Nigerian Aviation: Break It Up To Make It Up

Looks like a good time to talk about aviation so I will weigh in with my 2 cents. So I dont waste your time, I am not enamoured of the Nigerian aviation industry. I think it should be completely destroyed and rebuilt with the loss of jobs and whatever else such destruction might leave in its wake. Dont waste your time reading this if that doesnt appeal to you.

I am of the firm opinion that Nigerians cannot and should not be allowed to run airlines. It is too complicated and in my opinion is not even a business in the sense that you invest in it with a fairly good chance of earning a decent return. Running an airline is more likely to lose you money than anything else or as the saying goes, the fastest way to go from being a billionaire to a millionaire. 

Observe the chart below to buttress my point

Gao

The chart shows the profitability of the US airline industry from 1968 -2005 and it’s a sorry tale. At some point around the turn of the millenium, costs caught up with and overtook revenue and loss making became the order of the day. This is 7 years on and it has only gotten worse to the point where an airline like Delta is buying a refinery just to save on fuel costs. 

The exception to this rule of course has been SouthWest Airlines and that is mainly due to the hair’s breadth efficiency the company employs in its operations. For example it has only has Boeing 737s in its fleet which means it can save a lot of money on training and maintenance and also its planes can take off within 30mins of landing because all its pilots and crew can operate any of its planes.

But how counterintuitive is the fact that airlines run by Americans who love nothing more than to turn a capitalist buck are losing money by the billions every year and they remain in the air? Well maybe not so much. The ‘problem’ with an airline is that the need to carry passengers safely from point A to point B translates into one mighty big fixed cost. You cannot save money by using one pilot instead of two or using cheaper landing tyres because I doubt there are cheaper landing tyres to be had. Passengers have to be transported safely otherwise you wont even get the opportunity to lose your money. So you cannot cut corners with anything relating to safety even when it means it doesnt make financial sense and in running an airline practically everything is related to safety one way or the other.

It is this last point that makes me conclude that Nigerians should not be allowed to run airlines. At least not now. I do not trust my country men or the system in which they operate not to give them a huge opening to cut corners regarding passengers’ safety. Such a temptation is likely to increase when costs are running quickly ahead of revenues. Postponing an expensive check just to get in a few more full flights or buying planes that were about to be turned into scrap metal from some obscure airline in one remote country. And we havent even gotten to the service and reliability issues. Our airlines cant even seem to count judging by the number of times they sell more tickets than available seats on the flight. 

I like markets not because they are perfect but because they are generally better than any system directed by one person or a group of persons who arrogate wisdom to themselves thinking they know better than everyone else. I also believe that it doesnt take a lot for a market to form and they can generally come about without any kind of govt intervention.

But in this case I have got a solution that involves ‘helping’ a market to get organised mainly because the overriding point of passenger safety doesnt give a lot of room for the kind of experimentation that is really good for most markets to get properly established.

But never mind, in a few steps, here’s my idea of how the Nigerian airline industry can be destroyed so it can become better. Feel free to disagree with me but dont waste your time reading if you are ‘proudly Nigerian’, my intention is to offend you. 

1. First step is to revoke every single licence held by Nigerian companies to run airlines. Ever single one. Nigerians have no God given right to run airlines and I think it is a misallocation of capital so if that door closes to our money men, they will hopefully deploy their capital elsewhere more useful in the economy rather than a sector that currently only serves the 1%. 

2. Get a list of the world’s safest airlines from ENGLISH speaking countries. Not Russian or Chinese airlines. Airlines from English speaking countries or that have a track record of serving English speaking routes so Air France KLM will fall in this category. No point inviting Emirates and say Qatar purely because having done a case study on Emirates in particular, the airline was established as pretty much a British Airways clone including hiring loads of ex-BA staff. 

What we want on the list is the most recognisble and reputable airlines in the world from British Airways to KLM to Singapore Airlines to Delta etc. If we get 8 of them interested in the next step below, then we would have done well.

3. Think of this as something like the GSM licence auction we had a decade and some ago. This is where we help the market to form. My preferred number is 4, so we restrict the number of ‘licences’ to give out to 4. So basically we will end up with 4 domestic airlines to serve the whole country. I think this is more than enough and given that making money from this ‘business’ is rather difficult, it makes sense to restrict the number of participants to at least ensure they have a fair chance of making money.

