AIRLINE BAILOUT: THE CAVEAT BEFORE GOVERNMENT

(article written Nov 2009)

The cheering but belated news filtered out from the presidency recently that after much resistance the government has decided to support the airline industry, by looking into economic or commercial travails and providing the necessary palliatives to stop the rot that has resulted in the grounding of three scheduled airlines, four having issues with the Economic and Financial Crimes Commission (EFCC) on non- performing loans and taxes while another is battling a judicial liquidation process, with the rest either down sizing or delaying orders.

A committee comprising of members drawn from the executive arm of government and some top airline executives was set up to look at the problems confronting the airlines. Not surprisingly, the Aviation Minister is not part of the committee considering he has always publicly opposed any form of bailout. The committee is to work out modalities for the bailout and submit for perusal, approval and possible implementation.

The airline industry has different types of bailout, which can be generally categorized into financial, market or fuel bailout. In the US, the government has a market bailout enshrined by law, with the FLY AMERICA ACT while big network airlines benefit from huge financial bailout considering the economic implication of allowing such airlines to go down. Others are the Public Service Obligation route (PSO) enjoyed by regional carriers to operate to unviable airports and funding of remote airports to support corporate and private aviation.

In Europe Sweden, England, Spain, Italy and France all have market bailout by executive fiat, because membership of European Union makes it difficult to enact it in their respective constitutions. The patronage of domiciled or European registered carriers is encouraged when public funds are used, even for deportees.

There is also an Essential Air Service programme (EAS) in Europe that stimulates travel to remote or unviable airports and is subsidized by the different governments for scheduled regional operators. Early this year, the French government loaned some French banks 5 billion Euros to stimulate financing of Airbus aircraft claiming they are not directly subsidizing Airbus.

In Asia, China and India they encouraged, supervised and implemented the consolidation process when deregulation produced two or three aircraft airlines. They went further to remove taxes/surcharges on aviation fuel, thereby reducing operation costs. Also, fuel from China’s reserve was given to airlines when the crunch was biting hard. Recently, the government of India and Japan approved huge financial bailout for troubled Air India and JAL respectively considering their size and general economic implications.

The Brazilian government reduced the tax on fuel and ensured Varig did not go into liquidation by supervising its auction bailout, merger and eventual acquisition by Gol Airlines while the Argentine government re-nationalized the floundering flag carrier to save it from going down.

The Ecuadorian government created incentives to modernize the country's private airline fleets by opening a special credit line for new aircraft acquisitions, and eliminating fuel-tax subsidies for older aircraft, while airlines with newer aircraft continued to enjoy fuel subsidy. The government prepared a credit line of $100 million for airlines supported by the Inter-American Development Bank and the Andean Development Corporation.

In Africa, the Egyptians set up a Civil Aviation Fund that supports critical sectors of the industry, the latest being an aircraft leasing company that will offer their local carriers aircraft at highly competitive rates. South Africa has done everything possible to keep SAA afloat using all forms of assistance, while the story is the other way round with the only profitable carrier in Africa, Ethiopian airlines adding value to the government purse.

In the Middle East, almost all the flag carriers are beneficiaries of massive fuel subsidy, which they have gladly accepted, although Emirates continues to deny its status as a beneficiary. Fuel is a big factor in deciding the survivability of major airlines, considering the fact that the unit cost of fuel in most airlines is between 35 to 45%.

In Nigeria, we liquidated our national carrier instead of giving a life-line and wobbled and fumbled in an attempt to start another carrier. Fortunately, private carriers came to our rescue, but they are now being deliberately or naturally orphaned by government actions and policies which are tilted towards multiple designation and entry for foreign carriers. Some state governments are developing airports, while others are funding federal airports in their domain in a bid to save them from near collapse and have promoted flights to some of these airports by buying seats on some domestic carriers. States such as Ondo, Kwara, Cross River and Katsina have cloned the PSO and EAS service which is being practiced in developed countries.

The airlines in Nigeria were caught up in this turmoil due to some reasons such as bad system, process & management; low economies of scale; unfettered confidence in some expatriate managers; flirtatious bilateral agreements to enrich Bilateral Air Services Agreement (BASA) funds; greed of major oil marketers who were recently accused by petroleum industry officials, of selling kerosene as aviation fuel just to make excessive profit, not minding the safety implications of their actions and taking undue advantage of deregulation policy. Others are multiple and across the board rates, charges or taxes; the global economic meltdown; Nigerian Civil Aviation Authority (NCAA) emphasis on safety to the detriment of economic oversight and the recent but well intentioned Central Bank of Nigeria tsunami which resulted from the need to stop name flow lending instead of the universally accepted cash flow lending process.


