ESSENTIAL AIR SERVICES A CHALLENGE TO NIGERIAN STATE

(article written May 2007)

Direct financial support of the airline industry has existed since the beginning of commercial aviation. Most States have at some point granted subsidies or State aid to their airline industry, at least during its establishment phase. However the continuation of such generic support is not compatible with a liberalized environment and the air transport sector today is operating in an increasingly open and competitive marketplace. Yet that liberalizing marketplace may not deliver all the services considered necessary by governments for achievement of their economic or social development goals, nor may it provide that assurance of service which is considered indispensable by some States in a globalized economy.

It is in the light of the above, countries or states within countries have supported the provision of air transport to areas hitherto underserved or practically non exitent, with the objective of speeding socio economic development of such areas. These services are referred to as essential air services (EAS) or public service obligation (PSO).

EAS or PSO can be referred to, as the offer for tender of particular public transport routes which in a free market would not attract sufficient revenue to be viable, but would provide a socially desirable advantage.

It can also be defined, as a passenger air service of a public or social service nature, which a State may consider needs to be provided and where the market may not have sufficient incentive to do so.

The assurance of “essential services” has generally been considered to be a major responsibility of States. Although there is no uniform definition of essential services, such services may be described as basic economic services of general interest, which are necessary for the functioning of the society. They consist of those which are indispensable to life, health and those which are vital for the assurance of social participation (postal, telecommunication and transport services).

EAS or PSO route scheme exists in several jurisdictions where domestic or regional liberalization/deregulation has already taken place. It is a mechanism whereby support, in the form of a financial subsidy and/or an exclusive concession, can be provided to airlines for the provision of certain services of a public service nature, and/or for reasons such as social and economic development of remote regions or communities in the
Liberalized market environments. The mechanism enables support to be established on the basis of legislatively defined criteria as to eligibility for such support, and in accordance with a defined administrative process. A disadvantaged, lightly populated area might have a route subsidized to a regional or national capital to facilitate industrial development


TYPES OF SUBSIDY: airlines have traditionally received three types of subsidies, which may affect market structure, conduct and performance differently.

Direct subsidy: The most widely-used State assistance has been an across-the-board subsidy for airlines per se in a monetary form to fill the gap between individual airlines’ commercial revenues and their expenditures, including a fair rate-of-return on their invested capital, or actual operating losses incurred. (This was offered to the defunct Nigeria airways)

Indirect subsidy: There is also an indirect way of subsidization, which has been often used by States and local governments either as a part of a comprehensive aid package or as a measure supplementary to a direct subsidy for the opening of new routes or new frequencies.

This usually takes a form of the provision of service inputs for specific local operations of airlines at no cost or at preferential rates. Discounts or exemptions on charges for airport services, navigation aids, weather information, and airport facilities. Another indirect way is to provide subsidy to the tourism sector. This includes a wide range of export incentives and concessions to attract foreign tourists and inward investors (for example, duty-free exemptions). (This was also offered by the government of Cross River State)

Implicit subsidy. In addition to providing direct and indirect subsidies, States
have often required their national airlines to exercise cross-subsidization across the route network, to sustain loss-making domestic routes.(The liquidated Nigeria Airways was doing this can Virgin Nigeria and Arik who are the nations flag carrier do this now) In situations where there is strict regulation of market entry/exit and of tariffs, some States require airlines that wish to serve the major airports (trunk routes) to provide a pegged level of services between the major airports and the smaller airports, and sometimes also to provide a certain level of services between the smaller airports themselves.

