Evaluating intrigues, challenges in airline business

Deep pocket not solution

One can conveniently say that the only harder thing to start up than an airline is a nuclear plant. The reason you are able to raise capital is that financial markets love the idea of investing in an airline. When it works out, you can make enormous amounts of money.
However, having deep-pocket investors who ready to bankroll an airline is not enough. When Arik started flying in May 2007 out of Lagos, it had raised more than $300 million, making many to forget quickly the liquidated Nigeria Airways.
The carrier at the peak of its powers provided great services, pioneering the operations with over 20 brand new airplanes.

High mortality rate

The high rate of mortality of airlines in Nigeria is a huge and negative advertisement of how not to run a business of that magnitude.
In the past 20 years, only a very few of the carriers have maintained the near level of high professionalism they started with a few years ago. They are plagued by short lifespan of 10 years while those that have managed to exceed a decade have done that with so much pain.

With high oil prices these days, it means carriers must fly full planes to turn a profit, and smaller airports just do not provide enough passenger traffic.
At the same time, the major domestic carriers are more entrenched than ever in the Lagos-Abuja-Port-Harcourt triangular route. It is harder for a new entrant to wrangle gates there. Investors have become more cautious about lending to just any airline project. Infact, they run away from airline business in Nigeria because of the slow return on investment.

“Why would you ever want to start a new airline?” A respected aviator, who pleaded anonymity, quried. “The business is very capital-intensive, the returns are rotten and the track record is terrible. Plus, there’s simply no market for a new carrier today.”
Scores have tried and failed — Chanchangi, Bellview, Oriental, EAS, Air Nigeria, IRS, Aero Contractors, Triax, Okada, Savannah, ADC, Nicon, Albarka, Afrijet, Nigeria Airways, Capital, Dasab, Freedom, Fresh Air, Harco Air, Sosoliso, Wings Aviation among over 30 others.
Even the most successful of the new carriers, Arik Air, has so far failed to turn a profit consistently just like others.

Not even Buffet would dare

To underscore the precarious nature of airline business all over the world, Warren Buffett, who once called an investment in US Airways in the early 1990s one of his big gest mistakes, summed up the industry’s predicament in a letter to shareholders in 2008: “Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.” No accountability Losses in the nation’s domestic airlines from the early 1990s, the period the industry was deregulated, to the present are twice as large as their combined profits in the same period; although Nigeria airlines have never declared profits or losses. They do not have records of financials and have been managed in most cases like family businesses, making them to be very small and fragmented. Except for Medview that is listed on the Nigeria Stock Exchange (NSE), no Nigerian airline
for now is worth what it takes to be listed on the stock market.

Airlines in extinction

Fuel has become one of the biggest barriers to entry into the business, accounting for 35 to 50 per cent of costs as prices almost tripled in 10 years. The Nigerian Civil Aviation Authority (NCAA) that mandates airlines to do mandatory 50-hour demonstration flight as part of requirement for getting the all-important Air Operator Certificate (AOC) is a huge burden for start-up carriers.
This tough requirement could stop at least 27 prospective airline operators from completing the process.
A document made available by NCAA to New Telegraph showed that the airlines were in different stages of certification. While some have totally abandoned the process, others have put theirs on hold with plans to resume the process.
Operators, who stopped at stage one, are Glory Airlines (dormant), Dominion Air Limited, owned by Living Faith Bible Church (dormant) and Mounthill Aviation Resources Limited (dormant).
Those in stage three before they truncated the process are Air First (abandoned since 2015) and Jet Support Services. On stage three are Air Taraba, Air Jupiter, Quorum Aviation, Tropical, Xejet (on hold), and Jet Leasing Support.
Others on exploratory phase are Air Stream Aviation, Baltic Airlines, Manyatta Engineering Services, Meridian Airlines, Millenium Travels and Tours, New Okada, Onedot Aviation Oriental Airlines, Prime Air Services and Trebet Aviation Aerospace Nigeria Limited.
Prospective operators on stage four of their AOC processes are Toucan Airlines and Revilo. Revilo had made a request to the Director-General of NCAA to commence phase 4 on August 2, 2016.
NCAA has consistently stood its grounds in maintaining its strict policy of granting intending airline operators the all-important Air Operators Certificate.

Consolidation, merger as competitive edge

The fragmented and microscopic nature of Nigeria’s domestic aviation market are mainly responsible for the nation’s carriers not being competitive.
A former Managing Director of the Federal Airports Authority of Nigeria (FAAN), Mr. Richard Aisubeogun, had said that mergers and acquisitions remained the panacea for the survival of the country’s airlines.
He stressed that “domestic airlines should consider mergers and acquisitions, which will enable them spread risks, sustain their operations, provide better access to international capital market and provide employment opportunities for the industry.”
Describing the decline in the fortunes of airlines in the country as worrisome, Aisubeogun recalled that in 2010, Nigerian carriers owed FAAN $59.5 million, while the total debt of the airlines to aviation agencies as at 2011 was $66.7 million.
He explained that of the 150 active Nigerian airlines in 2001, the number declined to 19 in 2011, mainly due to financial mismanagement and failure to comply with industry policies. He stressed that only eight scheduled airlines were on the register of NCAA as at March 2017.
The industry seems to naturally gravitate towards post-iberalisation consolidation to spread risks and exploit group synergies.

Last line

For Nigerian carriers to survive, they must be able to translate broad competitive strategies into specific action required to gain and sustain competitive advantage. It is expedient to link strategy formulation and implementation into one efficient and seamless process.