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Nigeria: Aviation newcomers could use code-sharing to overcome weak naira

By David Whitehouse
Posted on Wednesday, 16 June 2021 20:12

Nnamdi Azikiwe International Airport in Abuja reopened for domestic Nigerian flights on July 8, 2020. REUTERS/Afolabi Sotunde

The rush of new entrants into Nigeria’s aviation industry will need to cooperate as airlines grapple with the prospect of further naira weakness, Seyi Adewale, CEO of Nigerian freight forwarding company Mainstream Cargo, tells The Africa Report.

New market entrants will need to collaborate more than they are doing currently, Adewale says from Lagos. Ibom Air in May announced Nigeria’s first-ever domestic code-sharing agreement. It is with Dana Air.

More such agreements are needed, Adewale says. If these can be achieved, there is “an excellent opportunity for all of them”.

The industry has growth potential due to new airports being built, the country’s poor road infrastructure and the fact that states want to generate their own revenue and so are aiming to get companies to come and establish themselves, Adewale says. The country’s food supplies cannot be transported purely by road, he adds.

Most airline costs are in US dollars, while their revenue is in naira. The weakness of Nigeria’s currency is “the major problem local airlines face,” Adewale says. But airlines are starting to peg their naira fares to the parallel-market dollar exchange rate, so effectively passing the costs of naira weakness onto their customers, he says.

The government is also trying to allocate more dollars to airlines, and well as giving waivers on some airline duties, he adds.

While more than 20 aviation companies have obtained operating licenses, only three have so far established themselves as genuine entrants, says Adewale: United Nigeria, which started flights in February, state-funded Ibom Air and Green Africa Airways, which has yet to start operations.

Green Africa is set to launch within the next two weeks, says Adewale, who counts the company among his clients. The airline will start by flying from Lagos to Abuja, he says.

Some question how long the company’s initial policy of undercutting existing fares can last. The strategy is “not sustainable in the long term,” says Tolu Odutola, a Nigerian pilot and aviation industry expert in Lagos.

“They have to cover operating expenses at the least. I hope they have some maths up their sleeves that we haven’t seen yet.”

Ibom Air, which is owned by the Akwa Ibom state government, has done “everything right”, Odutola says. The company operates daily flights between Uyo, Lagos, Abuja, Calabar and Enugu and this month added Port Harcourt.

Still, even Ibom Air does not have deep pockets to help it sustain losses, he adds.

The risk that the latest naira devaluation may not be the last increases pressure on airlines and passengers. “Most people cannot afford the fare. Some clients going for summer vacation may have to cancel their trip due to the high cost,” Odutola says.

Corporate governance

Nigeria has struggled to develop a successful aviation industry. It lacks a national carrier, and the Nigerian Civil Aviation Authority (NCAA) has pointed to corporate governance as a reason for previous commercial failures. Some airlines have been tempted to run errands for the elite rather than fulfil flights for ordinary paying customers, the NCAA said in April.

Odutola argues that Nigeria is “not necessarily ready” for a national carrier. There needs to be a period of growth for the smaller operators and a process of consolidation, he says.

  • The small operators that eventually will form part of the planned national carrier need to be chosen on merit, he adds.
  • He has no doubt that consolidation is needed: the risk otherwise is for “incidents and accidents” as small, cash-strapped operators struggle to keep going with minimum amounts of equipment.

Naira weakness is likely to accelerate the process. The cheap naira means that “you’re going to decide quickly” if it is viable to stay in business as a small airline, Odutola says. Industry consolidation is likely to take at least three years, he says, as opposed to a longer timeframe if the currency had held its value.

Bottom line

The sooner new airlines team up on code-sharing, the more of them will survive.

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