NIGERIAN AVIATION SECTOR:

CHALLENGES & OPPORTUNITIES

Presented at the 2012 Nigerian Economic Summit - December 3, 2012

by: Mfon Udom

This brief presentation will aim at reviewing the active aviation market environment in Africa with focus on Nigeria, and to demonstrate the challenges and opportunities for the aviation industry in Nigeria.

African airlines only have 2% of the total revenue of the traffic between Africa and the rest of the world.

Introduction

List of largest Airlines in Africa (Year 2010/2011)

Airline Passengers* Fleet Destinations AllianceState

ownership

EgyptAir 9.517 70 79 Star Alliance 100%South

African Airways 6.634 54 35 Star Alliance 100%Royal Air

Maroc 6.034 55 80 100%

Air Algérie 3.5 42 68 95%Ethiopian Airlines 3.344 47 80 Star Alliance 100%Kenya

Airways 3.041 29 54 Sky Team 29.8%

Tunisair 2.443 33 53 0%

Arik Air 2.303 26 29 0%

Air Mauritius 1.133 15 26

(*) Total passengers transported in thousands

The potential to reverse this situation exists, but will require the concerted effort of all stake holders to address the infrastructure, political, technological and manpower challenges that the sector is currently faced with.

Air transportation has been one of the most important factors shaping the economy and demographic patterns of the world. That is why governments all over the world continue to invest heavily in this sector.

Introduction (cont’d)

The 2011 full year revenues of some of the major airlines of the world tabulated below, clearly attest to the fact that the aviation industry can contribute a large percent to a country’s GDP.

Introduction (cont’d)

Airline Revenue

Emirates $16.75B

United Airlines $33B

IAG (BA + IBERIA) $22B

Ethiopian $1.425B

South African Airways $2.05B

First recorded flight into Nigeria landed in Kano, June/July 1925. This was a Royal Air Force fighter aircraft on reconnaissance flight from Cairo, Egypt.

In 1946 West African Airways Corporation (WAAC) was formed by BOAC and Elder Dempster Lines for the four British West African colonies of Nigeria (68%), Ghana (then Gold Coast)(28.5%), Sierra Leone(3%) & Gambia(0.5%).

In 1958 WAAC was transformed to Nigeria Airways after the 3 other countries set up their own airlines following independence.

After Nigeria’s independence in 1960, Nigeria Airways became 100% owned by Nigerian government and remained so until it was liquidated in 2003.

Nigeria’s Aviation History

The Nigerian airline industry was deregulated in 1983, ending the one airline monopoly of Nigeria Airways and gave way to the emergence of several private airlines.

Since 2003, the private airlines have provided 100% of the domestic capacity for air transportation in Nigeria.

In the last ten years 18 licenses were granted but only three airlines with reasonable capacity remain in full scheduled operation today, a situation attributable to harsh operating environment, mismanagement and corruption. A N300bn FG bailout fund has had no significant impact on the sector and is now mired in allegations of fraud and diversion.  

Nigeria’s Aviation History (cont’d)

Air travel has become tedious, exploitative, unpredictable, fraught with safety concerns, allegations of regulatory incompetence and overbearance. 

Passengers remain at the mercy of the few airlines currently in operation and suffer daily due to the uncertainties and inefficiencies in the commercial airline sector.

2012 estimates indicate over 150 private jets owned by Nigerians (average cost/jet = $30 million), making Nigeria one of the biggest market destinations for private jets in the world.

Current Issues

The present reform process led by the Ministry of aviation has impacted positively on airlines services and the attraction of investments for infrastructure development in the sector.

Some recent achievements of the sector:

◦ The ongoing refurbishment & remodeling of the airport terminals and other aviation infrastructure.

◦ Achievement of the NCAA in attaining FAA Category 1 status (only 9 of 62 African countries have achieved this).

◦ The domestication of the Cape Town Convention, which has created the opportunity for Nigerian airlines to lease modern aircrafts to expand their fleet.

◦ Passenger traffic has grown from 4.4 million (2000) to 14.6 million (2011).

◦ Nigerian Airlines have modernized their operations and have continued to support the development of new routes to domestic, regional and intercontinental destinations.

Recent Achievements

Infrastructure Lagos airport not ready for hub operation Aged airport facilities No maintenance facilities/centers Poorly equipped training centers Poorly managed/equipped cargo terminals

Government polices: No clear & coordinated polices and strategies to support airlines and the aviation industry.

Fierce competition from foreign airlines European and USA mega carriers Dominant Middle East & African Airline

Challenges faced by Nigerian Airlines

Low utilization of aircraft/ low productivity No in-house heavy maintenance facility Security issues(limited night operation) Inefficiency in the industry value chain Customs slow clearing processes Aged airport facilities Non-integrated International and domestic terminals in

Lagos Power disruptions Limited economic scale and scope

Reasons for High Operational Costs

Aircraft and spare part import tax/duties/hassles

High labor cost(expatriate pilots and engineers)

High fuel costs(COO $.94/ltr/Lagos $1.06/ltr)

High insurance costs(+100%)

No financing/high interest rate/short term

High lease rates

About 20% higher than industry(due to poor credit risk)

7.5% with holding tax and 5% VAT

High maintenance costs

No in-house heavy maintenance facility

Excessive ground time abroad

Reasons for High Operational Costs (cont’d)

List of Nigeria Airlines that have stopped operations since deregulation

ADC Airlines (1984–2007) Nexus Aviation

Afrijet Airlines Nigeria Airways (1958–2003)

