An infant industry and life support mechanism
Photo: PEXELS
Airlines globally rely on the government’s buffer to weather turbulence as they come. But in more stormy climates, strategic incentives for struggling operators should not be a hard sell to the local authorities. WOLE OYEBADE writes.
Last month was disastrous for the air travel business in Europe. Without an air mishap, the storm consumed four airlines in quick succession. Two of these airlines were over 50 years old, demonstrating that countries like Nigeria – with airlines not lasting five to 10 years – are not alone.
Thomas Cook, the world-famous in travel, went belly up after 150 years of success in packaged tours. On the day of the bust, over 600,000 of its passengers and guests were stranded in destinations around the world.
While patronage was least of Thomas Cook’s existential problems, several factors could explain the buildup to its demise. But the final cause was the refusal of the British government to support the airline with a bailout.
Justifiable or not, such a variety of economic and political supports for airlines and aviation sector globally, largely determine airlines that will keep surviving the odds and those that had either gone under or waiting to become history.
Survival of the strongest
At every news of another bust last month, stakeholders were quick to point at the European Union (EU) and its programme of airline liberalisation, which did open up the airspace and made it possible for all carriers to compete in all markets.
This has seen the likes of big conglomerates such as Lufthansa and Air France-KLM competing with low-cost airlines like Ryanair and EasyJet across Europe.
With the strongest support from investors and government, especially for national carriers, it was almost impossible for more private-owned carriers to sustain operations.
Of course, UK’s Thomas Cook, French’s Aigle Azur, and XL Airways, and Slovenia’s Adria Airways are not the only casualties of the currently volatile European market. The years 2017 saw the collapse of Monarch, Air Berlin, and Alitalia, who were joined by Cobalt and Primera last year. So far this year, Germania, Flybmi, and Wow Air had also gone under.
Ryanair chief, Michael O Leary, predicted months ago that Europe would see numerous more bankruptcies before the period of European consolidation was done, no thanks to the open market policy.
Africa tags along with SAATM
While airlines’ consolidation is still new if not alien to the African region, the region is already walking the tight rope of an open market, otherwise called the Single African Air Transport Market (SAATM) agenda of the African Union.
The Federal Government has since joined other 32 out of the 54 African countries to okay the air transport liberalisation plan – a move that has also widened the eyebrow of the struggling local airline operators.
On the merit of SAATM, the operators said there was nothing ugly with opening up for more connectivity and prosperity of aviation on the continent. But the challenge is opening up without a competitive game plan for attendant benefits.
Chief Operating Officer of a local carrier said: “As we speak, we are at a disadvantage. No Nigerian airline can compete with other African carriers. Add all the operating aircraft in Nigeria together; it is not up to half of Ethiopian Airlines’ fleet.
How do you compete with such an airline in an open market?
“Again, all the dominant airlines in Africa are national carriers, with the strong backings of their government and a better operating environment. Do we have such a business-friendly clime? No. So, why blame us for not being strong and competitive..”
An industry at its infancy
Some stakeholders are of the view that there is no basis for pitching the local airlines with their foreign counterparts in open competition when the industry in Nigeria has still not come of age.
President of the Aviation Safety Round Table Initiative (ASRTI), Gabriel Olowo, recently said one of the indices of measuring growth was the amount of revenue accruing to the industry, especially the airlines.
As a dollarised industry, he observed, the airlines were better off in the 90s than they are today due to the higher exchange rate without an adjustment in airfares.
In 1994, the exchange rate was about N22 for a dollar. Nigerian airlines sold a one-hour flight ticket for Lagos-Abuja or Lagos-Kano at N2,200 or $100 equivalence. About 25 years later, the exchange rate is N350, which implies that the airlines now charge less than $100 at an average of N25, 000 per ticket.
Industry expert and consultant, Chris Aligbe, reckoned that the foregoing was an indication of an industry in its infancy and must be treated as such for proper effect.