Guidelines and rules as obtained in other countries: The Australian Federal Government has been subsidizing remote air services since 1957, most recently through the Remote Air Service Subsidy (RASS) scheme established in 1983. The objective of the RASS scheme is to ensure communities in remote and isolated areas have access to scheduled air services for the carriage of passengers and goods. Communities willing to receive RASS services must meet two fundamental requirements: a demonstrated need for a weekly air service, and being sufficiently remote in terms of surface travel time. An airline providing RASS services is selected through a competitive open tender process based, on the operator’s safety qualification, operation policy, business plan, budget, financial viability and operation ability. The contract term does not normally exceed two years with an option to extend for up to two more years. The RASS scheme currently provides a total of $3.3 million subsidies for eight airlines serving about 250 communities annually. In addition, the State Governments of Queensland and South Australia each subsidizes regional airlines serving specific remote routes. Australia Post also has its own subsidy program (total about a$0.35million).Queensland GOVERNMENT believes that every community should be within 200km of an air service. It currently provides $7m per annum to subsidies essential air services to these communities; the New South Wales Government: Regulates lower volume routes of up to 50 000 passengers per annum to ensure their long-term sustainability by issuing an exclusive license to the operator for five years up to 2008.License fees do not apply to these routes. It does not use competitive tenders to select the exclusive operator. Allows open competition on higher volume routes of over 50 000 passengers per annum and levies a license fee of 0.2 percent of gross revenue.


In Europe: The Public Service Obligation (PSO) scheme was introduced at the EU level by the Second Liberalization Package in 1990 and enhanced by the Third Liberalization Package in 1993. Under this scheme, which covers both domestic and intra-EU international routes a member State can impose a PSO to ensure the adequate provision of scheduled air services to a peripheral or development region or on a thin route to any regional airport that is considered vital for the economic development but is not commercially viable. Once a PSO has been imposed, airlines can operate the route only if they meet the service requirements. If no airline is interested in operating the route, then the route can be restricted to one airline for up to three years. The operator shall be selected from Community air carriers (airlines with a valid operating license granted by an EU member State) by public tender, taking into account the adequacy of the service including air fares and, if any, the cost of the compensation required. There are now over 130 PSO routes, but not all of them with subsidies, some having market protection only.

In the UNITED STATES: The Essential Air Service (EAS) program was established in 1978 to ensure that no communities would lose air service as a result of the Airline Deregulation Act. The Department of Transportation (DOT) determines both eligible communities (such as over 70 driving miles from a large or medium hub airport) and required service levels (a connecting hub airport, frequency, capacity etc.) for each community. If the last airline serving a community, either with or without a subsidy, wishes to terminate, suspend, or reduce that service below the required level, it must file a 90-day advance notice. Any airline may propose to replace the incumbent on a subsidy-free basis during the notice period. If no airline is willing to serve on a subsidy-free basis, the DOT solicits proposals for subsidized service. The selection criteria include the preference of the community, the applicant’s marketing relationship with major airlines, experience in providing scheduled air service, financial stability, and requested subsidy amounts. The contract normally has a two-year period. At present, subsidies of over $100 million are provided annually to airlines serving about 140 communities (35 of which are in Alaska).Frontier has just invited about 50 regional cities to say how they'd support either turboprop or jet service to their markets.
Also airports do offer some sort of support, e.g United Airlines' new Denver flight is getting a financial lift rarely provided to other carriers, an expensive advertising campaign by the Raleigh-Durham Airport Authority. Though most airlines' flights get little overt promotion from the airport, the authority is spending $166,000 for television and radio commercials that showcase the united service.

KINSTON AIRPORT In 2005, Kinston chipped in about $300,000 in government and private contributions to market Delta Express flights, and Jacksonville last year offered up to $700,000 in inducements to Delta.


In Canada, a Federal Government’s direct subsidy programme based on competitive bids had been established in accordance with the National Transportation Law of 1988 to support the existing services to isolated and remote communities in Northern Canada (the “designated area”). After abolishment of the “designated area” in 1996, a different program was instituted on a provincial basis in Quebec, and is still in existence with some changes.

In the Western African region, member States of the West African Economic and Monetary Union (WAEMU) adopted in 2002 a liberalization package of the common air transport program within the region; including a PSO scheme similar to the EU’s scheme (it has not been implemented).