I dont think the govt should make money from auctioning the licences as there’s no chance they will reinvest the funds back into aviation as should be the case with funds received from auctions. But whatever the case, they can be auctioned off just so we can know who’s really interested and who’s half hearted. 

4. Once we get the 4 players who win these licences, they will then be allowed to form 4 ‘airlines’ to serve our domestic routes. Now this is very important – those airlines must carry the known name of the airline either solely or as a combination with another name. So for example, were Singapore Airlines to be one of the winners, they wont be allowed to form a local airline that doesnt contain the ‘Singapore Air’ name in one way or the other. Reputations are very important in this business so it’s important that they be willing to risk their brand name. In fact, even without knowing the name of the local airline, it should be obvious who the owner is from the livery – so if BA were to form such a company, the colours must be red, white and blue and not green and black as an example.

These local airlines will be 80% owned by the foreign airline owning the franchise. 10% will go to the Nigerian employees they hire including pilots and crew. If this cant be arranged, then that 10% will be floated on the stock exchange. The remaining 10% will be owned by local ‘technical partners’. Here preference will be given to former local airlines that had their licences revoked. 

After 5 years, the local ‘technical partners’ will get a chance to buy another 20% from the main company raising their stakes to 30%. This will not be by force though, it’s merely an option to buy meaning if they are able to come to pay market value and raise the funds, then the main company will have to sell to them. But not before 5 years. After 2.5yrs another 10% will be released and so on till we get to 50% for the local ‘technical partners’. After this, if the main companies want to exit, they can do so by selling to the local partners but not before 10 yers. 

5. So the structure is now in place. The next step is where the govt gets to make some money. We then plot the major routes in the country and then sell licences to operate them in 3 year slots. If all 4 airlines want to operate Lagos – Abuja, then they are free to pay the ‘route licence fee’ (RLF) or whatever name they choose to call it. 

If the govt sets the price for Enugu to Kaduna too high, no one will buy it forcing a readjustment. Price for Abuja to Lagos can be set fairly high as everyone will want that. After 3 years, the RLFs will be up for renewal and renegotiation by auction preferably. 

6. Last year I wrote this note about how our airports had become money pits and even avenues for corruption with the eyebrow raising salaries attributed to some of them even when they were generating no revenues. I’d say the govt should only own a maximum of 4 airports – MMIA, Abuja, Port Harcourt and Kano. All other airports should be ceded to the states where they are located to manage.

It will then be up to the states who own the airports to ensure that cows are not allowed to cross their runways when planes want to land or take off. 

The RLF can be designed in a way like say if the govt gets a total of $10m for the Enugu – Lagos route (to be paid in tranches over the 3 years please NOT upfront), the money can be shared 40% to each of the airports on the routes and 20% retained by the FG. If cows are then found to cross the runway, a penalty of say 10% of the next tranche of the RLF will be deducted. No lights on the runway will also be a valid reason to deduct from the RLF amongst other reasons.

7. These 4 new airlines will be given free rein to bring in their own booking systems and safety standards. They will also be allowed to employ whoever they want to employ. There’s no need to ‘insist’ on local content for this, a Western airline wont bring crew from their own country to come and serve our domestic routes when it will cost them much less to hire Nigerians. 

8. Scrap the Ministry of Aviation and let it become part of the Transport ministry who will have a supervisory role and be in charge of the RLF auctions while NCAA will continue its role in ‘coordinating’ safety as opposed to setting standards. FAAN will be in charge of the 4 govt owned airports while the states will be free to form a single private entity to look after their airports or if they prefer, form companies to look after their airports individually. It wont be long before they realise the benefit of having one body to look after these airports collectively especially as it will be involved in bargaining with the airlines to make certain routes attractive. 

9. There can be plenty of benefits with this plan. Tourism being one. Take Obudu for example – this destination is quite popular with Germans as I understand. Imagine of Lufthansa was one of the airlines that won licences to operate local airlines? This would seriously open up Obudu as a tourist destination because Lufthansa might then win the Lagos – Calabar route and then sell tickets from Germany direct there for example a German tourist would be able to buy a Frankfurt – Calabar ticket with a short stopover in Lagos for say 1hour and not having to clear customs. Once they get to Calabar, they can then clear customs and go on their holidays. The same journey will happen return. This makes the destination a lot more attractive because at the moment a German wanting to visit Obudu will get to Nigeria and then have to join one of our unreliable local airlines with all the attendant palaver. 

