Speculations of a possible merger of some domestic carriers have refused to abate. Rather, they are gaining momentum in the aviation sector.
There is discontent among domestic airline operators, Aviation ministry officials and industry experts over the propriety or otherwise of the move.
Some experts and operators describe the proposed merger as perhaps the best thing to happen to the sector where the attrition rate of airlines is high; others are suspicious that the plan may have been subtly packaged under the guise of domestic carriers’ recapitalisation. In other words, the recapitalisation plan is seen as a ploy to force domestic carriers to merge.
Such suspicion, The Nation learnt, started last month when a committee set up by Aviation Minister, Chief Osita Chidoka, recommended a N5 billion capital base for domestic carriers. Earlier in April 2007, after the spate of air crashes in 2005/2006, the Federal Government raised the capital base for airlines on domestic routes to N500 million, while regional operators were required to recapitalise to N1 billion.
Those on international routes were required to recapitalise with N2 billion. But, the committee headed by Mr. Ahonsi Uniugbe, said the N2 billion initially set as capital base for domestic carriers is insufficient, given the high cost of running airline.
The Unuigbe-led committee, therefore, recommended that domestic airlines should recapitalise, noting that the current minimum capital base for airlines, which is pegged at between N500 million and N2 billion is insufficient to maintain a single aircraft. “The minimum capitalisation requirement for domestic airlines is only N500 million, which at today’s exchange rate, barely covers the cost of effectively operating and maintaining one aircraft and, therefore, does not ensure a fleet size that allows for economies of scale,” the Committee said.
But some experts and operators would have none of that. They are kicking that the recapitalisation proposal is a ploy to force airlines to merge. Their suspicion may have been based on recent call by the Secretary General of African Airlines Association (AFRAA), Dr Elijah Chingosho, for the coming together of African carriers.
He said in Lagos that attempts by airlines to do it all alone, is not feasible. He said there have too many failed airlines, urging the government to put in place an appropriate policy instrument to encourage airlines’ merger and consolidation.
The AFRAA scribe pointed out that consolidation is critical to the airline sub-sector, warning that doing otherwise means the airlines would continue to close shop in droves. He observed that indigenous carriers failed in the past due to lack of consolidation, stressing that the era of small airlines operating in the continent was over.
The planned merger appears to enjoy the support of the Managing Director of Medview Airlines, Alhaji Muneer Bankole. He said the merging of domestic airlines or going into interline agreement was good for the industry.
According to him, cooperation among carriers is the only way to make air transport seamless and cost effective. He said if airlines cooperate, it would make air travel less cumbersome, adding it was time carriers embraced global practices.
The Medview boss said the rationale for interline pact might not be unconnected with lack of cooperation and other operational factors that led to the collapse of over 10 airlines in the country.
The implementation of the agreement, he said, would give airlines the leverage to tap from the benefits of economies of scale, which in turn would reduce cost for the operators. He cited a situation where Medview Airlines had some operational challenges with one of its aircraft, and had to transfer its passengers to another airline under an arrangement between the two carriers.
“If the cooperation and understanding does not exist between Medview Airlines and Aero, how possible would it be to help fly passengers who could not be air lifted due to operational challenges,” he asked, noting that Medview Airlines’ counsel is that more airlines should come together and forge cooperation, adding that this is good for the survival of the business.
President, Sabre Travel Network, Mr. Gbenga Olowo, agrees. He warned that Nigerian and African airlines might face serious trouble if they do not embrace merger and consolidation soon. Noting that efforts to ensure merger and consolidation among the continent’s carriers failed in the past, he, however, emphasised that merger or consolidation could not be achieved by government coercion.
Olowo lamented the precarious situation of indigenous airlines, saying that there were less than 70 aircraft in the fleet of the carriers in the country, whereas an airline like South African Airways has over 67 aircraft in its fleet. He said: “Nigerian airlines are at the bottom level of success. The airlines that we have in operation are in the lowest rung of the ladder in terms of revenue, service delivery and good business model.”