Air Nigeria (2010-2012)Nigerian Eagle Airlines (2009–2010, rebranded as Air Nigeria)

Albarka Air (1999–2007)

Nigerian Global Airlines (this airline was launched in 2003 but it never operated)

Bellview Airlines (1992-2009) Okada Airlines (1983- )

Capital Airlines (2003-2009) RiteTime Aviation

Chrome Air Service (1990–2007) Selcon Airlines (1993)

Dasab Airlines (grounded 2007) Sky Executive AirlinesEAS Airlines (1983–2006, to Nicon Airways) Skypower Express Airways (1985–2007)

Falcon AirlinesSlok Air (ceased operations 2004, to Slok Air Gambia)

Fresh Air (grounded 2007) Sosoliso Airlines (1994–2007)

Merchant Express Aviation Space World Airline (grounded 2007)Virgin Nigeria Airways (2005–2009, rebranded as Nigerian Eagle Airlines

Nigerian Airlines operate at higher cost than airlines from Europe, USA, Middle and Far East

The private sector alone cannot build the aviation industry

that “Nigeria deserves as economic power”.

The Nigerian government has to lead the development of a dynamic & world class aviation industry without further delay.

A government led transformational strategy that will bring government/private sector/foreign direct investment/strategic partners to rapidly transform the Nigerian Aviation Industry

Key Points

Strategic changes should be made in airline and airport ownership structure.

Review requirement for airlines to be designated as a flag carrier: such a company must be a public limited company with individual shareholding not to exceed 10%. This will ensure that no individual has an overbearing influence on the management of the company so that the airline can be run professionally and profitably.

Adopt PPP model for development of airports

Modernization and expansion of aviation training facilities: Massive development of young Nigerian talents in all areas of the aviation profession. Encourage young Nigerians to pursue career opportunities in the aviation industry by adopting the approach used in the 1960’s and 1970’s whereby young Nigerians were trained to become loyal, dedicated and skilled aviation professionals, under full sponsorship of government and corporations in the industry.

Top Priority For Government

Immediate waiver/avoidance of aircraft and spares import customs duties and hassles

Fast process of BASA requests

Transit visa/visa on arrival at Lagos airport.

Waiver of aircraft lease withholding tax &VAT, corporate tax (for at least 10 yrs), & value added tax on aviation services(ticket sales, airport charges, handling charges).

Low cost and long term financing for aircraft purchase and maintenance facilities.

Protection of Nigerian Airlines against foreign carriers

Investment in airports

Top Priority For Government

Review airport ownership structure – e.g. PPP with a view to creating viable airports.

Renovation of existing terminal buildings and structures (already in progress)

Construct new and modern terminal buildings in Lagos

Integration of international and domestic terminals in Lagos for smooth transfer of passengers.

Refurbishment of existing runways and construction of new ones where necessary.

Improvement of Navigation and Landing Aids

Provide steady power supply at all airports

Top Priority For Govt: Airports

Changes in policies should be discussed with all stakeholders and implemented in a manner that will create least disruption to the industry.

The CBN should empower the commercial banks to create a window for long term low interest funding for direct lending to aviation. The industry will require at least N500 billion for this purpose.

An aircraft leasing company with an initial investment of $10 billion over five years, should be setup by government to acquire modern aircraft direct from aircraft manufacturers and major aircraft lessors, and lease on to qualifying Nigerian airlines at preferential rates. This will help in the reduction of operating cost and improvement of efficiency and competitiveness.

Top Priority For Govt: Policies

Government to review downwards all taxes and charges relating to airline operation. This includes:

◦ Cancel import tax/duties on aircraft and spares◦ Significant reduction of stamp duty on aircraft purchase/lease

agreement◦ Waiver of aircraft lease withholding tax &VAT◦ In addition government should grant a corporate tax holiday for

at least 5years .

Top Priority For Govt: Policies (cont’d)

Government should take appropriate measures to reduce cost of aviation fuel. This should include urgent resuscitation of local refineries .

Reduce Insurance premiums paid by domestic airlines by empowering Nigerian insurance companies to form a local aviation pool that is able to negotiate better rates in the international insurance market for Nigerian airlines.

Urgent step should be taken to provide MROs capable of handling maintenance of various aircraft types operating in the country up to D-Check. In the interim government should fast-track the completion of the MRO facility at the Akwa Ibom International Airport and upgrade of the maintenance facility in Zaria.

Top Priority For Govt: Policies (cont’d)

African Airline StatisticsAIRLINE COMPANY

AGE FLEET SIZE

AVERAGE AGE OF FLEET

DESTINATIONS

Ethiopian Airlines

66 Years 42 aircraft

9.9 years 74 (57 International & 17 Domestic)

Kenya Airways

34 years 30 aircraft

8.9 Years 50 (41 within Africa)

Royal Air Maroc

54 Years 58 aircraft

10.2 Years 75 Destinations

South African Airways

77 Years 52 aircraft

9.2 Years 37 Destinations

EgyptAir 79 years 70 aircraft

5.2 Years 78 destinations

Despite all the improvements and innovation accompanying the deregulation and privatization of airline services in Nigeria, there are some challenges still prevalent in the system which have to be addressed.

A holistic approach has to be adopted to resolve the numerous issues militating against the growth of the industry

To catch up for lost time, there is need to consider the public-private ownership model for airlines in Nigeria, where the organization is led by the private sector and the shares held by the government can eventually be sold to the Nigerian public when stability returns to the sector.

Conclusion