Aligbe said though the government had lately given some assistance to the sector, so much still needed to be done to help the industry, especially the airlines to come of age and be competitive.
“For me, the industry is not asking the government the right questions. I have said it over and over, this industry is still at its infant level and what to be done is to declare it as an infant industry. That way, there are privileges that will accompany it as an infant industry.
“For instance, the government can create funds that the industry can access; not just things like intervention funds. There can be funds at single-digit interest rates. Today, the airlines cannot borrow at double-digit rates. No airline will survive at 21 or 25 per cent interest rate. That is a killer but the single-digit rate is okay.
“The businesses can even be protected by regulations that allow the airlines some tax-free holidays. The system can allow indebted airlines some period of grace to come out of the indebtedness like Chapter 11 provides for in the United States. We don’t have that here but we can have a body of benefits or incentives, within which an airline can grow.
“Government can also look at charges of the agencies from airlines as a means of helping the latter to survive. A new airline can be allowed to pay just 50 per cent if the charges for the next five years to gain stability and come up. If you cannot survive for five years, then it means you cannot outgrow infancy. Also, infrastructure should be improved to keep airplanes flying round the clock instead of being on the ground and losing money,” Aligbe said.
The Chairman of Air Peace, Allen Onyema, agreed that “cheaper funds” would go a long way to stimulate more activities in the sector.
“All over the world, aviation is a catalyst for economic development. It is not a profitable business, but it drives the economy. Today, Air Peace, at full capacity, does about 110 flights daily. That is huge for the economy.
“Outside Nigeria, airlines access funds at two to four per cent interest rates. Me, I have been borrowing for Air Peace at 26 per cent. That is why in Air Peace we would struggle immediately to pay back our loans,” Onyema said.
Life support for survival
Like other high-capital intensive industries, global airlines are not unused to a wide range of direct and indirect subsidies in the form of grants, equity infusions, loans, and guarantees, at least to avert a collapse and massive job loss.
For instance, in the period of 1990–1993, global airlines made a loss close to $25 billion, while in the period 2000–2005, losses may have been in the order of $30 billion, of which a considerable share was covered by government bailouts.
In the aftermath of September 11, 2001, some $5 billion was given in direct grants to U.S. airlines and supplemented by up to $10 billion in loans. These subsidies cover losses caused by an external event and were also awarded to airlines in some European countries.
Recent claims by the Partnership for Open and Fair Skies state that the airline Etihad received $1 billion in interest-free loans, and $1.2 billion in cash in 2013, as well as $3.504 billion in government shareholder funds in 2014.
Nigerian airlines are not unfamiliar with such interventions. Group Capt. John Ojikutu (rtd), recalled that the federal government “went out of the normal” to support private airlines in 2010/2012 with over N200 billion intervention funds at six per cent interest rate. However, the funds were mismanaged by many who had no business in the aviation industry and left the sector in the doldrums.
Ojikutu said while other governments might be supporting national carriers and designated flag carriers for growth, it is “definitely not private airlines”.
Travel expert and instructor at the Lagos Aviation Academy, Rilwan Saka, added that economic support model like the single-digit interest rate should apply to businesses generally, though in isolation might not change the fortunes of the airlines.
Saka explained that other positive factors like infrastructure and equipment had to be incorporated into the operation of the airlines, to bring them at par with dominant national carriers of the like of Egypt, Tanzania, Kenya, Ethiopia, and Rwanda.
Apparently in agreement with Saka, a member of the aviation round table, Olumide Ohunayo, said the industry had for so long focused on the safety component without the airline’s growth for adequate effect on the entire economy.
Ohunayo said models like the Fly Nigeria Act, which had been in the works in the last 15 years, should not be overlooked as part of the developmental plans of the industry.
Indeed, air travel business is volatile globally. But with more purposeful support from the government and the business community, the operators and the industry at large can get by, though gradually but surely.
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