Fadugba: NCAA Should Regulate the Financial Viability of Airlines

AVIATION INTERVIEW

International aviation consultant and former Secretary-General of African Airlines Association, Nick Fadugba, in this interview calls for strict financial regulation of Nigerian airlines. He also urged the federal government to articulate a blueprint for airport infrastructure. ChineduEze brings the excerpts:

Overview of the aviation industry

I really want to talk on three points, one is Nigerian airlines; two is the government and three is the regulatory environment. Let me start with Nigerian airlines. We have a situation in Nigeria today where we have too many airlines which are too small and the market is fragmented. None of the airlines have a critical mass in terms of fleet or route network to become effective and to make money.

When you look at Ethiopian Airlines, the combined fleet of all Nigerian airlines is about 40 percent of the fleet of Ethiopian airlines. We have approximately 40 aircraft as a country, all our airlines. Ethiopia at the moment has about 90 plus aircraft and the most modern. In the next few years Ethiopia will operate about 130 aircraft. So you see Ethiopian is taking on a bigger scale. You could say that in Ethiopia they have a monopoly which is very different from Nigeria and in Nigeria of course we have a very vibrant economy which is not a monopoly.

So we have many airlines;this is good thing in a way, but the problem is that none of them, to the best of my knowledge, is really profitable today. So what I would recommend for our Nigerian airlines is that they need to work together, they can compete; for example, on Lagos-Abuja or Abuja-Port Harcourt but they can work together on training, on maintenance, on spares pulling, on spare parts purchasing; there are many areas where they can work together.

They can still compete despite the cooperation. This is done in the rest of the world; airlines can compete and collaborate. More importantly, I would like to say that Nigerian airlines should come together. You mentioned ego, yes ego is a big factor, it is a negative factor in the airline industry in Nigeria; very negative; it is holding us back.  If you look around the world, British Airways is coming to Nigeria. Collectively within the IAG Group, they have about 600 plus aircraft. Delta Air Lines has 600 plus aircraft, Emirates, you can imagine a huge fleet and yet we have the market in terms of passengers; everybody wants to come to Nigeria.

If you look at any market in Africa, the most popular one is Nigeria. This is because you can be sure if you are a foreign airline you will fill your aircraft, probably from the front, first the business class and then economy. Nigerians like to travel in style if they can afford it.  You know you don’t get in countries like South Africa or Ethiopia or Kenya; the aircraft tends to fill from the back (economy class) but in Nigeria it is from the front. That means this is a premium market; the ticket yield is very high and you can be profitable and, of course, the load factor from Nigeria is unusually high compared to the rest of Africa. So I would like to see Nigerian airlines work together, they need to code-share. It’s quite a surprise and a disappointment that no airline in Nigeria is code-sharing. For example, if a flight is delayed on airline A, you can quickly send your passengers to airline B if you have interlining agreement and code-share. This is what they do in the modern world and we need to do that in Nigeria.

Funding

Financing is a big problem. We find that in Nigerian airlines there can be leakage of revenue, so what we need is transparency and good corporate governance to ensure that all revenues are reinvested in the operation. It is extremely important. And then I would encourage all Nigerian airlines to focus on unit cost, load factor and the fair yield. These are three critical ingredients for success. Unit cost, the cost of operation, the ticket yield, how much are they making? And then the load factor, are they flying half empty or almost full? This is because these make the big difference. So that is in terms of the airlines, I would encourage more cooperation; they can compete, yes on route but work together in many areas. And by working together they will save money collectively on maintenance and on training and on spares pulling and many other areas.

Government policies

I believe the government of Nigeria today needs to take urgent action to rescue the Nigerian aviation industry. When we look at the aviation infrastructure in Nigeria, it is far behind where we need to be. And we need to aspire to the global standard of excellence. I would like the government of Nigeria to take the Singapore aviation model and the Dubai aviation model. This is because in Singapore and in Dubai, in particular, the governments have harnessed aviation as a tool for economic development. Deliberately and decisively, they have taken aviation as a sector that will develop their economy. We are talking about Dubai, is it as big as Lagos? I am not very sure, probably not.

Singapore, I am sure you can fit it in Lagos State as well. Today if you look at Dubai, if there is no aviation we will be talking about Dubai? Singapore, we wouldn’t talk about it if not for the amazing aviation industry. It is a hub in Asia, a major hub and Dubai of course is a major hub in the Middle East.  And yet they built it with nothing that we have in terms of the population. What is the population of Singapore? Is it up to a million or a couple of millions? The real population of Dubai, is it a couple of a hundred thousand? And here we have a 180 million people in Nigeria or entrepreneurs. And I am talking from the board chairman to the market woman, they are all business people, they fly. I have been at MurtalaMuhammed International airport, I have profiled passengers, young men and women with briefcase, they are going to China. It is amazing.