Managing Director, Overland Company, Capt. Edward Boyo, said indigenous airlines would remain behind in global aviation industry unless they cooperate. He observed that in the past 10 years, no fewer than 10 Nigerian airlines have closed shop, leaving only seven.
Boyo said: “Mergers enable growth, increase the market shares, increase values of customers, increase credit worthiness for the airline and enhances market perception of the airlines. However, merger cannot be done by government coercion. It has to be marriage of willing parties and there should be trust.”
He observed that one of the problems of mergers in the sector is lack of trust among the players. “Merger is a voluntary amalgamation of two firms on a roughly equal term into one new legal entity. On the local scene, mergers, consolidation, cooperation and synergies are yet to be realised,” he explained, adding that the question remains how these conditions can be met within the local and regional operating environment.
Aviation finance expert, Mr Nick Fadugba, supports merging of airlines because of its benefits to them. He said: “I would like to see airlines in Nigeria enter into mutually beneficial partnerships and joint ventures with each other which would enable them to become more efficient and profitable. In fact, Airline Operators of Nigeria (AON) should be championing this cause. All the airlines in Nigeria are owned by shrewd business people who, in addition to wishing to provide safe and efficient air services, also wish to make a decent return on their significant investment.
The aviation expert said combining forces could help achieve these two objectives.
“I would like the airline owners, at least, those that are willing, to sit in a room, lock the door, and ask themselves: ‘How can we work together?’ ” he said, adding that if two or more Nigerian airlines joined forces, they would have a larger fleet size and other resources.
Fadugba also said though Nigeria’s airline industry can be bouyant, many of the players are too small, weak and undercapitalised to take advantage of the market opportunities. “I believe our airlines need to achieve a critical mass to benefit from economies of scale. I believe Nigerian airlines should come together and work together for the common good, no matter how difficult this may seem in the early stages,” he said.
He noted, however, that indigenous airlines’ owners said it would be difficult for them to work together, in view of their ownership and philosophies, adding that they are competitors. He said several airlines operate the same aircraft and engines, meaning that by forming aircraft spare parts and engine pools, they could achieve significant savings as well as greater operational efficiency.
Fadugba said the same approach could be applied to in-flight catering to reduce costs through joint purchasing. He, however, said each airline would have to ensure that it met its payment obligations promptly, otherwise such schemes would fail. Through such cost-saving arrangements, he believes that the airlines could maintain their individual identities in a partnership.
The airlines, Fadugba said, could also work together when it comes to negotiating with aircraft and engine leasing companies as airlines planning to acquire similar equipment could work together to obtain better pricing. With two or three airlines negotiating together for a larger pool of aircraft they are likely to obtain a better lease rate than one airline negotiating on its own for one or two aircraft.
Despite the obvious benefits of the proposed merger, not many players are impresed. They argue that they are mere subterfuge to force airlines to recapitalise.
The Executive Chairman, AON, Captain Nogie Meggison, said the government should rather raise the bar through regulatory policy instrument instead of forcing carriers to merge. He said recapitalisation would not succeed in aviation as it did in banking because they are different industries.
Meggison argued: “From my own point of view, aviation is not banking. Most of those who label themselves aviation experts at times have very myopic views about aviation. Since they are not inside, they don’t really have a clear view. It is like telling me to go and umpire a rugby match when I don’t really know the regulations. So, when you look at it; you do so from a finance point of view or from the point of view of a concerned interest in aviation.
“Merger is a different issue. They are all private companies most of the time it is not public companies using public funds, so you can’t tell Mr A selling Roast Plantain, that if he wants to sell he must join Mr. B. My feasibility study is different from the other person’s feasibility study.”
Captain Meggison said the best thing to do is to raise the standard. For, he said, “You can’t tell two people who are taking funds from two different sources and have two different projects to join their businesses. There are tricks. Some people come in with different policies and different agenda. Some came in as low cost; some came in as classic, some as charterers, while some as cargo. So, you can’t just place a blanket on all of them and ask them to merge. It doesn’t work and you will just end up with zero.”
