Tag: national carrier

Soon, the government will launch a national carrier following the liquidation of the Nigeria Airways 10 year ago. But to the Chief Executive Officer, Jed Air, Captain Nogie Meggison, what the country should be talking about is a flag carrier because that is the trend worldwide. In this interview with KELVIN OSA-OKUNBOR, Meggison speaks on what the government can do to improve the industry.

Why are domestic airlines experiencing high rate of mortality?

It is very difficult to categorically state one reason or the other why domestic airlines fail in Nigeria. It is important to give you my background experience. Having spent over 30 years in the aviation industry, the factors that lead to airline failure or simply put, what some people refer to as the burst and boom circle of airlines, it is a combination of many factors. From a global perspective, anywhere in the world aviation is a barometer of the economy. It is the development in the economy that affects the sustainability and otherwise of airlines. Airline as a component of the aviation industry does not stand alone. It is the general effect of businesses in the economy that affects airlines. It is a great determining factor. It is the stability of the economy that affects airlines, their survival and its impact in the aviation sector. The strength or weakness of the economy has a huge impact on the sustainability or otherwise of airlines. Simply put, the growth and failure of many airlines is a direct determinant of the economy. Aviation does not stand alone; it is a reflection of developments in the economy. The effect of the economy on businesses in the country has contributed immensely to the high failure rate of domestic airlines, because airlines depend on the economy. The stability of any airline is directly proportional to the strength or weakness of the economy. You can tell the strength of any economy by its airlines.

Is this the experience in other parts of the world?

There is a direct correlation between the success and failure rate of airlines with developments in the economy. If you recall what is happening in Europe, for instance, we will understand how the strength and weakness of the economy is affecting airlines and their success or failure rate. Today in Europe you can see what is happening in the aviation sector. There is a direct link between the performance of the European economy and the airlines that operate there. Consider what is happening in Asia, the economy of the Asian Tigers is having a direct effect on the economy. Even, in the Middle East, the hot economic hub, you can see how the performance of the economy is reflecting on airlines. Because of the growth in the United Arab Emirates’ economy, that is why more airlines are springing up and doing well in that part of the world. In Nigeria, we have gone through our own economic boom and downturn which have affected the growth and development of domestic airlines. Airlines grow hand in hand with the economy.

Is it the case of burst and boom circle for domestic airlines?

People tend to think it is a circle that airlines just come and go. It is a pure reflection of the twists and turns in the nation’s economy. Rather, it is a different experience; aviation business in Nigeria is peculiar. It has its unique attributes and characteristics. Your feasibility studies may have been put together correctly by a team of experts on how to grow the airline business profitably, the truth is that the profit margin is so slim, compared to the turn over. The turnover is pretty high compared to the profit margin. The major challenge affecting airlines in Nigeria is interference. By interference, I mean external influences that affect the business that were not factored in when an operator was planning how to run the airline business. This factor is mostly responsible for the burst of airlines in Nigeria. It is also a contributory factor in other operating environments. External interference is a factor that is not calculated in the feasibility studies for the airline business. This factor easily affects the profit margins for Nigerian airlines. For instance, if there is war in the Middle East, it has a direct impact on aviation and airline operations in the area of the price of aviation fuel. This is part of the external influences or interference that trickle down to affect the fortunes of airlines from operational cost point of view. Another scenario, we can adopt is if there is an embargo on Venezuela, a member of the Organisation of Pteroleum Exporting Countries (OPEC) countries, it will affect the price of crude oil, from which aviation fuel is processed. The global price of crude oil could move around 10 to 20 per cent depending on the prevailing circumstances. If the margins of profit and loss in the aviation industry is about eight to ten per cent, you can see how the ripple effect of between 10 to 20 per cent change in the global price of crude oil could impact on airline operations . These are the factors that affect the growth and depletion rate of domestic airlines. These are purely external influences and interference that affect airline operations, which are not factored in at the initial stage when the airline feasibility was worked out.

The consequence of this is that if the oil price index moves about 20 per cent, with the cost of aviation fuel contributing over 40 per cent of the cost of operations, this invariably affects the profit margin arising from increasing costs of operations from fuel alone. There is also the issue of interference from government policy with its attendant impact on airline operations. Today in Nigeria, the issue of government policy in the area of navigational and terminal charges just increased for non – scheduled commercial operators by aviation agencies is having a direct impact on airline operations. Operators are not opposed to introduction of charges, but would appreciate if such charges reflect the scale of their operations in a way that it does not put much pressure. For instance, if a $4,000 charge is introduced by aviation agencies for charter operations, we automatically know how such amount will affect charter airlines. If the average hourly charge for domestic charter for a flight from Lagos to Abuja is about $6,000, with a return flight averaging about $12,000, the introduction of $4,000 as charge for such operations will increase the operating cost for the airline by30 per cent. So such incremental charges will eat deep into the profit margins of the affected operators.

