The CEO of African Aviation Services Limited and former Director General, African Airlines Association (AFRAA), Nick Fadugba said that for Nigerian airlines to survive, operate profitably, they must engage in partnership and cooperation. Fadugba who spoke to Chinedu Eze at the African Aviation Summit in Addis Ababa, Ethiopia last week, said the aviation regulatory environment in Nigeria is not stable. Excerpts:
Nigeria has every opportunity to become a major aviation hub in Africa but it seems to have frittered away those chances. What do you think is the solution to the failure to establish viable airlines in the country?
Ideally, in 2004, the Government of Nigeria should have privatised the loss-making national carrier, Nigeria Airways, rather than liquidate it. The Government of Kenya followed this strategy and Kenya Airways is now one of the leading airlines in Africa. Running a successful airline is a very difficult job. You need deep pockets, a viable business plan, competent management and an enabling regulatory and economic environment to run a profitable airline anywhere in the world. Many Nigerian airlines today are disadvantaged from the outset, in terms of their aircraft fleet size and commercial viability and the operating environment. Captain Nogie Meggison, Chairman, Airline Operators of Nigeria (AON), told the African Aviation Summit 2014 and 23rd Air Finance for Africa Conference and Exhibition in Addis today that the AON has 26 airline members and their average fleet size is around three aircraft. Now compare this to Ethiopian Airlines which currently operates 50 aircraft to 81 destinations across five continents with over 200 daily flights, with no real domestic competition.Government-owned Ethiopian Airlines has a turnover of over US$2 billion and a net profit exceeding US$200 million. What I am saying is that in today’s world for airlines to survive and prosper they need a critical mass of aircraft and air traffic and an optimal route network. If you look at Arik Air, to its credit, it has most of the ingredients to be effective and efficient. It has the largest airline fleet in Nigeria, with over 20 modern aircraft, the largest route network and almost certainly the largest revenue turnover. Will it capitalise on its leading position in the Nigerian airline market?
So the size and scale of an airline’s operations are important. It is very hard to compete against bigger African and international airlines with just a handful of aircraft. During this conference we also heard from several bankers who said it was difficult for them to finance small and weak airlines in Africa which lack a business track record.
I believe the message for Nigeria, especially if we take Ethiopia, Kenya, Egypt and South Africa as examples, is that airlines need a reasonably-sized fleet to be able to compete effectively.On the other hand, all airlines must start somewhere. Smaller airlines can succeed if they keep very tight control of their revenues and costs, or focus on uncrowded niche markets. According to Captain Meggison, AON has 26 members. In my view, many of these airlines are competing on the same routes in Nigeria and hence it will be difficult for all of them to operate profitably.
I would like to see airlines in Nigeria enter into mutually beneficial partnerships and joint ventures with each other which would enable them to become more efficient and profitable. In fact, the AON should be championing this cause. All the airlines in Nigeria are owned by shrewd business people who, in addition to wishing to provide safe and efficient air services, also wish to make a decent return on their significant investment. Combining forces could help achieve these two objectives. I would like the airline owners, at least, those that are willing, to sit in a room, lock the door, and ask themselves: ‘How can we work together?’
If two or three, or more, Nigerian airlines joined forces they would have a larger fleet size and combined resources and would become more bankable and more formidable. I believe sincerely that Nigeria has all the ingredients for a successful airline industry but many of the players are too small, weak and undercapitalised to take advantage of the market opportunities. It is not a good thing for Nigeria that its airlines, according to Captain Meggison, carry only three per cent of the international air traffic to and from Nigeria. There is no other country in the world that would allow such a situation, apart from those with no airline industry and no sizeable air traffic market.You can imagine what Kenya, Egypt, Ethiopia and South Africa, etc, think of Nigeria. They believe this is a joke. They would never allow it themselves. They can never understand why this is the case in Nigeria, of all places.In the aviation industry worldwide, nobody understands it. How a country can have such a vibrant air transport market and yet its own airlines don’t benefit from it. Every airline that flies to Nigeria makesgood money, apart from Nigerian airlines. It is a paradox. So we need a solution. I believe our airlines need to achieve a critical mass so as to benefit from economies of scale. I believe Nigerian airlines should come together and work together for the common good, no matter how difficult this may seem in the early stages.
