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‘Nigeria’s Market Cannot Support More Than Three Large Airlines’

19 Nov 2012

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Mr. Nick Fadugba 


Aviation expert and former Secretary-General of African Airlines Association (AFRAA), Mr. Nick Fadugba, has identified consolidation and an enabling operating environment as key factors that would ensure the success of Nigeria carriers. He spoke to Chinedu Eze. Excerpts:

The Federal Government has said that it would float a national carrier and also give a boost to domestic airlines by helping them to acquire new aircraft through long term, single digit loans. What is your reaction to this plan?


These are critical issues for the future of the Nigerian airline industry. My understanding is that the Government wishes to launch a new national carrier and then designate other airlines as ‘flag carriers.’ Nobody has explained to me yet what the difference is between a national carrier and a flag carrier? I would like somebody first of all to distinguish very clearly what the difference is between a national carrier and a flag carrier. And what will be the difference particularly in the allocation of route designations? If you say that a national carrier is a preferred carrier vis-a-vis the flag carriers, how would the route designations be allocated? How can the government be sure that each of these new entities will be successful? This is because, at the end of the day, the lifeblood of any airline comprises the routes it flies.


I should also respectfully sound a note of caution to the government because everywhere else around the world; in China, in Europe, in North America, airlines are consolidating. In America Delta took over North West, Air France bought KLM in Europe and British Airways merged with Iberia. There are more examples. For instance, in China the government prescribed four major airlines instead of the many they used to have.  The government decided that there should be only four major airlines…China Southern, China Northern, etc, for a population of over one billion people. So today around the world everybody is consolidating and the number of airlines is being reduced because it is a very tough business and it is very hard to survive. Airlines need a critical mass and economies of scale to survive. So I question the rationale for creating four more airlines in Nigeria.


I would like to see the business case for the government being involved in creating four more airlines. That would be in addition to Arik, Aero, Dana, First Nation Airways, IRS, and Overland, etc. So we will end up with around 10 airlines and, as big as the Nigerian market is, I do not believe that 10 airlines can succeed and all be commercially successful.  The way of the airline industry today is joint ventures, cooperation and consolidation. While I commend the government and the Minister of Aviation in particular for her infrastructure development projects at various airports in Nigeria, I believe more thought needs to be given to whether the government should create four more airlines. I believe we should be talking more about consolidation instead of creating several more airlines. It is likely that some of the existing airlines will not survive and one or two stronger ones will emerge.

In floating the national carrier, government intends to partner an international airline to run the new airline in a professional way. Does this sound idealistic?


Let me first of all say that there is no reason why Nigeria, as a nation, should not be able to run a successful national carrier without the help of a foreign airline - if not for the fact that we have proved incapable so far of running a successful national airline. All the ingredients for a successful national airline exist in Nigeria more than in any other African country. But, so far, we have failed as a nation to harness our potential. Hence, people are now saying we have to team up with a foreign airline.


That would not be necessary if Nigeria was able to come up with a sound business plan, competent management, adequate funding, the appropriate aircraft fleet, plus an enabling environment. There is no reason why Nigeria cannot do this by itself. It would then be in a stronger position to enter into a commercial agreement with a foreign airline partner on better terms.


If it is concluded that Nigeria, as a nation, is incapable of running a sound and profitable national airline on its own, then, of course, it could seek a foreign partner but it has to tread carefully.  We have tried it before with Virgin Nigeria which failed woefully. There were many competent aviation people in Nigeria who advised the government against the Virgin joint venture but the government of the day went ahead with the deal. That airline was not optimally structured in the interest of Nigeria. So it was actually structured to fail and this was pointed out before the airline was launched.


You can constructively criticise a government’s plan without being critical of government. When people in the past criticised the Virgin Atlantic joint venture with Nigeria it was out of a genuine concern for Nigeria and the Nigerian aviation industry. I felt that Nigeria as a nation was being short-changed by the Virgin Nigeria transaction. Those who voiced their concern were at the end of the day proved right. Therefore, I would not want to see Nigeria sign a deal with another foreign airline without due diligence and proper thought from the Nigerian perspective.