What are the implications of such charges on the operations of airlines ?

Let us be realistic, such a charge is already a threat to the profitability of any charter airline. This is because there is no way any operator makes 30 per cent profit on any flight to justify sustainable operations. These are the issues that affect the burst and boom circle of airlines in Nigeria. The scenario I have just given automatically takes the airline operations into the financial red region of unprofitability. Other factors that affect airlines’ sustainability include the taxes, levies and payments that airlines are expected to make that come from the government. They have their collateral effect on the operations of airlines. Other factors and charges that are not fixed take a huge toll on airline operations. The airport charges, taxes, navigation fees, and other levies introduced by government is affecting the business. Then, look at the role of financial institutions. They are also not assisting enough to get Nigerian airlines out of trouble. The high interest rates charged by Nigerian banks are too high. This alone has led to the collapse of many airlines.

How does this affect the economics of airline business?

High interest rates by Nigerian banks is not conducive for the domestic airline environment. When compared to the interest rate by banks and financial institutions from other parts of the world, the rates are relatively low enough to stimulate business and borrowing. In some parts of the world, banks loan money to airlines at between two and three per cent interest rate, but here in Nigeria, the banks charge as much as between 22 and 27 per cent. This is too high for any profitable business. But, we are happy that the government is doing something to bring about reduction in interest rates to enable domestic airlines access funds through some intervention. If this intervention fund is well implemented, it will assist airlines a great deal.

The Federa Government packaged intervention fund for the industry a few years ago. What happened to it?

Well, talking about intervention and funds from the banks that some airlines accessed in the past, it was not given as investment into domestic airlines. It was given to cushion the banks that borrowed money to some domestic airlines. It did not bring about any serious investment in the airline industry. The intervention funds were given to the banks as a way of reducing their exposure to the aviation sector bad debts. The intervention funds did not bring about any serious investment into any domestic airline or investment in their infrastructure. It was intervention funds for banks to cushion the effects of loans given to airlines, which had almost become bad debt. So, domestic airlines that did not have bad debts with the banks were not a beneficiary of the intervention funds that were given. The consequence of this is that, if as an airline operator, you were not indebted to the banks, the so-called intervention funds did not impact on your operations positively. If was just an avenue to cushion the effects of bad debts owed banks by done airlines. It did not bring about any positive investment in airline operations.

For airlines that were indebted, instead of the banks charging high interest rate on the debt, government facilitated a reduction of interest rate the debtor should have paid to the bank for the loan. That was the whole essence of the intervention funds. For those of us, who did good business and did not fall into the hands of the banks by owing them money, the intervention funds were not for some of us. What government did was to negotiate the interest rate on behalf of the debtor airline from the supposed 28 per cent to about eight per cent. That was basically what happened. So, those of us that did good business without owing we’re not eligible to benefit from the intervention funds. That is the major reason some of us cried foul over the way the funds were disbursed, that it did not bring in any investment into the aviation sector for domestic airline operators, whether you are scheduled or charter. Our clamour is that government should put in place a more robust policy or scheme that will bring in investment into the industry. That is one of the ways that intervention should be robust.

Are airlines’ business plans robust enough to ensure profitability and sustenability ?

It will be wrong to say airline operators do not have a robust business plan. Everybody gets into business with the expectation to make profit having done their background checks. So, I am confident to admit that indeed many operators set out with a good business plan. The business plan may be robust at the point the airline was set up, but the effects of external factors and interference affect the business. That is how an unfriendly policy from government as an external factor or interference could affect the business which was not factored in in the business plan. No matter how robust the business plan, the effect of such policy could affect the profit margin. This explains why we are discussing with government on how to assist domestic airlines, which will be in the form of subsidy or one measure of assistance or the other.

To what extent is the multiple charge regime by aviation agencies impacting negatively on airline operations?

Multiple charges have direct impact on the operations and profitability of airlines. A collapse of the charges into a unified block will assist operators, whether they are involved in charter operations or scheduled. That is why the one-stop shop payment system introduced by government will be of immense benefit to domestic airlines. We think it is good, it is the way to go, and it will assist airlines to rework their cost of operations, which we continue to argue is on the high side. The single platform payment system just introduced is good for the system, it is good for all. If well implemented, it could ameliorate the problems of airlines. It is good for operators, because it will take the headache and stress off their shoulders and heads. It is good, but, we insist that the process should be transparent enough for both service users and providers. If the charges remain same and we are paying into one system, it is a good idea. But government just waking up with a sudden increase in charges will definitely affect our profit margins and business plan.