In the past, I have heard some airlines in Nigeria say that it would be difficult for them to work together, as they have different owners and philosophies, and they are competitors. I agree that at the moment it would be too optimistic to envisage equity swaps among the airlines. But let me offer some initial suggestions, based on what is already happening in the wider world. Nigerian airlines all need to train pilots, engineers, cabin crews and administration staff, so why don’t they purchase these training needs jointly. Airline A may need to train 10 pilots and Airline B 15 pilots. Joint purchasing through the same training school would help reduce their individual training costs through group discounts. Similarly, several airlines in Nigeria operate the same aircraft and engines. By forming aircraft spare parts pools and engine pools they could achieve significant cost savings as well as greater operational efficiency. The same approach could be applied to in-flight catering, reducing costs through joint purchasing. Of course, each airline would have to ensure that it met its payment obligations on time, otherwise such schemes would rapidly fail. Through such cost-saving arrangements, Nigerian airlines could maintain their individual identities, whilst working closely together.
Even when it comes to negotiating with aircraft and engine leasing companies, airlines planning to acquire similar equipment could work together to obtain better pricing. Two or three airlines negotiating together for a larger pool of aircraft are likely to obtain a better lease rate than one airline negotiating on its own for one or two aircraft. Why can’t Nigerian airlines code-share with each other? Passengers would surely benefit.
We were talking about liberalisation, Nigerian’s type of liberalisation is not based on principle or policies; it is based on compromise by government officials. What will government do to limit these frequencies and to empower the domestic airlines?
I posed a question to Captain NogieMeggison of Airline Operators of Nigeria during the African Aviation Summit 2014 held in Addis Ababa. I asked him to list in order of priority the three most serious factors which are holding the Nigerian airline industry back. Whether it is the stiff competition from foreign airlines; an unconducive aviation regulatory environment in Nigeria; or whether the problem rested primarily with Nigerian airlines in terms of their business strategies which have prevented them from competing effectively? These are the three key areasI believe deserve attention. Dr Harold Demuren, the former Director General, Nigerian Civil Aviation Authority (NCAA), who participated in the conference, was very clever and said it is a combination of all of these three factors. First, over the years air traffic rights have been generously granted to foreign airlines by successive Nigerian Governments, seemingly at the expense of Nigerian airlines. The negotiation of bilateral air service agreements appears to have been lopsided and the negotiators for Nigeria have often not obtained the best deals possible. Always remember, in business and in life generally, you get what you negotiate. So, Nigeria needs knowledgeable and strong aviation negotiators at the Government level.
Second, it is clear to experienced aviators that most airlines in Nigeria have been unable to take advantage of the opportunities to launch substantial air services within Africa and further afield because they lack the necessary financial and management resources. Some have had to quickly drop their few international routes because they were loss-making and the external competition was too tough.
Third, the aviation regulatory environment in Nigeria is not stable and this inhibits sound business planning on the part of the airlines. With virtually every change of Government or Minister of Aviation the rules keep shifting. It is like playing a game of football in which the referee keeps changing the rules. How can you move forward? It is an impossible situation. Aviation is a long-term business and is capital intensive. A stable regulatory environmentis required to ensure progress. Government leadership and especially Ministers of Aviation in Nigeria should avoid the temptation of having personal vested interests in aviation projects; or having certain airlines which they favour and other carriers which they try to undermine. These practices have been the bane of the Nigerian aviation industry; and Nigeria as a whole has suffered the consequences. I have no doubt that the current Government is committed to aviation development in Nigeria. In this regard, I would strongly recommend that the Government ensures that all aviation decisions are based firmly on national interest, rather than personal interest. The Government should be commended for waiving taxes on imported aircraft spare parts and, working closely with the Nigerian aviation industry, it should explore further areas of possible assistance, so as to remove barriers to growth.
