Nigeria Launches a New National Carrier –Hit or Miss?

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Thursday, August 02, 2018 /08:55 AM / FDC

 

Background 

15 years after the liquidation of Nigeria Airways, the FGN formally initiated plans to float another national carrier at the end of Q4’18. The launch of the national carrier, which is expected to be private sector driven, is one of the current administration’s major interventions in the aviation industry. This initiative is projected to boost Nigeria’s African footprint, as well as create job opportunities in the sector. 

The proposed airline is anticipated to ply 81 routes and will require as much as $300 million seed capital. To this effect, the Infrastructure Concession Regulatory Commission (ICRC) issued a conditional Certificate of Compliance along with the Outline Business Case (OBC). The 12-month certificate will enable the government commence a competitive bidding process for strategic investors to cater for seed capital, operation and management of the national carrier.

 

Lessons from Other National Carriers 

Most national carriers have been performing sub optimally, both in revenue terms and average seat per kilometer. The industry has been plagued by losses, squeezed margins, high costs of fuel and security since the 9/11 terror at-tack. A number of key national carriers, such as British Airways, have had to be privatized to mitigate financial haemorrhage. Other national carriers, like Swissair (Switzerland’s national carrier) filed for bankruptcy in 2002; Sabena (Belgium’s national carrier), filed in 2001 after numerous years of unprofitability. 

Particularly in Africa, uninformed interference has widely undermined the success of most national carriers, as very few of these airlines have been able to fully breakaway from government intervention and conflict of interest. 

With the exception of Ethiopian Airlines, national carriers in Africa have been generally unprofitable. Rwanda Air has declared annual losses since its inception in 2002; South African Airways has also experienced financial turbulence of recent, as the African Giant is in search of institutional investors to inject additional capital into the ailing airline; and Kenyan Airways has continued to reduce its fleet of aircrafts to narrow its operational losses.


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Ethiopian Airline’s success over the years hinged on aggressive expansion strategy. The airline operated a national carrier devoid of government interference and control despite being 100% owned by the Ethiopian government. In addition, the airline enjoys income streams from its maintenance, repair and overhaul (MRO), which serves numerous airlines in Africa.

 

Times have Changed 

In view of the shifting competitive environment and the traction free trade is gaining, operating a national carrier has limited upsides. The popularity of trade policies such as the open skies agreement and the African Continental Free Trade Agreement (ACFTA) has led to the unattractiveness of operating a national carrier.

Hitherto, most trade agreements were bilateral. This resulted to the need for a flag carrier to facilitate the movement of people and goods between bilateral partners. However, since the emergence of multilateral trade and less protectionism, national carriers have had to compete internationally based on internal efficiencies and superior customer service delivery.

The history of FGN’s participation in the aviation industry proves that Nigeria is at a competitive disadvantage. This is in light of its economic woes with Nigeria Airways, plagued by misappropriation and conflict of interests. Subsequent efforts to revive the national carrier through collaboration with Virgin Group also fell through due to political intrusion. This affirms that Nigeria is unequipped to successfully compete in the global market.

 

Is the Proposed National Carrier a Priority? 

Air transport is a major facilitator of international trade being the preferred and fastest point-to-point transport medium across national borders. In Nigeria, the aviation sector contributes only 0.10%2 to GDP, but the sector remains a key catalyst of economic growth and development. Despite the absence of a national carrier, 13.39 million passengers and 162 million kilogram of freight travelled to, from and within Nigeria in 2017. More than 39,000 inter-national flights departed Nigeria, while another 175,000 flights operated domestically. Comparison with air activities before the cessation of Nigeria Airways established that the industry achieved significant strides without a na-tional carrier. The most impressive is the 87% growth in passenger traffic from 7.16 million passengers in 2003.

 

Recommendations 

Focus on Infrastructure Injections 

Remarkable breakthroughs can be recorded in cost and quality despite the limited economic resources at the disposal of the government. The priority of the government should centre on the concessioning of the busiest airports. This can be achieved with little or no cost to the government.

There is also the need to address technical issues in the air transport value chain to jumpstart growth in the aviation sector. These issues revolve around local aircraft MRO, as well as airport handling services and flight simulation centres. Tackling these infrastructural deficiencies will reduce airlines operation cost, as well as the attractiveness of the industry. Consequently, key industry stake-holders will move to complement government’s intervention, creating a much more viable and sustainable framework for potential growth. Hence, the key to success is the full independence of airline operations from government’s management and control.

 

Need for Extensive Stakeholder Engagement 

Extensive stakeholder engagement is an essential frame-work that needs to be incorporated in the regulatory mechanism for decision making. This will mitigate error rates as a result of goal incongruence and increasing conflict of interest. 

Essentially, private stakeholder engagement will facilitate the much needed capital injection, as well as the technical aptitude to efficiently deliver value in the aviation value chain. However, the onus is on the aviation public administrators to align the interest of institutional investors (RoI) and the FGN (social interest) in order to ride on the gains of globalization and international trade.

However, more pertinent issues stalling accelerated growth in the aviation industry is the wide infrastructure gap estimated at $30bn by aviation industry experts. Top on the list is the concessioning of the four major airports (Lagos, Abuja, Kano and Port Harcourt). This will ease the heavy burden on the government’s budget and incorporate the much needed efficiency into airport management. The involvement of the private sector will boost investment, which will trickle down to other infrastructural deficits in the aviation value chain. 

The absence of an MRO facility in Nigeria has cost local airlines over $500 million in capital flight. This has weighed in considerably on their costs, as well as the attractiveness of the industry. These constraints have left the industry unattractive to foreign and institutional investors. Consequently, investment in MRO facilities will ease FX denominated leakages and boost FX earning, especially from patronage of West African countries. 

Moreover, the utilization of tax payers’ funds to finance an unprofitable venture will show a high level of inefficiency. The opportunity cost of the $300 mil-lion seed capital for an airline for the elites is socially ineffective. The impact of a $300 million injection will have had greater social impact in key sectors, such as healthcare and power.

 
Proshare Nigeria Pvt. Ltd.

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