Also, several small island States and dependencies in the Caribbean and Pacific whose economies are heavily dependent on tourism have provided financial assistance (such as direct subsidies for the operation on the route and the purchase of a specified number of seats) to airlines including
Foreign airlines to keep their traffic links to tourism-generating developed economies. In addition, several other schemes are in the pipeline.

In 2003, an Indian governmental committee proposed the establishment of an essential air services fund (EASF) to preserve essential but uneconomical domestic air services, which are currently supported by cross-subsidization in accordance with route dispersal guidelines.

There are also several other regional schemes outside the PSO in the form of a public-private partnership (PPP) between local governments and private businesses. For example, Route Development Funds (RDFs) were established in Scotland in 2002 and Northern Ireland in 2003 with the budgets of GBP 6.8 million and GBP 4 million, respectively, spread over three years. In 2004, the Northwest region of England also established an RDF, while Wales and other regions in the United Kingdom have shown an interest. The aim of RDFs is to promote the development of new routes through the provision of investment support for local airports to reduce landing charges for airlines selected. The targeted routes are primarily to Continental Europe, but in some cases also to intercontinental destinations such as the United States and the United Arab Emirates.

In Nigeria, the defunct national carrier Nigeria Airways (WT) was provided with the direct, indirect and implicit subsidies to operate and develop new and thin routes. The country and industry later became too robust for WT at a stage, which necessitated deregulation and introduction of private airlines.
Some airlines were approached by state government to provide services to their respective states.reciprocrately; the government bought some seats on these flights to cushion the financial effects of operating these routes. here are some examples: Capital Airlines/Edo state on Benin-Abuja route;Overland /Oyo&Ondo State governments on the Abuja-Ibadan-Akure route; Aero/Cross river on the Obudu-calabar route;Overland/kwara state government on Abuja-Ilorin route.
Also Sokoto state government introduced a new flair by buying shares of ADC airlines, this compelled the airline to operate and increase frequencies to Sokoto from Lagos and Abuja respectively, Aerocontractors started scheduled operation to Warri and Benin based on commitments from oil & gas companies operating within the area.

The beauty of this partnership is that the operating airlines now view those flights as A MUST GO, because of the financial and moral commitments and ensure it remains so, provided it does not impinge on safety. The states involved have been able to provide alternative source of transportation to visitors, tourist and investors alike, generate income and ancillary service for citizens who work within and around the airport. Unfortunately all airports are government owned and are bogged down by protocols and debts which have made it difficult for them to launch tantalizing offers and discount that will attract airlines.

Sadly some states are lagging behind despite the huge potentials of developing tourism and their economy, the governments of Benue,Bauchi/gombe,Kebbi,Adamawa,Taraba,Niger,Katsina need to sit up begin a process of encouraging local airlines and to operate into their respective airports and also upgrade facilities at this airports to be passenger friendly and ensure safety.

I also commend states that now own airport by virtue of self help after waiting endlessly for the federal government to provide them with an airport; these are Imo& Kebbi states, for those who are still planning to own an airport such as Delta, Anambra and Akwa-Ibom e.t.c. the plan should inculcate airlines that will operate into these airports.
The essence of having an airport is having flights operating into it and enticing visitors/investors alike, it is in regard of this I will advise Imo State government not to hallucinate as the present flight and activities in and around Owerri airport is due to the closure of the Porthacout Airport, as the government must start working with an airline that will keep the airport alive when the airlines eventually return to porthacout.

The present posture of the federal government is to concession airports and airlines, so the State governments should take the lead and at the same time gourd corporate organizations in their vicinity to participate by buying or blocking seats on flights to cushion the financial effect of starting lean routes and encourage the continuous operation of scheduled flights to their respective states.


From the above it is glaring that world over the airports, citizens, corporate bodies, local, state and federal government are all involved in efforts to encourage and develop socio economic variables in their respective localities, and Nigeria can not be left behind. The giant of Africa must wake up to its responsibilities.