The crux of the present problems with our carriers is our in ability to support and believe very strongly in our flag carriers which are the de-facto national carriers. Quoting Mr. Nick Fadugba recently “What Nigerian airlines need urgently is a hand-up and not a hand-out like their counterparts world over”. We need to realize that KLM, British Airways, Lufthansa are flag carriers not national carriers, with strong national identity and government backing. Flourishing flag carriers will have and encourage viable domestic operations either as competitors or subsidiaries. We must protect and support them by placing less emphasis on commercial touting otherwise known as generating BASA fund. We need to re-jig our bilateral agreements and provide a bailout package or an industry centered stimulus package, which is not a favour but a norm as earlier highlighted.

Bailouts are directed at troubled organizations while stimulus are used to improve a system or service delivery, they generally save jobs, keep the flag flying and save the economy from any distortion due to absence of competitive flights or service. Other reasons considered for Airlines are those that have valid Air Operating Certificate, operating scheduled flights that are critical to the country’s air network, verifiable business plan and ownership & management composition. Looking at our carriers, only four of them are entitled to financial bailout while every other scheduled operator can benefit from the market and fuel bailout, except for the youngest operator who has the highest load-factor per flight departure with his MD 83 aircraft. The airline however needs to infuse Nigerians into its ownership and management structure, before it can plug into tax payers bailout.

The charter, private and special service operators are not entitled to any form of bailout. It is a luxury service that must pay its way. This category of airline have abused past palliatives going under the tag of Airline Operators of Nigeria or using documents of registered operators to circumvent the system.

There are some constraints we need to address before giving bailout. Our airlines are fragmented and lack the critical mass, in line with the recent decision of the African Civil Aviation Ministers meeting in Yamoussoukro, Cote’d Ivoire. African airlines were advised to commence a process of consolidation and integration to improve operational efficency, combat foreign competitors and stimulate the implementation of the Yamoussoukro Decision.

We also need to look at the management of these airlines and their books, the days of regulatory nonchalance are gone, and we must also watch the mercenaries who come with colorful resumes, only to leave us in red ink. Messrs Kevin Dudley, Jason Holt and John Roijen were the Chief Operating Officer, Director of Flight Operations and Chief Financial Officer of Virgin Nigeria when the airline leased five B737 aircraft at an astronomical rate of $181,000 per aircrafts which was 80% higher than the going market rate and were also owing fuel marketers N30m when they launched a new uniform for N90m. They assisted the Virgin Group to quickly re-coup the $25m initial investment while pushing the airline into a huge debt that haunts it till date. These men have been recruited by another Nigerian carrier to continue the debt ridden policy. Nobody is talking; I will not be surprised to see the last of the quartet Mr. Clifford Conrad returning as Managing Director of another Nigerian carrier as the industry has confirmed it is bereft of competent airline administrators.

It is a big oversight not to have any representative of the legislative arm of government in the Committee as they will approve the necessary funds, draft the necessary protective act, which will probably reduce the time needed to draft and complete a rigorous legislative process.

Nigeria’s risk and credit rating should be addressed. At the recently concluded African Finance Conference in Abuja, the aircraft lessors that were in attendance did not hide their hesitation to do business with Nigeria airlines. They easily referred to the ugly Banex Airline saga that earned us the unenviable status of a defaulting nation. Other issues are the nation’s prolonged legal process, cap on fares, unfavorable bilateral agreements, non availability of insurance cover by government owned service providers, taxes, airspace and airport infrastructure and the ability to deregister the aircraft quickly. Surprisingly, they were not swayed by the domestication of the Cape Town Convention and the democratic governance in place.

Also at the conference, we were reminded that our dear country with the second biggest economy in sub-Saharan Africa does not have an airline rated among Africa’s top 10. We can be hopeful as projections indicate that Nigeria will produce two mega carriers whose revenue will be in billions of dollars. We have to our advantage a vibrant aviation press which is unmatched in the continent, a population that is upwardly mobile, that the foremost aviation conferences in the region are managed by distinguished Nigerians, Captain Ed Boyo and Mr. Nick Fadugba. They also acknowledge the autonomy and separation of government owned service providers with an equally vibrant regulatory body.

The future is bright for our troubled airlines if they unite and cooperate with sound leadership. They must collaborate to succeed. They should start looking Eastward, China to be precise, for cheaper funds, spew their commercial brain box by tapping the abundant leisure passengers which is a rare blessing considering that in other countries the aircraft cabin gets filled from the back, while the class conscious ‘Niger’ aircraft get filled from the front. Also the airlines should capitalize on the civil service reforms that intends to centralize all foreign travel in an office reporting directly to Head of Service

On the aero-political front member airlines of African Airlines Association (AFRAA) should reach out to other carriers by presenting an internationally recognized Nigerian to take over from the out-going Secretary, Mr. C. Folly-Kossi. The Ethiopians are all over, placing their egg heads in regional and global baskets. You may ask, “Where are Nigerians?”

The call for bailout makes me remember those who stood up and said no to the liquidation of Nigeria Airways and tried to promote government intervention or bailout.

Ironically, the private operators who kept agitating for the liquidation of Nigeria Airways and clicked glasses at the liquidation have eaten humble pie by asking for handout to save them from extinction. C’est la vie.