I don’t see it in any country. We travel round the airports in Africa. When I travel to these countries in the continent I sit down and I profile the Africans in particular; the European we are tourists or businessmen. Nigeria is amazing, I don’t see such market Nigeria has in South Africa, businessmen going to China to buy and bring back, no. In Kenya, not really, in Ethiopia I don’t see it. So what do we have? We have the aviation product in terms of passengers and cargo demand. There is absolutely no reason why Nigeria should not have two or three thriving airlines. I do not believe sincerely that Nigeria needs more than maximum, three large airlines. It can have niche airlines. If you want to be a niche airline I can decide to fly from Lagos to my village; that is fine. That is what I want to do, I am a niche airline. If you look at Air Namibia for example, you can say it is like a niche airline. They go to Johannesburg, they go to Windhoek(Namibia), to Frankfurt, but they are not trying to be everywhere.

So in Nigeria, I would have said the country should have two airlines, but I just want to be over generous and say three. We need three strong airlines with a fleet of 50 aircraft minimum each. Now we are talking, if you have minimum 50 aircraft and you have critical mass, when you are ordering aircraft you can dictate to your supplier. When you are buying spares you can dictate, when you are getting MRO (Maintenance, Repair and Overhaul) you can dictate your terms. At least you are in a better buying position. 

National maintenance hangar

Let me turn to the national hangar. All of us in Nigeria, this great country have been hearing of this national hangar. It is as if establishing a national hangar is beyond achievement; it is not rock science, it is a hangar. If you go to Ethiopia they have like six hangars and they are modern, state-of-the-art. And yet here in Nigeria, we don’t have one major MRO centre and it is not good enough. So I believe the government really needs to take decisive action to harness aviation as a tool for economic development. I am not saying that government should fund MRO, I believe Nigerian airlines, individually they don’t have sufficient fleet to fund the investment but collectively they can work together.

Instead of Nigerian airlines complaining about government all the time, they need to work together. When they have worked together to the maximum possible, then they can complain about government. But I really want a more practical achievable cooperation. If you look at other countries all around the world, they work together; it is only in Nigeria we are trying to kill each other.  And the thing is that other foreign airlines are taking advantage of the Nigerian airlines due to lack of cooperation. They can see what we are doing and they must think we are not wise. A lot of Nigerians complain about Ethiopia but I want to put it on record that Nigerians should not envy Ethiopian airlines, they should emulate it.

They should seek to match it and surpass it. After all, a big percentage of the customers of Ethiopian airlines are from Nigeria. I have no doubt in my mind that if we have strong airlines, efficient airlines, safe airlines, on time airlines, Nigerian passengers will fly with them. I have got no doubt in my mind because when Nigeria Airways was there everybody was proud to fly on Nigeria Airways. And I have no doubt in my mind that if we have one r two strong airlines in the future Nigerian will patronise them. 

National Carrier

I now want to talk about national carrier.  Let me first of all pay respect to the government and the Minister of State, Aviation, Senator HadiSirika. He is an aviator; he is very committed and dedicated to aviation industry in Nigeria. However, my question is that the government of Nigeria has some levels of control of two airlines today- Arik Air and Aero Contractors because they are party owned by AMCON (Asset Management Corporation of Nigeria), which is a government body.

So what we are saying is that if the government by default is a part owner of two Nigerian airlines, why are we talking about creating a third airline? This is because you can be sure that if you establish a third airline, all three will not make money and of course there are other airlines beyond the three. So I would suggest, very respectfully, that the government needs to rethink its policy on a national airline. What is going to happen to Arik? What is going to happen to Aero? I don’t think it can be expected that Arik can flourish, Aero can flourish and a new national carrier will flourish all at the same time. And we also have Air Peace and so many other airlines.

I would have thought in my own mind that the government would merge Aero and Arik, turn it into a national carrier. The current owners-the owners of Arik and Aero would now become key shareholders in the new venture. The beauty is that this carrier will inherit the Nigerian Airways hanger and compound which is the best in Nigeria, of airside and landside. There is no doubt in my mind that if you combine Aero, Arik as a national carrier they will be formidable. So I think the government needs to rethink its strategy because I do not believe sincerely that all three airlines can survive.

If you revive Aero, you revive Arik, then you establish a national carrier, to do what? To compete with the airlines that you have just spend public money to restructure and then you create another airline to compete with them? Yes, I do believe that Nigeria needs a national carrier; but a national carrier in which government should have a minority golden share. Because sometime it is important to have government ownership in international market but it will be a minority golden share and the rest should be sold to shareholders. Therefore, the current owners of Arik and Aero should be offered shares in the new venture; it should be a combined effort. And all the other private Nigerian airlines should be offered shares to buy in to this new national airline. 

