise the books. 

A candid scrutiny of the books revealed the following: Arik was already insolvent as early as 2015. Let me break it down: In 2015, Arik’s total revenue or income for the year was N61.789 billion, while its expenses stood at N88.376 billion. Even a layman understands that this means Arik spent more money than it made in that year. Precisely, Arik spent approximately N26.59 billion more than it made in 2015.

Of course, there are lots of businesses around the world that spend more than they make but are not declared insolvent. What was peculiar about this case, was that the company already had N145.58 billion in debt at the time and a finance cost of N24.18 billion. Arik did not have any free penny to meet critical obligations. 

For the records, a company is considered insolvent when it is unable to meet its financial obligations or pay its debts as they become due. As early as 2015, Arik already fit the picture. The airline had taken loans from Union Bank, Keystone Bank, and Afriexim Bank. Beyond the loans, the airline also owed Lufthansa, Euro Control, Export Development of Canada, and ASECNA, in leases and other costs. The airline was exposed to foreign exchange debt, which has continued to increase as the naira depreciates. 

Since AMCON took over and appointed receiver managers, the airline’s new management has reduced expenses, kept revenue steady despite the odds, and reduced losses from as high as N45.5 billion in 2015 to N15.10 billion in 2018. 

WILL THE AIRLINE SURVIVE?

Going by the numbers in the financial statements for the five years reviewed, the answer should be an outright no. However, with AMCON on your side with the weight of Nigeria’s federal government, a lot more is possible. For the airline to have survived this long is some sort of miracle. 

Arik needs capital to stand a chance at survival, and some form of moratorium from its lenders. For that to happen, the company’s shareholders have to be willing to restructure the company. Johnson Arumemi-Ikhide and Mary Arumemi-Ikhide are holding a combined 95% of the airline, which means AMCON needs them to be able to restructure the airline. Failure to do so means Arik may not survive its ongoing debt crisis.

The verdict is obvious; the Arumemi-Ikhides agree to restructure the airline or they watch their creditors sell off the company’s assets and distribute the proceeds among Arik’s creditors. 

Arik is definitely between a rock and a hard place.