Go Big Or Go Home? Go Home, Please – Feyi Fawehinmi

Ever since President Buhari let it be known that he likes the idea of a national carrier, a week has not gone by without one former pilot or aviation expert using the pages of Nigerian newspapers to tell us how much of a wonderful and long overdue thing it is.

It is persistent and frankly, irritating. This is the way ‘debates’ are won in Nigeria — insiders falling over themselves to tell us why the government should spend money on their industry. Unfortunately, it is a tried and tested model that works so there is no reason to expect it to stop soon.

The latest installment is by Mr. Dikko Nwachukwu — an aviation expert — in ThisDay newspapers ‘challenging’ the new aviation minister (who does not need a challenge as he’s a paid up member of the National Carrier Must Land lobby) to ‘go big or go home’. Go where? And why? It is important for Nigerians to be engaged with the arguments being made to justify this national carrier before they are led on a mistake that will cost billions before anyone’s eyes clears.

Here’s Mr. Nwachukwu’s opening gambit:

Nigerians like things big. Nigeria is the biggest economy in Africa. Nigeria has the largest population in Africa. Lagos is one of the largest (if not the largest) cities in Africa. The fleet of private jets owned by Nigerians is also probably the largest in Africa.

Yet… there’s no Nigerian airline that can lay claim to being close to Africa’s largest. Our airports are — if anything — the worst in Africa.

Nigeria should have the largest airline in Africa. The logic is simple. In Europe, Germany has the largest economy and Lufthansa is arguably the largest airline. If you say British Airways/Iberia is the largest, the logic still works when you add the economies of the UK and Spain. There’s supposed to be a correlation between size of economy, population and size and/or importance of air transport

This is the first time I’m hearing there’s a correlation between the size of an economy and size of an airline. But even if we are to take the argument seriously — largest airline by what? Fleet? Passengers carried? Revenues? Each of those metrics will probably give you different results if you start comparing airlines —Chinese airlines carry a lot of passengers by virtue of the country’s population, but no Chinese airline makes as much revenues as SouthWest Airlines in America. Turkish Airlines serves more countries than British Airways or Emirates. FedEx has more planes than Lufthansa. H.L Mencken said — to every complex problem, there is a solution that is clear, simple and wrong.

To further stretch the ‘logic’ — what business does a tiny country like Singapore (GDP $55bn) have operating a world class airline like Singapore Air compared to India (GDP $1.8trn) that has tried everything to get rid of its bankrupt national carrier? A big head does not equate to a good life.

What exactly is the logic that is simple here?

But the ridiculous part is the declaration that Nigeria ‘should’ have the largest airline in Africa. Who decreed it to be so? And why? Something that is almost certain to turn into a money pit and cost hundreds of millions of dollars is justified by a declaration that it is something that Nigeria ‘should’ have?

Who Will Pay For It?

When people in the private sector are calling on the government to come and spend money in their industry, it ought to make us sit up and try to work out what is going on. Mr. Nwachukwu has worked in the aviation sector in various roles and presumably knows the industry quite well. And I suppose that is the giveaway; if he is calling on the government to come and do the job, you know something is amiss.

To use an example here in the UK — Willie Walsh, the boss of British Airways, was a supporter of the 3rd runway project at Heathrow Airport as recently as 2013. But earlier this year, the Commission set up by the UK Government to look into the matter submitted its report and recommended that the 3rd runway should be built — at a cost of £17.6bn. Mr. Walsh promptly changed his position and condemned the project as an outrageous vanity project. The moment the project had a cost, he did his numbers and figured, rightly, that the government was never going to pay for it. The cost would be borne by airlines via increased landing fees. And with BA being the largest airline at Heathrow, it was guaranteed to bear the lion’s share of the costs.

Private sector people will support any fanciful project until you ask them to pay for it. Then they will tell you its a waste of money.

So how does Mr. Nwachukwu think the new national carrier should be paid for?

FUNDING

Let me get to it. The government has no cash, so everyone can pass on that angle. But here’s how I propose that they can get this funded. Issue a Sovereign Guarantee for the project cost. This will give everyone a lot of confidence. The equity and debt can be raised a lot easier and probably a lot cheaper with this in place. If the management is smart they can leverage this position to allow the new entity access to the kind of cash it needs to be successful. Think about it this way: the two most successful start ups I know, JetBlue and Azul started with $140m and $200m in equity respectively. They were able to leverage this equity to get amazing equity to debt ratios. This allowed them access to brand new aircraft and systems that gave them an advantage from the onset. They had other things but this was very important

In other words, private sector guys can go out and borrow lots of money with the full confidence that if it becomes a mess, the government will step in to clean it up. How nice eh? Of course, the airline is bound to run into trouble especially with debt denominated in foreign currency (the people who sell airplanes don’t accept Naira) and the government will pay up like it has had to pay up for Arik and Aero (where Mr. Nwachukwu).

Bringing up JetBlue and Azul is also interesting. What is the lesson to be learnt here? David Neeleman is a Mormon American who was born in Brazil and later went back there to do missionary work for the church. He started JetBlue in America in 1998 and then in 2008, he went to repeat the trick in Brazil with Azul. I am yet to hear that the money used to start either of these airlines was guaranteed by the US or Brazilian governments.

Furthermore, there are several airlines — Skybus, Maxjet, ATA Airlines,Independence Air — who have tried their luck and failed in the same period. If there’s anything to be learnt here, it is perhaps that David Neeleman has a knack for the business. Or perhaps it is a Mormon thing as another Mormon, Ralph Atkin, also started SkyWest Airlines (though he tried and failed withGhana International Airlines).

It goes on:

If things go remotely close to plan, this airline should be at 20–30 aircraft in 3 years (aggressive I know but hey, we got to go BIG) and should be doing north of $500m in annual revenues. Using a 3x multiplier this means the airline could have a valuation of $1.5bn in 3 years. At this point, when it should have shown good corporate governance and a penchant for being the solid airline we have always wanted, if market conditions are right, this will be the time to do an IPO. With the funds raised at IPO, the government guarantee can now be retired and the company will have to stand on its own.

One more thing about the IPO and why this can be a true NATIONAL carrier owned by Nigerians rather than a national carrier for the state of Nigeria. The IPO can choose to restrict any individual or corporate entity from purchasing more than a 5% stake in the business. This should in principle give access to ordinary Nigerians who want a part of a Nigerian success story.

That is to say, once the government has miraculously guaranteed the debt for 3 years, the mess will then be passed to ordinary Nigerians to carry. So when will people like Mr. Nwachukwu get to put their money into this wonderful idea they are promoting? All I see here is movement from government to unsuspecting magas on the street.

Failure is far more common than success in this ‘business’ so why does anyone think things will go to plan even remotely?