The quest for a national carrier has been highlighted by every minister of aviation, at least, in the past five years, despite the glaring unprofitable nature of the airline business. Last week, the issue of a national carrier surfaced again, although it is unclear how the idea originated. I do not think it’s wise for government to embark on another futile investment.
If Nigeria was interested in keeping a national carrier, then there was no reason for the liquidation of Nigeria Airways in the first place. Restructuring the former national carrier whereby private equity could exceed direct government funding would have sufficed. To revive a government-owned airline is as good as waking a dead life, which is virtually impossible.
A new national carrier is good for just one reason- to provide jobs for the 600 unemployed, young pilots roaming the streets of this country. It should be seen as a social service to the nation, to create jobs and reduce the number of unemployed aviation/non-aviation professionals in our society. The airline will definitely create jobs for about 1000 Nigerians in the first year of inauguration. This will support Mr President’s jobs’ creation policy.
But if the airline is being proposed as a sustainable business that will generate profit to support itself, then the promoters of the idea should simply forget it. Again, if it is going to be a wholly government enterprise, it will not survive beyond three years as Nigerians will loot every penny of it. Private equity must be the guiding investment principle of the carrier, with 40 per cent probability of its survival.
According to Warren Buffett, the third richest man on earth, “the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.” Think airlines. Here, a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.
Airlines are wonderful generators of profits- for everyone except themselves. Even in good times their margins are as thin as a boarding pass; and in recent years, they have more often lost money.
In a country like Nigeria, service providers like FAAN, SAHCOL and other airport agents, each makes more profit than Arik, Aero, Med- view, and DANA combined.
Averaged over the past four decades, the net profit margin of the world’s airlines taken together has been a measly 0.1 per cent. By contrast, other bits of the travel business that depend on the airlines—such as aircraft-makers, travel agents, airports, caterers and maintenance firms- have done very nicely.
According to Travel Forward, an airline lobby group, the world’s carriers pay $7.5 billion in GDS fees a year—more than double their expected net profit of $3.5 billion this year.
The airline’s chronic unprofitability in other parts of the world is partly the result of a wave of competition—especially from new low-cost carrier; rising cost of fuel, and other operating expenses.
To explain the narrow profit-margin of airlines better: Emirates airlines’ 2013 operating revenue was $21.1 billion, an increase of 17 per cent over the previous year, but net profit was a mere $845m. The same goes for British airways, whose operating revenue for the same year was about $18 billion dollars, and net income was $680m. Other airlines, including South African Airways posted huge losses last year.
In Nigeria, in addition to the rising cost of fuel, regulatory bottleneck, navigational and landing charges pose direct hindrance to carriers’ growth.
Those who make reference to the survival of airlines in Africa, such as Kenya Airways and Ethiopian Airlines must understand the ownership structure, management, and operating principles of these two carriers.
For instance, Kenya Airways was established in February 1977, after the breakup of the East African Community caused the demise of East African Airways. It started operations on 4 February 1977 and was wholly owned by the Kenyan government until April 1996.
In 1986, Sessional Paper Number 1 was published by Kenya’s government, outlining the country’s need for economic development and growth. The document stressed the government’s opinion that the airline would be better off if owned by private interests, thus resulting in the first attempt to privatise the airline. In the fiscal year 1993 to 1994, the airline produced its first profit since the start of commercialisation. Also in 1994, the International Finance Corporation (IFC) was appointed to provide assistance in the privatisation process. In 1995, Kenya Airways went through some important financial processes, including the restructuring of its debts and a master corporation agreement with KLM that bought 26 per cent of the shares in Kenya Airways and became the largest single shareholder. In 1996, shares were floated to the public, and the airline started trading on the Nairobi Stock Exchange. In October 2004, the company cross-listed its shares at the Dar-es-Salaam Stock Exchange. In April 2004 the company reintroduced Kenya Airways Cargo as a brand and in July 2004, the company’s domestic subsidiary Flamingo Airlines was reabsorbed.
In the full year, results ending 31 March 2005, profits after tax almost tripled over 2003-4 to US$50 Million.
The airline is currently owned by individual Kenyan shareholders (32.5 per cent), KLM (now Air France-KLM) (26 per cent), Kenyan government (22 per cent), Kenyan institutional investors (15.7 per cent), foreign institutional investors (4.36 per cent) and individual foreign investors (0.07 per cent). It has 2,408 employees (as at March 2007). Kenya Airways also owns 49 per cent of Precision Air in Tanzania.
But despite the pedigree of the shareholders, the airline’s heavy financial loss last year has almost affected its smooth operation.
As for Ethiopian airlines, in 1945, Emperor Haile Selassie, ruler of Ethiopia at the time, contracted Trans World Airlines to set up, and manage the airline. The agreement included the provision of spare parts, and ground equipment by TWA in return for fixed payment based on revenue. It also included hiring of flight and maintenance crew and other key personnel. Expatriates constituted half of Ethiopian Airlines employees at the time.
In 1965, the status of the airline was changed from corporation to a share company and the title Ethiopian Air Lines became Ethiopian Airlines.
Obviously, those clamouring for a national carrier know very little about airline business, especially if government is directly involved. I am not sure if Nigeria is ripe enough for another wasted public enterprise, when glaringly, other government-owned corporations like NNPC and NEPA have been outlets for looters. It is not difficult to merge Arik and Aero to form the new national carrier, since both are owned by Asset Management Company of Nigeria (AMCON). But desire for profitability should not be the motive because it will not be profitable in the first seven years of its establishment—-guaranteed.
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