BEHIND THE FIGURES By Ijeoma Nwogwugwu
Between 2000 and 2001, the director general of the Bureau of Public Enterprises, the agency charged with the reform and privatisation/commercialisation of public enterprises, Nasir el-Rufai, was engaged in a war of attrition with the aviation minister at the time, Dr. Kema Chikwe. Their dispute arose from the attempt to privatise Nigeria Airways Limited and the strategy adopted by the bureau for its sale to private interests.
The fight between the parties got so ill-tempered that the president at the time, Olusegun Obasanjo, was compelled to intercede and ordered el-Rufai to tender an apology to Chikwe for some comments he had made against her for frustrating the privatisation of the airline. In the final analysis, Nigeria Airways was never sold, was underfunded, debt ridden, and unable to compete with emerging competitors on the domestic, regional and international routes, leading to its eventual liquidation by the same agency (BPE) that had tried to salvage it.
That incident should have served as a lesson to public sector officials resistant to reforms and want to hold on to enterprises that they mismanage and keep bleeding dry. But we never seem to learn from the lessons of the past. Today, another public enterprise – NITEL – is facing liquidation for pretty similar reasons that led to the demise of Nigeria Airways.
From the carcass of Nigeria Airways, Arik Air emerged. Its chairman, Joseph Arumemi-Johnson, started out by acquiring some of the Lagos-based assets belonging to the defunct airline through the liquidation process. Also leveraging on the gap caused by the absence of a flag carrier, he embarked on an aggressive shopping spree acquiring long, medium and short range aircraft. Arik, today, is by far Nigeria’s largest airline. It boasts a young fleet (by industry standards) of 23 aircraft for domestic, regional and international flights, employs some 5,000 people and possibly double this number indirectly.
But despite its aggressive growth, its flight path has been anything but smooth. Arik has encountered the same challenges that have emasculated several airlines worldwide, leading either to their bankruptcy or acquisition by larger airlines. High energy costs resulting from soaring oil prices, massive debts, poor management and cost structures; and in Arik’s case, high interest rates, undefined government policies, and the absence of an anti-trust and competition law, have all combined to undermine the capacity of the airline to remain afloat under the harsh operating environment.
It is not only Arik that has lurched precipitously through the turbulent aviation sector. Other local airlines such as Air Nigeria, Aero Contractors, IRS and Dana Air are not significantly better off. What has set them apart is that while Arik has anchored its business strategy on competing on domestic, regional and international routes, the others, save for Air Nigeria, which plans to recommence international flights on the London and Johannesburg routes anytime soon, have limited their operations to domestic and regional flights within Nigeria and the West African sub-region.
In spite of the odds stacked heavily against Arik, the airline still has the capacity to survive, if only its owner(s) can adopt and stick to a clear-cut strategy to restructure and reinvent the business along strictly commercial lines that are devoid of sentiments. As a first step, Arik would have to restructure its bank debts which have been taken over by the Asset Management Company of Nigeria. The goal is to provide the airline with some breathing space that will enable it repay its debts over a long period at a single-digit interest rate and will still leave it with a revenue stream to fund its operations and meet other obligations.
The second step is for the airline to enter into a technical services agreement with an airline that will put in place a management team and provide technical support to run the airline. As it stands, the last thing Arumemi-Johnson wants is to see the airline that he built from scratch grounded. If his aim is to grow an institution that can stand the test of time and would outlast him, he would have to break away from the owner-manager trap that has destroyed so many Nigerian businesses and consider the option of bringing in competent professionals to manage Arik. If he must continue to play a role, he can continue to preside over Arik as its chairman, but in a non-executive capacity.
Fortunately for Arik, as the largest carrier in the country, it is best-positioned to lobby the authorities to stop international airlines from airlifting passengers on the domestic route. A situation where certain airlines such as Air France are allowed to land in Lagos, fly to Port Harcourt to lift Paris-bound passengers, and then return to Lagos before departing for Charles de Gaulle Airport in Paris, must be stopped. If Air France is desirous of lifting passengers from other parts of the country other than Lagos, Arik and other local airlines should be encouraged and supported to enter codeshare agreements with the airline and other foreign airlines for this purpose.
Nigeria is possibly one of the few countries in the world that permits foreign airlines to fly on its domestic routes to airlift international-bound passengers, thereby depriving local carriers and the airports from additional revenue. In any case, any foreign airline that wants additional frequencies in and out of Nigeria should be compelled to fly directly to and from the cities of its choice, not via other cities in the country.
But whilst the adoption of one or all these suggestions might give Arik some measure of relief, its biggest challenge remains its long-haul flights. As any aviation expert would attest, keeping a long-range, fuel guzzling aircraft airborne and profitable is one of the most difficult tasks in the industry. Several airlines worldwide that have transited from low-cost, no frills domestic and regional carriers to international carriers have found it extremely difficult to compete against bigger airlines. Such airlines have either been forced to wind up or scale down their international operations.
Fortuitously, the current face off between the Nigerian government and British airlines over the high cost of airfares presents Arik an opening to take advantage of the situation. It can partly achieve this by getting over its obsession with flying from Abuja to London Heathrow Airport, where exorbitant landing slots, coupled with other operational costs, have made its flight on that frequency unsustainable. As a fall back option, Arik could operate from Abuja to London Gatwick Airport, which would enable it device an aggressive marketing strategy that is premised on cheaper airfares capable of luring passengers from British Airways and Virgin Atlantic.
Lest the owner(s) of Arik forget, up till less than a decade ago, British Airways was airlifting passengers from Lagos directly to the Gatwick Airport profitably. It was not until the turn of the century that British Airways first started flying passengers from Lagos into Heathrow Terminal 4 and later Terminal 5 when the new terminal was opened to flight operations in 2008. Essentially, the ploy is for Arik to evolve a competitive fare package that will make it more attractive for Nigerians to fly to Gatwick instead of Heathrow. Not only will this give the dominant British carriers a run for their money, it will assist the aviation ministry achieve its objective of lowering airfares between Lagos/Abuja and London.
That British Airways and Virgin have successfully colluded to charge exorbitant fares on the Lagos/Abuja-London routes is because there has been no serious competition to compel them to reduce their airfares. The government can also throw its weight behind Arik (and Air Nigeria) by encouraging its departments and agencies to patronise Nigerian carriers, as a first choice, on international destinations. Indeed, the best way to force down prices is not by government fiat and threats that are certain to deter investors, but by creating the right environment for local airlines – in this case, Arik and Air Nigeria - to compete against the British carriers.
As a reminder, this exact scenario played out in 2001 to 2003 when MTN, Econet and M-Tel started telecom operations but refused to introduce per second billing in the country. It took for the emergence of Globacom to force them to transit to per second billing, which resulted in lower telecom tariffs for subscribers. Similarly, the entrance of Bharti Airtel into the telecoms market less than two years ago led to a cut throat price war for market share, which again resulted in lower tariffs to the benefit of consumers.
A final but medium to long-term option for Arik is for its owner(s) to sell down their interest in the business. Through a combination of a core investor sale and initial public offering on the local bourse, Arik will be able to raise cheap capital to pay down its debts, inject fresh funds into the business, and expand its operations to yet-to-be exploited destinations. As it is often said, it is better to own a lower stake in a profitable going concern than 100 per cent of an unprofitable, debt-ridden one that is likely to keep its owners awake at night and could cost them the shirts on their backs.