The government cannot do this alone and must consult with the Nigerian airline industry.  Nigeria cannot afford to keep making mistakes in the aviation industry. While I appreciate what the President Goodluck Jonathan Government is trying to achieve I would also sound a note of caution. We have gone down that path before and we have to ensure that this time we get it right.


Another area of concern is the level of financial exposure the government is committing itself to in respect of the aviation industry. The government very thoughtfully introduced the intervention fund for the airline industry. This was a very positive measure and I think it was well motivated on the part of government.  However, my concern today is that public funds have been loaned to airlines through the Central Bank of Nigeria, the Bank of Industry and AMCON and the level of exposure now is quite substantial.


The level of indebtedness of individual airlines to AMCON is becoming excessive and I have some reservations about whether some of the airlines involved are capable of refunding these debts in full. In fact, at least one of the airline beneficiaries of the intervention fund has now gone out of business.


In short, the intervention fund is a good idea but it has to be carefully implemented so as to ensure that the Central Bank of Nigeria and AMCON do not become over-exposed financially, especially as the government is now talking about creating a billion dollar guaranty fund to assist airlines to acquire modern aircraft. The new fund will create even further exposure for the government and therefore I want to sound another note of caution because there is a very real danger that if care is not taken, public funds could be jeopardised. Most Nigerian airlines are under-capitalised and heavily indebted and are finding it very difficult to service their current debts. We are now planning to create further indebtedness through an aircraft guarantee fund.


In principle, if the government sets up an aircraft guarantee fund it is a good idea, but given the state of our airlines today where many are not servicing their current debts on time, providing further financial assistance is potentially a minefield. It is therefore essential that the government carefully monitors the business performance of the airlines benefitting from these public funds.  It must ensure that the loans extended to the airlines are serviced promptly. If certain airlines that benefited from the intervention fund are severely behind in their loan repayments, what justification is there for the government to provide them with further financial assistance?


Some airlines say it is okay to owe debts. This is correct; airlines all round the world have debts because it is a capital intensive business. However, the critical thing is while airlines all over the world have debts, including in Nigeria, it is essential that all debts are serviced regularly and promptly. You cannot justify having large debts if you are not servicing them properly. You need capital to run an airline, but you must also pay your bills promptly. Some airlines in Nigeria are said not to be servicing their debts regularly and yet they are looking for more loans from public funds.


What are my conclusions? Nigeria today cannot support more than three large and strong airlines, plus several niche airlines. The niche airlines will be serving secondary routes etc. It is not every airline that needs to be a national airline; if you serve a niche market you can still make money. It all depends on your business plan.


So, I believe that at our current level of national development the Nigerian aviation industry cannot support more than three very strong airlines – airlines which are well-capitalised, well equipped with a large fleet of modern aircraft and which have sufficient routes to generate revenue. That is probably what the market can sustain at the moment. To create more than that will be over-taxing the industry and some of the airlines will not survive. So we don’t need to go down that route. What we need is two or three very strong and well-run airlines in Nigeria.

As I have mentioned, who is monitoring the financial and business performance of the airlines that have benefitted from public funds?
Some might say that the NCAA should do this but at the end of the day, the NCAA is a regulator. It is not a bank that can monitor the financial performance of airlines on a day-to-day basis. I believe that if the Federal Government of Nigeria is going to provide these huge funds to the airline industry then the Federal Government or the CBN should set up a mechanism or a body to monitor on a monthly basis the financial performance of the airlines that have received public funds. And at any sign that these airlines are unable to service the loans provided by the government or pay their bills promptly, then action must be taken.


At the moment many creditors both within and outside Nigeria are complaining that Nigerian airlines are not servicing their debts regularly and this is not acceptable. If the government now wants to set up a new fund to guarantee the acquisition of aircraft by Nigerian airlines this is a good idea. But, how this fund will be managed remains of great concern to me.


If the government is going to provide $1 billion or $500 million worth of guarantees for aircraft financing, who is going to negotiate these deals with the aircraft manufacturers and leasing companies? Is there anybody within government that can negotiate in terms of aircraft prices and contractual terms and conditions? We don’t have that competence within government. Only a few airlines in Nigeria have various degrees of skill in this complex area. But, if the government is going to lend public funds to airlines which will be secured by aircraft assets then the government should ensure that it is well up to speed on aircraft residual values and aircraft remarketing to minimise its exposure. This is because what the government is getting into now is aircraft asset based lending. And this is a very complex and potentially risky area in which even seasoned leasing companies around the world have lost money when they got it wrong.


