VENTURES AFRICA – With economic crisis continuing to afflict mature airline markets in Europe and North America, aviation analysts’ eyes have lately turned to Africa – a continent dubbed “the last frontier” by the influential founders of the new pan-African carrier fastjet.com.
On a continent of a billion people, sparsely distributed among large megacities which themselves are separated by poor ground infrastructure, aviation is increasingly seen as a way to turbocharge economic growth while generating significant returns for investors.
Of all Africa’s airline markets, perhaps none is as promising as Nigeria’s. Following the tragic Dana Air accident in Lagos on June 3 which killed 159 people, attention has turned to the safety records of Nigeria’s airlines. Arik Air, a Nigerian airline, apparently deemed the safest carrier with the most modern fleet, has seen year-on-year bookings soar by 35 percent this summer, indicating that the provision of a quality product in this market will deliver strong returns for its backers.
Even more promising for aviation investors is that Nigerian air capacity still doesn’t meet demand. Airbus predicts that within twenty years, Lagos will become an airline megacity that handles more than 50,000 passengers per day, but current seat availability is limited. While average seat occupancy aboard internal European and American flights is 72 percent and 74 percent respectively, Nigerian domestic flights are, on average, 87 percent full.
Nigeria’s Punch newspaper reports that the number of Nigerians applying for UK visas in 2010 would, by themselves, have filled 75 percent of all the seats available between the UK and Nigeria; everybody else – dual nationals, British travellers, and foreign businesspeople flying via London – must squeeze into the remaining 25 percent of the seats. It is clear that current capacity is insufficient.
The undersupply has also forced fares up, though Abuja erroneously blames collusion. In 2011, Arik reported a 30 percent increase in revenues while simultaneously cutting its ASKs, a measure of seat capacity, by 9 percent – that is to say, the airline made more money while offering fewer seats.
This is great news for new market entrants and their investors, because it suggests that margins are very high and ripe to be reduced. Unlike elsewhere in the world, where airlines like Spanair (Spain) and Malev (Hungary) have collapsed under the burden of ultra-thin profit margins and cut-throat competition, Nigeria’s aviation market is buoyant and, with the right management, could be very profitable.
Of course, more competition and lower fares would also benefit Nigerian consumers and the Nigerian economy. Airlines create trade links, boost tourism, and drive innovation, skills and technology. Nigeria’s Aviation Minister Stella Odua appears to have abandoned plans to finance a state-backed airline operating to the same business model as African aviation’s two greatest success stories, Kenya Airways and Ethiopian. But there remains plenty of scope for privately-backed airline ventures to thrive.
The only serious obstacle for a Nigerian start-up is safety. On domestic and international routes, especially from Lagos, business traffic would be the airline’s bread and butter. Oil executives and contractors pay handsomely for tickets at the front of the plane, and travel not seasonally but all year round – which is music to any airline’s ears.
However, such multinationals place an enormous emphasis on safety and, in Africa, tends to individually audit an airline’s safety before signing any travel contract. It is therefore telling that most multinationals’ employees fly into Nigeria aboard foreign airlines like British Airways and Virgin Atlantic; for domestic travel, some of the larger businesses even have private jets, which can now be serviced by Evergreen, a new jet management company based at Lagos’ Murtala Mohammed Airport.
In order to differentiate itself from its competitors, and in order to win lucrative contracts from the big multinationals, any new Nigerian airline would need to commit itself to European safety standards that exceed the minimum requirements set by Nigeria’s federal aviation agency. Since few of Nigeria’s present operators do the same, this would place a new airline at an immediate cost disadvantage.
But by leasing modern aircraft with better reliability and lower operating costs such as fuel burn, a new Nigerian airline could easily offset the expense of adherence to European safety standards. Such an airline would not only mop up underserved demand, but also win customers from its less pioneering competitors, the current market incumbents who still operate twenty-year-old aircraft that arrive late and cost a small fortune to operate and maintain.
Nigerian air safety has improved dramatically in recent years, and in 2010 the US Federal Aviation Administration gave Nigeria’s carriers Category 1 status, the highest safety endorsement, for the first time in more than twenty years.
But the Dana Air accident and consistently poor levels of customer service and operational reliability shows that there remains significant room for improvement.
A new and modern airline for Nigeria would be a tremendous boon to the country, and would reap considerable immediate returns for the airline’s backers – rewards which are far from guaranteed in the sclerotic aviation markets of Europe and North America.