Why Nigeria's airlines are struggling to survive

Arik Air was forced to temporarily shutdown operations on Tuesday due to insurance problems. 

(Photo by Ben King)

Nigeria's aviation sector is in dismal shape right now.

A recession, combined with a shortage of dollars, high costs and scarce fuel supplies have created the perfect storm for the industry.
 
One domestic airline went bust at the start of the month and another has halted services, citing problems getting hold of foreign currencies. Major international airlines -- including United Airlines and Spanish carrier Iberia -- have stopped operating in Nigeria altogether.

On top of it all, a temporary shutdown this week by the country's largest airline -- Arik Air -- set off alarm bells.

Arik Air has since resumed operations after Tuesday's shutdown, and Arik's chairman was quick to point out that it was not due to wider problems in the sector. But he admits that business conditions are tough.

Johnson Arumemi-Ikhide, chairman of Arik Group, told CNNMoney that the shutdown, which left hundreds of passengers stranded, came after the airline's insurance expired.

The company had to scramble to get chartered planes for its passengers on Tuesday, and then scheduled additional flights on Wednesday to get operations back to normal.

Arumemi-Ikhide dismissed reports that the company was experiencing financial difficulties.

"Arik is profitable. It's not as profitable as the hard work we put in, but we made around $6 million to $7 million [last year]. When you look at our assets, cash and everything, we are positive. The issue of bankruptcy doesn't come to mind at all."

But Arumemi-Ikhide said Nigeria's capital controls, which restrict the flow of U.S. dollars within the country, hurts airlines. Essentially, some sectors have easier, cheaper access to dollars than the airlines. This has forced Arik to buy dollars through unofficial channels at a higher exchange rate.

In June, under pressure from low oil prices that have slammed Nigeria's export revenues, the central bank devalued the naira.

That in turn led to a further drop in the flow of U.S. dollars into the country as investors feared instability.

The currency crisis isn't the only problem. Profits in the notoriously tough airline industry are "thin" partly due to expensive fuel prices and scarce supplies, said Arumemi-Ikhide.

Additionally, poor infrastructure is an issue: Many runways are in bad repair, and it can be difficult for passengers to reach airports in the evenings.

"There's a need for the government to address some of the issues if they want the industry to survive," he said. "All the airlines are struggling."

Nonetheless, Arumemi-Ikhide said his company had a strong line of credit and was on track for an initial public offering in 15 months.

(Stephanie Busari - CNN Money)