How difficult is it to set up an airline in Nigeria? What is the level of returns on investment?

The whole system about setting up and running an airline in Nigeria has changed dramatically. Many years ago, an operator could acquire an aircraft and in a matter of days, the airline hits the ground running. But, these days, the regulatory procedure and processing is becoming a lot more tighter and longer in terms of time. You need about 18 months before you can conceive an airline and start flying. There is a lot more involved in terms of certification processes and procedure to get the air operators’ certificate and start flying. You could even wait for more than 18 months no matter how push full the operator is. The stakes have been raised.

There is this idea of floating a national carrier airline. What is your take on it?

Well, this is an interesting subject that often would elicit varied reactions. But, let me address this from the point of view of being Chairman of the Airline Operators of Nigeria (AON). I have told my members that we need to look at the books and give serious consideration to this issue. Generally, we should be moving forward and not moving backward. There are different voices on this issue among operators. But, I think the concept of national carrier is archaic. What is being adopted globally is the flag carrier model. The airline industry has gone far ahead of archaic models. The era of national carrier is long over. Even, a country as vast as Brazil, now has many flag carriers. Even in the United Kingdom (UK), it is the concept of flag carriers that the country is pursuing. The concept many countries are pursuing now is flag carrier. This has happened in Brazil which now has seven flag carriers after the experience of Varig Air. In the UK, they have moved from national carrier to the concept of flag carrier with British Airways and Virgin Atlantic Airways. So, the concept of national carrier is outdated. I think Nigeria should look in the direction of what other nations have done to designate domestic airlines as flag carriers. Gone are the days of national carrier, it is out of vogue. Aviation business has gone digital, it is no more analogue, so, why do we need to go back to outdated models? But, airline operators under the umbrella body are consolidating and talking to the government on how to achieve what is the best for the aviation industry. We are convinced that government has good plans to set up a national carrier, I am sure the promoters of the carrier would have done their home work so that by the time the whole thing is worked out, the picture will become clear, and it is going to be a win win situation for everybody.

But lack of capacity has been identified as the major reason for not designating international routes to domestice airlines. Is this correct?

Well, this is a very interesting issue. But, let me give you a scenario of what happened in the telecommunications sector and power sector. Long time before privatisation or deregulation, government threw out bids and asked those who were interested to demonstrate their capacity. In the same vein, government should throw international routes open for bid for airlines that think they have the capacity to fly into them. The same thing should apply for all the bilateral air services agreement. That way, it becomes competitive for those who have capacity to deliver.That was what happened to the generating and distribution companies in the power sector. The same model should be applied in the aviation sector. That is what happens in other parts of the world. If it is done this way, it will be more robust and transparent for those who have capacity to deliver in flying into international routes. International routes should be put up for bids for those that have the financial capacity to go into its operation. What the airlines will then do is to get technical partners that will assist them to make it a reality. That is how global aviation works. It is driven by technical partnerships. You cannot do it all alone. Operators do not need to come alone but approach the business from a technical partnership point of view. That is the way to drive growth and development for air transport. Generally speaking airlines should bid for routes.

What is the best form of intervention that government can package for airlines?

There are many ways the government can intervene to assist domestic airlines. Government can create some soft landing measures to assist airlines to keep the business running. The minister of aviation is seriously looking into that through the partnership of the Central Bank of Nigeria (CBN), we are confident she is going to do something about it. The minister has been talking to the CBN on how to assist domestic airlines. We are confident that something good is going to come out of that. Assistance to domestic airlines by government is not necessarily the provision of funds for the business, it could be through the establishment of aircraft maintenance facility; the construction of a fuel facility to reduce operating costs for airlines; it could come through many other ways. It could be by making the flight time shorter, which will save time and reduce over 20 per cent cost of fuel. It could come from the provision of landing aids, fuel subsidy and put the money into refineries that will reduce the cost of aviation fuel.

What about accessing funding from multilateral organisations?

This will be achievable if we have a more conducive operating environment through favourable government’s policy. This is good, but Nigerian banks are afraid because of risk perception to loan to domestic airlines. Once government can give guarantee and create a development fund and give guarantee to access funds, then this will be easier for airlines. But, there are different ways of accessing the funds if you have a local bank guarantee. But, it is a bit difficult now, because the banks are afraid. But, government can give loans as it happened in the power sector.

Do you think the airlines in Nigeria are too many?

The airlines are not too many, if the government creates an enabling environment for them to thrive. It is a capitalist world. We can have as many airlines as possible. More airlines are welcome if there is stability. We can even go into other West African countries as it has happened in the banking sector because the position of Nigeria has already made it a regional hub.