In principle, all of our airlines in Nigeria should be given every possible support. However, there are legitimate concerns that the debt exposure of Nigerian airlines is very high and that the debts are not being serviced regularly and fully by the airline beneficiaries of the intervention fund. So to now talk about a $1 billion aircraft guarantee fund requires us to exercise caution.


The government needs to get aircraft finance experts whether foreign or local to really go through its proposed plan very, very carefully. The establishment of a Nigerian aircraft leasing company, with private sector involvement, should also be explored by the government.

How can government regulate and empower the airlines so that there would be only three major airlines with modern aircraft fleet that can meet passenger demand at affordable fares?


Most importantly of all, the Federal Government should create an enabling environment in which Nigerian airlines can grow and prosper. Improving the airport infrastructure across the country and the abolition of import duties on aircraft and aircraft spare parts were two welcome steps in the right direction by the Government. I would also recommend that the Government significantly raises the financial entry barrier to the airline industry and adopts a much more stringent approach to monitoring the financial performance of Nigerian airlines, so as to ensure that the airlines have sufficient funds to run their business, that their bills are paid on time, that corners are not cut and that safety is not jeopardised. However, I would not advocate that the Government should dictate the number of domestic airlines allowed in Nigeria. Instead, I would leave that to market forces.


Running an airline is not an easy job and I praise the many hardworking staff and managements at various Nigerian airlines over the years who have tried their very best to provide safe and reliable air transport services. Nonetheless, we need to carefully examine the reasons why so many airlines in Nigeria continue to fail financially. In many cases their business model is flawed and they are incredibly under-capitalised. It is hard for an airline to survive on cash-flow alone; hence it must have sufficient equity and working capital. If an airline has an unviable business plan, if it lacks the prerequisite financial resources, if the owners don’t heed the advice of aviation professionals, or if the management team lacks the critical skills needed to run a profitable airline, then the carrier is unlikely to succeed, no matter how many aircraft it has, or how young the aircraft are. That is a fact.


This brings me to the controversial question of aircraft age. Given the history of the Nigerian airline industry and the unfortunately high number of fatal aircraft accidents that have occurred, I personally believe that the maximum age of commercial aircraft allowed to be brought into the country by Nigerian airlines should not exceed 15 years. QUOTE I know this measure would be financially painful for several airlines in the country. I am aware that older aircraft are not necessarily unsafe, as long as they are maintained properly. I also know that operating young aircraft is no guaranty of safety if the right training and procedures are not adhered to. However, I believe the time has now come when we need to make a great leap forward in the Nigerian airline industry. We must now focus on younger and newer technology aircraft. The Government should insist on this.


Air travellers in Nigeria have been traumatised by the aircraft accidents during the past 10-15 years and by the tragic loss of lives. Rightly or wrongly, many Nigerians and others are afraid of flying within the country today and yet travelling by road is no guaranty of safety. So the time has come when we must boldly drive the Nigerian airline industry forward. The people of Nigeria deserve local airlines equipped with well-maintained, modern aircraft which provide safe, reliable, efficient and affordable service. We must take the fear out of flying in Nigeria so that passengers can have a pleasant flight and peace of mind.


Aircraft older than 15 years of age require increased maintenance, are less fuel efficient, incur higher costs and are less reliable than younger aircraft. In addition, the aircraft maintenance culture in Nigeria is not yet well-developed. So, in the interest of safety and efficiency, I believe that the Government should immediately mandate a ceiling of 15 years for all commercial aircraft operated by Nigerian airlines. Currently, the age limit is 22 years but this is too high. Airlines operating aircraft older than 15 years should be given a short grace period to modernise their fleet. The Government’s proposed aircraft guarantee fund could play an important role here, assisting local airlines to upgrade their aircraft.