In short, the airlines are trying their best to succeed, but the regulatory and economic environment in which they operate is quite tough. I always admire them for theirherculean efforts, but believe they could be more successful by forming partnerships and joint venture. This is my view.
When you come to aircraft insurance Africa has the highest insurance cover in the world. If Africa is such a dangerous environment to operate in with such high insurance premium, what does it portend for African and Nigerian airlines?
Aircraft insurance is compulsory for all airlines. You cannot fly without it. It is not an option for airlines. They must have it. Now, the pricing of aircraft insurance is fixed by underwriters who are mainly based outside Africa, such as at Lloyd of London. Underwriters rarely visit airlines directly. They fix the price based on numerous factors such as market capacity, historic and current losses, the overall airline industry safety performance, the loss record of individual airlines, and the size and value of airline fleets. Aviation insurance brokers contend that the cost of insurance has been reduced in recent years. However, for many African airlines this may not have been the case. Unfortunately, according to IATA and ICAO, Africahas the worst air safety record of any global region. Hence, its airlines are likely to pay more for their insurance cover. Also, due to their small aircraft fleet size, many African airlines pay proportionally more for their cover. In the main, large international underwriters do not rate small African airlines very highly. To reduce their costs, it is advisable that African carriers work closely with leading insurance brokers and try to put across a success story to underwriters. Nigerian and African airlines could also consider forming groupings to negotiate reduced rates through collective cover. This can be tricky though, especially if the airlines are very different in size and have contrasting safety records.
US-based Delta Air Lines has a fleet of over 600 aircraft, more than the combined fleets of all African airlines. With that number of aircraft and with its safety track record you can be sure that Delta will obtain a lower insurance rate than the average airline in Africa insuring a fleet of less than 10 aircraft.
Where does the Cape Town Convention come in because Nigeria is a signatory?
Originally, the Cape Town Convention was meant for two purposes. One, it was meant to provide comfort to foreign aircraft owners and financiers when they lease aircraft to airlines around the world, including Africa. If an airline defaults on a deal the Cape Town Convention ensures that the aircraft owners can get their assets back quickly and smoothly. This was the core reason. In recompense for giving that guaranty that you can repossess your aircraft smoothly, it was agreed that the export credit agency financing rate for airlines would be reduced; so airlines benefitted from the lower costs of funds. On this basis, many countries quickly signed up to Cape Town Agreement and ensured that it was domesticated within their national laws.
However, in 2011, revised Aircraft Sector Understanding (ASU) rules were introduced to the international aviation finance market which raised the cost of funding on aircraft transactions.Effectively, this higher cost of funding erased the discount provided by the Cape Town Convention. So what was given with one hand was taken back with the other hand. While the Cape Town Convention made it cheaper to purchase new aircraft the new ASU rules have negated most of these benefits.
Take Comair,a leading private airline in South Africa, for example.It recently bought a new fleet of Boeing 737-800s. According to the CEO, when they placed the order for the aircraft the export credit agency financing rate was lower than at the time of aircraft delivery due to the new ASU rules. So the airline’s aircraft financing costs have increased beyond its earlier expectation. Nonetheless, although its financial benefits have been reduced, the Cape Town Convention is still a step in the right direction as it has enabled international leasing companies to lease more new aircraft to airlines in Africa than ever before.
If you look at the central theme or what a lot of the delegates agreed; that foreign airlines have taken all the market in Nigeria and they believe that government policies have encouraged them to do that. How in concrete terms can we remedy the situation?
