Revamping Nigeria’s Aviation Sector

The administration of President Buhari announced recently that they plan to overhaul Nigeria’s aviation sector. The president’s spokesperson indicated that Buhari is concerned about the massive debt profile currently in the industry. The president is reported to have instructed the aviation ministry to look into re-establishing a new national carrier. Presently the Nigerian owned Arik Airways remains heavily indebted to NEXIM (Nigerian Export Import Bank) and AMCON (The Asset Management Corporation of Nigeria), owned by the government. The operation of Arik is essentially now largely overseen by AMCON.

It is unclear if the president intends to nationalize Arik Airways or if he feels that the solution to a struggling and heavily indebted airline that is already now being controlled largely by the government, is to create another one to compete with it.

The idea of creating a second Nigerian airline to compete with Arik given this current dynamic is among the worst ideas and will fail miserably. The government already has heavy interest in the largest indigenous airline in Nigeria, Arik Airways, through its heavy debt burden to two government banks, AMCON & NEXIM. It is in the interest of the government that Arik becomes profitable again so that it can repay these debts. A second airline subsidized by the government will only compete with Arik and undermine its market share.

Accordingly what the trade and aviation ministry, AMCON and NEXIM, and need to do is develop a plan to enhance the efficiency of Arik airways in order for it to increase its market share and become a profitable enterprise. Whether or not the government formally nationalizes the carrier will have little to no impact on the matter.

What are some of the things that can be done to enhance the efficiency of Arik Airways and/or increase its market share? Since the 90’s, with the guidance of major private equity investors as well as invest banking consultants, major airlines throughout the world have begun to consolidate and form mergers into larger carriers. In this time the United States has gone from having 10 major carriers to only 4 . European carriers have also taken a similar path with KLM and Air France merging, as well as British Airways and Iberia.

Even before the merger phenomenon, in the global front airlines began to form alliances with one another forming what is now the 3 major global airline alliances consisting of what is now 62 member airlines. The alliances of SkyTeam , Star Alliance , and OneWorld now account for almost 60% of total air travel worldwide. The market share of these three major alliances continues to grow. Further the trend of airline mergers as a means of increasing efficiency is continuing. By joining an alliance, individual airlines receive immediate benefits including, shared booking, maintenance, and baggage facilities that helps lower the overhead cost of operation. In addition passengers are able to traverse a wider array of intercontinental routes seamlessly on flights operated by other carriers within the alliance.

With looking at these trends in the airline industry globally, what are the options for Nigeria and Arik Airways? Most importantly Arik needs to merge or perhaps even better buy a majority stake in another airline that would increase its destination capacity and enhance its market share. As it stands the airline is simply too small and offers too few routes to be taken seriously as a partner by any of the major alliances. There are several other airlines in Arik Airs position that are yet to merge and do not yet cooperate with any of the major alliances. Perhaps most significant among them is Caribbean Airlines. Arik offers very few flights to North American destinations, while Caribbean flies through much of the US and Canada as well as Caribbean and South America.

A merger between the two would expand Arik Air’s reach to both North and South America and would allow the two increase market share on flights to various African destinations that Arik services. Together the two airlines will be a major player in the global air industry and will offer unique routes that no other airline has ever serviced or offered. This is the same strategy that South African Airways took when it purchased Ethiopian Air, Kenyan Airways did when it merged with KLM. It would also position Arik as one of the leading airlines servicing African routes along with Kenyan Airways and South African Airways. Both Kenyan Airways and South African Airways and members of 2 of the 3 major global alliances, namely Star Alliance for South African Airways, and Sky Team for Kenyan Airways.

The only major global airline alliance that does not have an African partner is OneWorld. Ones Nigeria cleans-up Arik Air, executes a strategic merger most likely with Caribbean Airlines, the next logical step would be to become the strategic African partner in the OneWorld alliance. While this rough-sketch blueprint for revitalizing Nigeria’s aviation industry is light on specifics and details, it is informed by trends in the aviation industry coupled with an understanding on the state of the industry in Nigeria and Africa as a whole. It is this kind of strategic economic planning that leads nations to succeed in the global economy.

The Buhari administration, whenever it becomes active, must have strategic planners within their ranks that have experience both in corporate finance and management consulting but also in strategic national planners that are hungry for change. In the past, Nigeria has fielded some of the most incompetent decision-makers that when compared to their counterparts in the rest of the world have no business occupying the positions they boastfully occupy in Nigeria. Even among the ones that can compete globally, many of them are too old and/or comprised by their records and longstanding ties to make drastic shifts. If you look at some of the major deals and leading global firms that are reshaping our world, they are led and executed by talented young people.

Just as is the case with revitalizing Nigeria’s aviation industry, what I want to demonstrate now more than anything, is that the solutions to move our country forward are within reach. It does not require a miracle to turn-around the conditions on the ground in Nigeria immediately. Anyone who believes this is unqualified and thus unable to see, or is obsessed with chasing stolen funds that may never be recovered, or has a vested interest in maintaining the status quo. Fighting corruption while very important in the context of Nigeria is not a substitute for economic planning and effecting decision-making.

It is not a panacea, not even for Nigeria, and even if Nigeria is unable to recover 1 kobo, the country’s economic capacity to thrive in the immediacy remains strong. There is no need for the naira to be weak, or for local governments to be unable to pay salaries, or for the aviation sector to be in disarray. All these issues we face have solutions that does not involve fighting corruption, many of which I have outlined in previous articles. The challenge today is to hold decision-makers accountable, and to no longer let them get away with low-levels of achievement, distracting the public with tails of corruption, passing blame and making excuses for their incompetence.

Kuranga and Associates Limited is an investment management advisory firm and an asset manager with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net . © Copyright 2015 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.