Arik Air has set the pace and the airline’s Chairman, Sir Joseph Arumemi Ikhide, should be commended for this. Six years ago he was a new-comer to the airline business. But from day one he committed himself to setting new standards in the Nigerian airline industry, particularly with respect to the aircraft fleet, maintenance and safety. By investing so heavily in new aircraft and backing this up by partnering major international aircraft maintenance, repair and overhaul (MRO) provider, Lufthansa Technik, Arik Air has taken the Nigerian airline industry to a higher level. Of course, Arik Air still faces many daunting challenges and no other existing airline in Nigeria can match the financial resources of Arik. But Arik has shown the way forward and has also shown the importance of being well-capitalised in the airline business.


In addition to introducing younger commercial aircraft, the Nigerian aviation industry should place increased emphasis on regulatory oversight, aviation training, aircraft maintenance services, and airport and air navigation modernisation. As the industry grows we must ensure that the regulators are doing their job. Under the strong leadership of Dr. Harold Demuren, the Nigerian Civil Aviation Authority (NCAA) is playing a much more effective role in policing the aviation industry and in enhancing safety standards and this is most welcome. At the end of the day, an airline industry consists of three key parties, namely, the regulators, the airline operators and the service providers. It is essential that all three parties work closely together to ensure the safe and smooth running of the overall industry.


While the regulators and service providers are making good strides, Nigerian airline operators are faced with a major challenge due to their small market share. Today, it is a fact that 95 per cent of international traffic to and from Nigeria is carried by non-Nigerian airlines. It is a paradox that while Nigerian airlines are all struggling to survive, virtually every foreign airline flying to Nigeria is benefitting from high passenger and cargo load factors, high fare yields and impressive financial returns. This represents a major loss of business to Nigerian airlines and massive capital flight from the Nigerian economy. It is an untenable situation, but it will only be turned around when Nigerian airlines are big and strong enough to compete with the world’s best carriers.

Arik Air plans with Lufthansa Technik to establish MRO in Nigeria but Lufthansa said that this must need the cooperation of the Federal Government. What is your view about the planned project?


The Management of Arik Air made two wise decisions from the outset of the airline, namely, opting to acquire new aircraft and selecting a leading international MRO provider, Lufthansa Technik, as a partner. This signalled the airline’s intention to provide world-class services within Nigeria and beyond.


Arik Air and Lufthansa Technik have worked as partners for six years and are now exploring the possibility of jointly establishing an MRO facility in Lagos, Nigeria.  When it was founded, Arik Air bought the strategic landside and airside premises of Nigeria Airways, the former national airline, at Murtala Muhammed International Airport, Ikeja, Lagos, including the aircraft maintenance hangar. If the two parties are able to structure a win-win MRO joint venture this will also be to the benefit of the Nigerian aviation industry as a whole.  Given the risks involved, it is normal that a foreign partner such as Lufthansa Technik should seek some safeguards from both Arik Air and the Nigerian government before embarking upon such a large project. 


A modern MRO facility backed by a large Nigerian airline and a major international MRO provider will strengthen the Nigerian aviation industry, introduce new technologies, provide more jobs and training facilities as well as generate commercial revenue and profits if it is managed successfully. All in all, it is a good idea and I wish both partners well. I am confident that the government of Nigeria will provide this project with all the support it can.


West Africa is the only region in the continent today without a world class aircraft maintenance facility. North Africa has one; East Africa has one; Southern Africa has one, but West Africa and in particular Nigeria has none. Akwa Ibom State has built a modest MRO facility but so far has not been able to generate business in terms of aircraft passing through the facility. So something needs to be done now to improve this situation.


There is a need for sufficient skills and marketing know-how. Akwa Ibom may need to seek partners and needs to examine why it has not been able to attract airlines to its facility.  There must be a reason why. I assume there must have been a business plan before they started building it because you need to know which airlines will be bringing their aircraft to the facility from day one.


What happens is that before you build an MRO facility, you already get airlines committed to bringing their aircraft. Companies that build MRO facilities normally enter into commercial agreements with airline customers before they start building the facility. That is, if I am going to invest millions of dollars in building an MRO facility, I need to ensure that I have sufficient airlines bringing their aircraft through my facility. You cannot just build an MRO facility and then wait for customers to show up. It doesn’t work like that in this day and age. So for a successful MRO facility, it is a partnership between the facility and several airline customers.