It is very difficult. It is very, very difficult. Once you have given away your market in a legally-binding air services agreement it is difficult to renege on the contract. How do you tell a foreign airline that you have willing given, say, 10 frequencies that you are now reducing the number of frequenciesit is enjoying? Even if you do so, do you have local airlines that can readily fill the gap and provide the same efficient and high quality service? It has become a big problem for airlines in Nigeria because various Nigerian Governments have been very generous in giving traffic rights, concessions, designations and entry points to non-African and African airlines alike. Meanwhile, Nigerian airlines are now left with just three per cent of the air traffic market to and from Nigeria. If you look at Africa in general, African airlines collectively carry only 20 per cent of the air passenger traffic to and from Africa. Nigeria has the largest economy in Africa as well as the most vibrant air transport market in Africa and it is hard to rationalise and justify why Nigerian airlines have such a small share of their own market. However, the fact remains that Nigeria is a signatory to the Abuja Treaty of 2004 under which the Yamoussoukro Decision of 1999, liberalising African skies, is legally-binding. I believe Nigeria should stand by the Yamoussoukro Decision and honour the Abuja Treaty.
Let us look at the Yamoussoukro Decision (YD). Some countries that will want African airspace to be liberalised may not enhance it in their own countries. There have been the campaign to liberalise the African skies but practically some countries will still kick against it. What is your view?
The Yamoussoukro Decision was meant to open up the skies in Africa to African airlines but it has not been fully implemented by some countries. This Decision is legally binding on African countries which have signed the Abuja Treaty of 2004, although some have still not enforced the Decision seemingly to protect their local airlines. Some countries are reluctant to enforce it and we have queried why they signed a legally-binding agreement which they did not intend to implement. That is where we are today. The fact is, if you take Nigeria, fewlocal airlines are in a position to respond to the competitive challenge posed by Ethiopian Airlines, Kenya Airways and others. For example, Arik has traffic rights between Lagos and Addis but, as Captain Meggison mentioned, the Nigerian passenger traffic is normally going beyond Addis. Most Nigerian travellers are not going to Addis; they are going to Dubai and to China. I would have wished that when Arik entered into that agreement they had negotiated traffic rights beyond Addis Ababa, or formed a partnership to feed traffic to Ethiopian Airlines and vice-versa on a win-win basis.
Some Nigerian airlines are not yet ready to operate the regional and long-haul routes that are currently available. Which Nigerian airline is going to fly to Dubai head-to-head with mighty Emirates? I believe Arik Air intends to do so, and this will be a big test for the airline. Defunct Virgin Nigeria Airways tried this route for six months and then pulled out as it was losing too much money. Lagos-Dubai became a hole in the airline’s pocket. Nigeria has allowed African and non-African airlines to fly to Nigeria and these carriers are now very well established. They have diligently built up their customer base and captured market share.It will be very difficult for Nigerian airlines to successfully compete with these foreign carriers, but not impossible if they can provide an even better service.
Agreed that mistakes have been made giving out these frequencies in the past, how is it that we have not learnt from these mistakes?
I believe it is time for a high level meeting in Nigeria of all aviation industry stakeholders to review where we are as a country, where we should be and how we can get there. We should review everything, including air traffic rights, market access, the Yamoussoukro Decision, the regulatory framework, aviation financing, aircraft fleet modernisation, aircraft maintenance, repair and overhaul (MRO), joint ventures and partnerships, airport and air traffic control infrastructure, and many other issues. It should be two or three days of intense deliberation on the aviation challenges and opportunities facing Nigeria and the way forward. We should address how we can salvage the aviation industry and collectively move it forward. What has happened in the past is that either politicians or regulators have sat down to formulate policies and rules for the industry. It hasn’t worked and it won’t work. For instance, look at the national hanger project, as well as the recent national airline project which was conceived behind closed doors. It was no doubt conceived in good faith, but there was no open discussion. It can never work, especially in Nigeria where everybody is very vocal and has their own opinion on every matter. So I would recommend that we sit down together and find practical ways to transform the Nigerian aviation industry. Of course, as we have seen in the past, no matter how brilliant the proposals from such a meeting may be there is no guarantee that in 10 years’ time the report will not be sitting on a shelf somewhere gathering dust. So implementation will be the key to success.