Merger of airlines

That means we can shrink the number of airlines in Nigeria from, maybe, 12 today to maybe three or four. Now we are talking serious business because the scale will be much bigger and therefore the likelihood of success will be enhanced. I am not criticising the government policy, but I think right now the government is spending public money, tax payers’ money to restructure two airlines which the government partly owns by default, through AMCON. So talk of a third national airline to compete with these, in my mind it is not a wise decision. I don’t think in Nigeria we can have more than three very strong airlines.  You can have as many as you like but I am talking about strong, profitable, efficient, reliable, safe airline which have a critical mass and scale to be formidable, to compete with other airlines from around the world.

Regulatory environment

The third point I wanted to make is the regulatory environment. You know the government has made great effort and everybody commends Dr Harold Demuren (former Director-General, the Nigerian Civil Aviation Authority). I really want to commend him so much and many others in the industry but what DrDemuren has done is formidable.  And he is recognised around the world and I must admit that I am one of his great fans in the aviation industry. I believe he has done a great job. To move forward, we need a stronger regulatory environment. The government took a wise step a few years ago to regulate that a one aircraft airline is not an airline. I believe we need to take a step further as the ART (Aviation Round Table) President, Mr. GbengaOlowo suggested.

I believe we need to increase the minimum number of aircraft needed to constitute a viable airline. It could be five; I would love to say 10, a minimum of 10 aircraft to be an airline, a real airline. I know this will be punitive for many of the airlines that don’t have the resources to get up to 10 aircraft. But I really do believe that in the interest of the industry, we need to scale up. And this should be part of the regulatory requirements to have a minimum size fleet which is viable. In addition to regulating the size of the fleet, I believe it is critical for the NCAA to regulate the economic and financial viability of every airline in Nigeria.

If you go to the UK CAA (Civil Aviation Authority), one of the delights is that you can go online and you can get their traffic statistics, their financial statistics; it is amazing the public information that is available. We need to adopt that system. Now, who knows what airlines carried, the passengers, is it public knowledge? It is not widely known, it is not widely reported. This is data, it is critical to know the size of the industry and the industry trends. So the NCAA must become stronger in terms of data collection from the airlines, the traffic, the on time performance, the financial performance. Is the airline paying staff, are they maintaining their aircraft? We need stronger financial and economic oversight for airlines in Nigeria to move forward. I have tremendous respect for all airlines in Nigeria and for the owners. It is not an easy job and they are working very hard but if we want to move forward we must scale up in terms of fleet, traffic, and cooperation and joint ventures. We really need to move forward.

Bilateral Air Service Agreement (BASA)

You know it is very difficult. When I look at BASA in Nigeria, it is like we opened the stable door and the horse has gone and to catch it back it is going to be very difficult. We entered into BASA agreements with numerous countries, the principle of BASA is reciprocity and yet we entered into BASA and we are not able to reciprocate. Why? because we don’t have the airlines. And why don’t we have the airlines? because they are weak, small and under capitalised.

When you go to BASA, you allocate the routes and the frequencies and everything. The foreign partner will come and say they want to operate to Lagos; for example, 10 times a week. Where is your airline to operate to London 10 times a week? To reciprocate or to any other route, we cannot match it. And the government cannot hold back the industry because Nigerian airlines cannot reciprocate. Because people have to travel, the Nigerian economy would have been much weaker if the government says, okay until we wait for these Nigerian airlines to catch up we won’t allow foreign airlines to come to Nigeria. So when I look at BASA, it is of great concern to me but it is a problem that we created in Nigeria. Why? Because we did not ensure that we had strong enough airlines to reciprocate. And therefore we gave the market to foreign airlines to provide our economy with safe, efficient air service.

When you have opened your market on that basis, it is very difficult now to take it back out of spite or out of resentment or what have you. So it is a tough, tough question and the only way it can be resolved is by having strong airlines that have the capacity to provide the service. Because, for example, if you have three, my hypothetical number of three is very strong, you can have more airlines but three very strong airlines with 50 aircraft each minimum, these airlines would be able to put on the services required. So you can go to Ethiopian, you can go to British Airways and renegotiate, now we are ready to reciprocate. And that’s the way you can get your market back. But it is very, very difficult to take back the routes, having given them away. Nigerians say let’s renegotiate, okay we go back to the negotiating table, where are our airlines? Is it not the same situation? Who is going to fly the frequencies? So even if we go back to the negotiating table today we do not have any airline we can put forward that can perform the reciprocal services.

I know it is going to take us a long time but if we really come together, if we regulate minimum number of aircraft, a realistic number, if we regulate that airlines must work together, the government did it with banks and it worked and the banks became very strong. And we can do it with airlines and I really want to urge the federal government of Nigeria to embark on this mission of harnessing aviation as a tool for national economic development. This is because without it we are not going anywhere in terms of global aviation. 