Today, the airlines in Nigeria individually don’t have a sufficiently large fleet to justify a huge MRO facility on their own. That is why internationally an MRO facility will usually service the aircraft of many airlines. For example, Ethiopian Airlines MRO facility does not service the airline’s aircraft only. Nigeria needs a modern MRO facility. However, when people say we need several MRO facilities in Nigeria it worries me. This is because MRO facilities are capital intensive; they are expensive to construct; they are expensive to equip; they are expensive to run. And they can only survive if a sufficient number of aircraft pass through their hanger doors.


Airlines in Nigeria don’t have a sufficiently large fleet to justify many MROs and I believe that it would be difficult for two large MROs to survive commercially in Nigeria. Akwa Ibom State has one already, but for an MRO facility to really do very well it should be located in the heart of the action at a major airport such as Lagos or Abuja. Lagos has the largest number of aircraft both local and foreign operating there and is probably the best site for a large MRO facility.


This is not to say that the Akwa Ibom MRO facility cannot survive, because it can. For example, the facility there could specialise in certain aircraft types. If a major MRO facility were built in Lagos it could partner the facility in Akwa Ibom State in terms of work share. Some of the work could be sent to Akwa Ibom and vice versa for their mutual benefit.

The trend now is that Nigerians air buying private jets and I heard that Nigeria is the highest buyer of private jets in Africa; don’t you think that at the level of our economy that is outrageous expenses?


No, I disagree with you. The fact that Nigeria has become the largest market for private jets in Africa is a sign of the growth of the Nigerian economy. As long as the funds used to buy these corporate jets were obtained legitimately I have no problem with this new trend.


Corporate aircraft are business tools and in business time is money. In the main, these private jets in Nigeria have been acquired by corporations, banks, businessmen, by the Federal and state governments and, interestingly, also by churches. The desire for prestige may have influenced some of these private jet acquisitions. There is also the fact that the Nigerian airline industry today is not as reliable and efficient as it could and should be.


I believe that the growing number of private jets in Nigeria is a positive development because it shows that the Nigerian economy is growing and I predict that the number of business aircraft in Nigeria will grow even more in the years ahead. In the past, countries such as South Africa, Angola and Kenya led the field in terms of corporate aircraft in Africa.


In line with its growing fleet of private jets, I would suggest that Nigeria needs a large Fixed-Base Operator (FBO) to provide essential aeronautical services such as fueling, hangaring, parking, aircraft maintenance and pilot training to the owners and operators of these aircraft. Currently, a lot of private jets in Nigeria fly to Europe, South Africa or Kenya for maintenance services and training. But now there is a critical mass of business jets in Nigeria, there are opportunities for one or two service centres to be established to cater both to the aircraft in Nigeria, as well aircraft based in nearby African countries.


A vibrant FBO could be sited in Abuja because there is a sizeable government fleet of private aircraft based there, as well as a growing number of corporate jets flying to and from Abuja on business. This would complement the proposed modern MRO facility for commercial aircraft to be built in Lagos. The aviation industry in Nigeria then really would be taking off.


Everywhere around the world, business aircraft are indicators of economic growth and wealth. I know there have been a lot of comments in Nigeria, both positive and negative, on this new trend, but from an aviation and business perspective I believe that Nigeria becoming a major centre for business aircraft in Africa is a positive development, which could provide many more job opportunities.

Nick Fadugba

BioData 

Nick Fadugba is the CEO of African Aviation Services (AAS) which he established with the raison d’etre of promoting aviation development in Africa. Since 1988, he has provided a wide range of consultancy and advisory services to African and international airlines, as well as to aviation finance and aircraft leasing companies, the aviation insurance market, aviation suppliers and to some governments.


In December, 2003, the African Airlines Association (AFRAA) presented Fadugba with an Individual Achievement Award for his ‘Outstanding Contribution’ to the African Aviation Industry. He was elected as Secretary General of AFRAA in November, 2009, and later stepped down to return to his former position at AAS. He continues to work closely with AFRAA member airlines, the wider African aviation industry and leading international organisations.


  

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