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Nigerian airlines: Flying through stormy sky

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THE root of Nigerian airline industry’s troubles is that none of them has that sufficient scale to operate their networks efficiently. As each airline scrambled to gain market share, the industry lost its sanity.

The airline industry has never been profitable over the entire business cycle. Instead, short periods of profit, fueled by market growth, are typically followed by periods of heavy losses, which, on an accumulated basis, drag the industry below breakeven

It was in each carrier’s individual interest to undo the other in order to fill more seats on routes. But ultimately this type of cutthroat competition prevented the industry from remaining profitable over the course of the business cycle. The result has been a string of bankruptcies among the carriers.

Despite these challenges, the airlines have carried on as if they can go it alone, without looking at the possibility of collaborating for maximum benefit. In other climes, big carriers are merging, code-sharing and interlining even when they have the muscles to go it all alone.

One of the key questions that airline industry have to answer is this: If the airlines can earn significant profits in a weak economy/high fuel price environment, how will conditions deteriorate to the extent that these companies would lose substantial amounts of money?

The nation’s carriers are confronting a dire outlook. They are in a terrible shape as the future looks very bleak.

No doubt, the airlines have contributed immensely to the strength of the economy and one of drivers of the economy, but they have not been helped by the policy of the government that has contributed to their woes.

With a huge debt portfolio, indebtedness to aviation fuel marketers, aviation agencies such as the Nigeria Airspace Management Agency (NAMA), the Nigerian Civil Aviation Authority (NCAA), the Federal Airports Authority of Nigeria (FAAN) and other sundry charges, only a miracle would see them wriggle out of it.

Few of them have potentials to emerge as a force to be reckoned with, but bad business model, coupled with bad managerial decisions have further helped to stunt their growth.

Should the NCAA carry out economic audit on the airlines, only very few would pass the test.

The Assistant Secretary General of Airline Operators of Nigeria (AON), Mohammed Tukur, said all airlines would have to critically revisit their cost structures in response to the situation at hand, adding that many are doing so already.

“They will have to slash costs in the short term to protect their liquidity and launch medium- term programmes designed to protect what little profitability they have left”.

He explained that the fastest, most effective measure that airlines could take was to reduce unsold capacity by cutting the number of flights and, if necessary, grounding planes.

According to him, this is because approximately, 50 per cent of an airline’s costs are related to capacity production, including fuel and en route charges, adding that by that much, the levels of surplus capacity would rise.

The result in such situations is often a downward price spiral that further endangers the remaining yield and increases competitive pressures.

There are those who hold the view that even if airlines do make the necessary cuts in capacity in a timely manner, there are serious problems inherent in the process, especially for smaller carriers.

They  opined that, “When airlines reduce capacity, they lose the economies of scale associated with efficient scheduling of planes, crew rotations, among others.

In the face of these conditions, consolidation in the airline industry appears inevitable.

Consolidation can be achieved in two ways. Airlines can simply exit their unprofitable markets, or they can pursue mergers, acquisitions, and alliances to improve their market positions.

In either case, the result is a healthier industry. Increased share allows the remaining competitors in each market to offer more efficient service and raise their margins, which, in turn, enables them to invest in new opportunities.

When flights are consolidated, the merged airline gains market power and can apply its unused capacity to serve additional destinations. The added customers on consolidated routes also allow an airline to use planes that are larger thus more cost-efficient and to bundle more traffic from more destinations through large hubs, increasing utilization and yield.

This is exactly what occurred in Europe’s long-haul flight market, which today is essentially directed through three major airline gateways by British Airways, Lufthansa, and Air France.

History proves that consolidation can also provide airlines with a variety of functional synergies, as evidenced by the first wave of consolidation in the U.S. market in the 1980s and more recent European mergers, such as Air France-KLM and Lufthansa/ Swiss.

Lufthansa and Swiss were able to create substantial value in the short term by integrating their networks, as well as sales and marketing initiatives. Two years after the merger, the market capitalization of the airlines had risen 70 percent and they outperformed the industry benchmark index by 10 percent.

Additionally, in the medium term, Lufthansa/Swiss had many significant opportunities for functional consolidation in areas such as aircraft maintenance, purchasing, and IT.

While the promise of airline consolidation is bright, its full potential remains unrealized because of lack of understanding of the whole idea by Nigerian airline operators.

The NCAA had come up with the framework for consolidation but there are still teething problems.

The inability to get a reliable clearing-house for interlining remains a big challenge.

Nevertheless, in order to leverage the benefits of consolidation, there must be continued and expanded liberalization of air traffic.

Article credit: Guardian Newspaper

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Updated 6 Years ago

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