Chairman, Air Peace, Mr. Allen Onyema, also thinks that the proposal is an inappropriate measure in addressing the challenges of airlines. He said recapitalisation by airlines is not sufficient evidence that the carriers are in sound financial health.
According to him, pegging a fixed amount for any airline is insufficient evidence that the carrier has the technical wherewithal to operate safe flights.
His words: “I am in support of any policy by the government that would make the aviation sector stable. I have not heard anybody in the government talking about recapitalisation of airlines. But we are hearing rumours that they are proposing about N5 billion recapitalisation for domestic airlines. It is strange to me that figures are being thrown about. The airline sector is not like the banking sector. It is strange to hear this in Nigeria; it is unusual in other parts of the world to propose this.”
He emphasised that airlines are not banks that had to recapitalise because they need to give out loans daily. He noted that banks need more money as back-ups to give out, adding that the same model cannot be applied to airlines. “Banks need solid financial base because they daily have to give money to people to trade with. Airlines do not trade with money, so the whole idea of requesting them to have a N5billion recapitalisation base is not ideal,” Onyema argued.
The Air Peace Chairman said that when the government is proposing recapitalisation in aviation, the model for the banking sector could not be applied to aviation. “What I think the government should do is to put in place policies that would assist airlines to source cheaper access to funds, ease the problem of aviation fuel by reducing the taxes. The new airlines should be given four years tax holiday,” he suggested, adding that there are no mega profits in airline business.
Onyema said what should be paramount is to ensure that airlines are categorised to operate according to the number of aircraft they have. For instance, airlines, he said, should be restricted to operate limited routes according to the number of aircraft in their fleet. “To me, this is the best form of recapitalisation. Airlines’ operations should be restricted to the number of aircrafts they have, not to set N5billion by the side,” he said.
He warned that if the government’s plan is to forge mergers in the industry, the proposal will not materialise, as mergers are not forced. He called for the creation of a conducive environment that would encourage collaboration among the carriers. He said the partnership among airlines is the way to go, as against the proposed recapitalisation.
Onyema also said that Air Peace is not favourably disposed to merging with other operators, but could enter into operational agreement for use of aircraft under a code share arrangement.
“I do not think I am interested in merging with another airline. But I will be happy to work with airlines that have same business model like AZMAN Air to consolidate our northern operations. Airlines should be free to partner one another if the business understanding is there,” he said.
Similarly, Director, Zenith Travels, Olumide Ohunayo, argued that the planned recapitalisation is not a solution to the challenges facing local operators. He said instead of embarking on another round of recapitalisation, the Federal Government through the Nigerian Civil Aviation Authority (NCAA) should strengthen its regulatory functions on the issuance of Air Operator’s Certificates (AOCs) to local carriers.
Executive Director, Centre for Aviation Research and Safety, Sheri Kyari, condemned the proposed recapitalisation. He said it would lead to the death of some of the airlines that are struggling to survive due to several challenges confronting them.
According to Aircraft Engineer, this is not the time to recapitalise. To him, the recapitalisation may be a ploy by the authorities to force domestic airlines to merge.
But what is the government’s position on the issue? According to Chidoka, the government is worried over the high failure rate of domestic carriers. He noted that efforts were underway to design stimulus package and incentives that would get the troubled carriers out of the woods. Nigerian carriers, the Minister said, are grappling with a litany of woes.
Hear him: “Nigerian carriers have experienced dismal performance due to gaps in the system, which have hampered growth. These gaps include: underfinanced domestic airlines, underutilised BASA (bilateral Air Service Agreements), poor incentives for private sector participation and weak corporate governance in the industry.” He said government is worried hence the need to reverse the trend.
Chidoka said the government has designed a stimulus plan to assist domestic airlines, as other countries have done. He said the plan “would involve a package of financial incentives that will provide support across the aviation value chain.” What this means is that the government has not thrown its weight behind the proposed merger. It has not ruled out the option either.
So far, the Ministry has yet to make any pronouncement on recapitalisation. But when it does, it would be opposed by operators.