 

 

The rest of it is pretty straightforward. Like I said earlier, Nigerians dont have any particular God given right to own airlines but the Nigerian people do have a right to fly as safely as possible for a flight they have paid for. If we are to measure by crashes alone, then it would look like we havent had a crash in Nigeria since 2007 until this last Sunday. But safety is not measured by only the times when a plane crashes, the near misses are important too – the times when someone did go wrong but by pure luck, the plane didnt crash. These near misses are very regular in Nigeria just going by newspaper reports alone. And the underlying problem is because when running an airline and you are faced with the choice of safety or making a loss, you are must make a loss and not compromise on safety. There is no evidence that this is the case in Nigeria. 

So will foreign airlines choose to make a loss instead? The answer is that such airlines have a much deeper buffer than Nigerian airlines have. So it might be worth British Airways making a loss on the Lagos – PH route for instance if it means that it can offer its passengers quicker and more reliable connection coming from London just as an example.

And what happens to our local airline ‘industry’? Well my answer to that is that it is not by force to have a local airline ‘industry’. We need that capital in other important sectors of the economy so this is a sector that will be good for foreing investment to develop. A country is not automatically obliged to take part in every industry just because it can, there is the question of compartive advantage as to what it can do and what it need not bother with. Alas in Nigeria we have N300bn Power and Aviation Intervention Fund (PAIF) run by the CBN through the Bank of Industry. This is bizarre if not silly. Why do we have this kind of money to throw at airlines when roads are in such a shocking state of disrepair? Again, this is another representation of how powerless the people are against vested interests in Nigeria who are able to corner huge resources for themselves as rewards for failure. Stockbrokers will soon get their own ‘bailout‘ too according to the Finance Minister. Is this why some of us were excited at her return? To serve the few at the expense of the many?

 

The solution to the problems our aviation industry faces requires that we come to the acceptance that the thing is not working as it is and is hardly getting any better. If our businessmen are so enamoured of the airline business that they must do it by force, they should be allowed to operate private jet companies for themselves….the 1% for the 1%.

The thing about a crisis is that it’s always an opportunity to do the truly radical things that could never be done when everyone was coasting and vested in the status quo. But we have a habit of wasting crisis in Nigeria such that people are very quick to want to bury the truth just so that status quo can be returned to as quickly as possible. 

So yes, you’ve just wasted your time reading this. No such thing will happen.

 

FF

 

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7 thoughts on “Nigerian Aviation: Break It Up To Make It Up

  1. So so true Feyi. If only this can be published in the Nigerian news but then again the greedy animals we have as leaders will never put this system in place, if it doesn’t put money in their pockets it’s not an option. I’m really sad for Nigeria, really sad

  2. The only (minor) issue I can see here is the potential for price fixing with only 4 providers otherwise ideas are very good. Do you send your blogs to people in FG by any chance?

  3. Indeed, the same goes for many other critical sectors we have chose to “run it our way”, a euphemism for a total disregard for standards, regulations, legislation and enforcement. From road infrastructure to education and health care, the story is the same. Do we have a business getting independence? Hard, I know.

  4. That the commenter Bayo asked the FG question is hilarious. The idea is genius and amazingly simple. 2-3 years and implementation will be complete. Really sad that it will never see fruition. O well. Good work tho Feyi!

  5. Good on Paper, but those benefitting from the status quo will never allow the idea to fly. Just ask what happened to Virgin or is it virgin Nigeria they call it?

  6. Please do you realise that saying state governments should run airports is still the same thing as the current structures cause the issue is not management but how to eliminate corruption and how to make it less attractive to corrupt individuals.And to the point on regulations can we guarantee a system that would be corner cutting proof?And what makes you think this airlines would leave their better business climates to come to Nigeria where they would be expected land aircrafts in the night with no electricity supply from PHCN?

  7. I enjoyed your piece very interesting read. I admire your simple and understandable use of plain English. You did not disarm your readers with technical terminology or outdated English like I see often with some of my fellow country men espcially when you are writing to a wider audience not your professional collegues there is no need to use outdated words, confuse your readers or disarm them by sending them away to another blog that makes more sense. The internet is non linear I just move to a more English friendly site or blog. Keep it up. I totally agree with you. It is doable only if the powers that be see it this way.

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