International Civil Aviation Organisation (ICAO) Forum in Abuja

I am very pleased, first of all that Dr. Bernard Aliu was elected the first African and a Nigerian President of ICAO Council. It is a tremendous achievement for Nigeria and he is doing a wonderful job and we are very proud of that. When it comes to financing, let us look at the airlines in Nigeria, we heard today that our airlines are not bankable, many of them. They don’t have a good business plan, they don’t have sound management, they don’t have critical mass. We heard from the speakers today that they are a risk, financial risk. Therefore, we need to clean up our house in the aviation industry.

We will need to work on it otherwise we are not going anywhere. We need strong airlines, the only way we can do that is to regulate a minimum size, it is to enforce cooperation. There is no reason why two airlines flying to Abuja within half an hour of each other and one has technical hold, you cannot deploy the passengers to the other plane. It is a win, win situation. You know we need to get away from this mentality, ego and all of that type of thing, it is really damaging. I was listening to the Minister of State, Aviation talk about AMCON, which is a government agency. AMCON owns by default Aero and Arik and I am thinking of a new national carrier, an investor will wonder how you are going to fund the national carrier when government already has two competing airlines. I would not as a banker fund even Arik or Aero, and let me tell you, there are many people outside Nigeria that had called me all the time and asked about what is happening in Nigeria. Some of them are aircraft suppliers or financing people. They wonder why the country owns basically Aero and Arik and it is still talking about a third airline.  And yet Aero is out there looking for money, Arik is looking for money and government is talking about a new national carrier.

It is confusing everybody and it has been dragging on for almost two years now. The government is over two years now and we have been hearing of a new national carrier for two years. We don’t know how to define it, who are the owners, what form or shape and then you are saying come and fund the other airline, it will not work. So that is on the airline’s side, it is a confused situation right now.

Infrastructure

Let me turn about physical infrastructure like airport. The government doesn’t have the financial resources to manage properly or fund 22 airports. It is a huge challenge to fund 22 airports, many of them are not economically viable but they are there. You are asking a foreign investor to come and fund airport infrastructure in Nigeria. They want to commission the airport and if I do my research as an investor, I would want to come to Nigeria because it seems to me as a huge potential market. I do my research as an investor of airport infrastructure, the first thing I would see on the internet is MM2 (Lagos domestic airport) and I would come up with reams of information about the court case up till now, litigation and litigation.

There is also litigation with Maevis, I would now turn to Chief Akande’s land at the airport or the disagreement there. What guarantee do we have or does an investor have that coming into invest in the new airport that is about to be concessioned would not end up in the same situation? I would have preferred that the government, before you call anybody to come and invest in any other infrastructure, to resolve these problems. The government needs to bite the bullets and needs to urgently resolve the MM2 situation, the Meavis situation and the Chief Akande situation. These issues need to be resolved urgently because we do not want to see any more concessioned airport or infrastructure end up in the court. And I believe if we are not careful this is going to happen.

I am also concerned in my mind that we are inviting foreign investors to come and invest in different airports, I believe that before we do that we must have an aviation blue print for the country. Because if you invite an investor to come and invest in Abuja another in Lagos and Port Harcourt and they are all in different strategies conflicting with each other, it will not work. So the government should have devised and published a blue print for aviation development for Nigeria.  So when the investor comes in he will follow the blue print; he will not do things arbitrarily. And then we have coordinated infrastructure development. But at the moment if you concession the airport to three, four parties and they are all coming with their own different strategies, where is the harmonisation? Where is the coordination? Are they going to use different infrastructure technologies? Will they be able to speak with each other in terms of the technology, the different airports, the gates, all the equipment and what have you?

So the government by now should have published a blue print for infrastructure development for Nigeria and the investors have to follow the blue print. If they come in now what rules will they follow? Are there any guidelines? Is there any harmonisation? I have not seen it. So I believe two issues need to be clarified immediately by the government-the national carrier, the government needs to look carefully at the implications of a national carrier on the other troubled airlines in Nigeria; especially now that the government itself is a part owner to two of the troubled airlines. That situation needs to be resolved. And the second one is aviation infrastructure; the government needs to have a harmonised blue print, a clearly articulated blue print for aviation infrastructure development in Nigeria. So that when the concession the airports, they follow the plan and if they don’t follow it they are out.

So any agreement with the concessionaires must be stipulated that they follow the guidelines in the national plan for aviation development. Otherwise we are going to get investors coming in and introducing completely different models. That means that if you go to Abuja it will be completely different philosophy, you go to Lagos there is no harmonisation and dovetailing of systems and procedures and infrastructure. So I really think the government needs to address these issues urgently. We don’t have a lot of time to waste in Nigeria, we are far behind.