Strange Shindig in Nigeria's Aviation Sector

11 Oct 2013

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Stella Oduah, Aviation Minister

Simon Tumba

Recent developments in Nigeria's aviation sector give cause for concern to decent and independent minded observers of the sector. Although the media is awash with 'achievements' by government officials in the sector, keen observers in the sector know that there's more to this than meets the eyes.

Over the last three years there have been issues between government and concessionaires with nearly all the major ones ending in litigations, while different parties lay claims of either disobeying or obeying series of court orders. The roforofo fight has become so embarrassing, unfortunately nobody seems to care.

Currently there are three major concessions in dispute, all associated with the Federal Airports Authority of Nigeria Federal Airport Authority of Nigeria (FAAN); Bi-courtney Aviation, Maevis and AIC Hotels ltd. The drama related to these has become an albatross for this promising but unfortunately dying sector, and a very bad signal to any serious investor in the sector.

Some important questions: How come that Nigeria, Africa's second largest economy boasting of the largest indigenous travelling public in the continent does not have a functional user- friendly international airport or a leading carrier connecting its nationals to major world capitals? Why are policies enunciated for the benefits of personal motives not the long term benefits of the sector?
How come that a Nigerian, Adebayo Ogunlesi, who owns the second largest airport in the UK (Gatwick Airport) and the London City Airport (part ownership) has not been invited by the government to invest in the sector nor has he even expressed any public desire to invest toward making our airports of high  international standards? What is wrong with Nigeria's aviation sector?

While the world over governments are divesting from private enterprise and concentrating on social amenities, the opposite is the case in Nigeria. Why would government be building airports, or setting up a national carrier in this era, when our hospitals, schools and roads are in need of serious attention?
The dearth of capital is so dire that even roads and railways are being developed under a PPP!  And recently Nigeria's power sector was privatized. Ironically there's money to spend in renovating airports or building new terminals, or investing in a national carrier.

What prompted this piece are two basic issues, which government has no business in getting involved with: national carrier and airport development.

While this strange shindig goes on, the government is at the threshold of floating a national carrier this October. Why? It claims that local carriers are undercapitalised, that they want Nigeria to play in the big stage, and Nigerian carriers are not competitive, while a chunk of foreign exchange is drifting away through capital flight as a result of repatriation of funds by foreign carriers.

Although these points are valid (and the government is to be blamed for most of these lapses), is setting up a national carrier the answer?

A recent study by International Air Transport Association (IATA) on the global airline industry said there's low expectation of slow returns on airline investments. It reveals that the global airline industry generated over $12,000 billion dollars in revenue during the last 40 years.

Of this amount generated during the period only about $19 billion accrued as net post-tax profits revealing a margin of about 0.1 per cent profitability.  In essence airlines in all regions of the world when compared to other industries failed to generate a return on invested capital equal to the weighted average cost of capital.
The Vision 2050 Report disclosed that there is about $500 billion in investors’ capital tied up in the airline industry. The Report said: “In normal industry, those investors would expect to earn at least the industry’s average cost of equity and debt capital, which is essentially the next best return that the capital could earn elsewhere.”

According to the report, for the maritime industry, this cost averages 7-8 per cent, which implies that airline industry should generate a minimum of $40 billion in annual returns to keep capital invested in the industry. In other words, IATA Report disclosed that returns in the airline industry are sufficient only to pay bills, renew aircraft fleet and service debts.

Hence investors in airlines during the period under consideration have seen their capital earn over $20 billion a year less than it would have earned had the money been invested elsewhere. In 2007 for example, the report disclosed that over $9 billion of investor value in airline was destroyed. This report covers the mega carriers with the major global alliances, who were once government-owned enterprises.
When the European Commission began blocking state aids to these airlines, they had to be privatized, and now they are more efficient and profitable. Classical examples are KLM, and Air France. A more recent IATA outlook for 2013 says out of projected revenue of $708 billion only $11 billion will be realised by the global airlines as profit; this represent a mere 3 per cent of return of investments.

With this scenario in mind what magic wand does Stella Oduah, the Minister of Aviation and her team have to change the airline industry with a government-owned carrier? Every decent airline observer knows that the business attracts very thin margins.
It's far worse in Nigeria with the topsy-turvy government policies we have, especially when a new minister comes on board. Is there any government-owned commercial enterprise in Nigeria that is breaking even today, talk less of making profit? What makes the national airline status tick? Nothing! Why the rush to set up a 'national carrier'? Why did the Euro carriers decline the offer for the project?

I know the idea of a Public Private Partnership (PPP) had been muted on this project, but for crying out loud, show us one PPP venture in this sector that is running successfully under more than two or three ministers? We don't have the discipline, maturity, structure and patience to make it work. The corrupt system wouldn't allow it to work either.

Government should rather strengthen domestic carriers through investor friendly policies, force foreign airlines interested in flying into more than one or two points of entry to partner with local airlines, reduce bureaucracy of importing aircraft and spares, assist local carriers to access cheap funds and encourage airlines to merge.
These will help airlines have the critical mass to be profitable and be more efficient. Airline managers need to be more professional, conservative and smart in managing their resources. It's tough to run an airline, it not a tea party.

On the issue of our airports, despite the much publicised renovation, the quality and vision behind the project is a sad commentary. Yes it may be better or will hopefully be better than what it was (forget about the bad quality of the job and the fact that we have the wrong tiles), but we have the potential and the capacity to do more.

The status of Nigeria, with the annual traffic generated should look beyond this size and start building a $1billion or $2billion mega airport, an architectural masterpiece that can serve generations, not an under-capacity structure that will be begging for another upgrade or renovation in less than five years.

Some airports take over 15 years to build. A progressive plan and strategy can be agreed on the basis of target traffic over a period of 10-20 years, starting with one terminal and ending with four or five terminals, with the mind of making Lagos a hub.
The idea is to brainstorm with key stakeholders and get globally rated airport designers to pitch for a new airport structure in a transparent manner. Often our planners in Nigeria are far too short-sighted when it comes to mega structures like airports.

Governments have no business building or running airports, we have failed before, and we shall fail again, for very obvious reasons: like corruption and lack of vision. For now the minister should lay off her national carrier project, allow private enterprise to take over the airports in a transparent transaction and concentrate on enunciating standard policies that meets the aspirations of genuine stakeholders, not some jobless clowns who claim to be aviation experts

The ministry of aviation is becoming bigger in the scheme of things and this must be redressed. In most countries the regulatory body runs the industry - Federal Aviation Administration (FAA) in USA, Civil Aviation Authority (CAA) in the UK, Ghana Civil Aviation Authority in Ghana, etc. unfortunately the ministry appears to be taking over the powers of the NCAA in Nigeria.
This must stop; otherwise the industry will revert to the old era of constant incidence.
Policy makers must be separated from the regulators. Nigeria's aviation potential is arguably the best in the continent, but we need the right people with the right policies and character to make this happen.

* Tumba, CEO of SY&T Communications Ltd, writes from Lagos

Tags: Aviation Sector, Business, Featured, Nigeria

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