Last week, Boeing unveiled its upgraded 737 plane called the 737 Max. The 737 itself has been Boeing’s best-selling plane with about 13,000 sold since it was launched in around 1965.
Boeing 737 Max
The new single-aisle airplane will deliver 20 percent lower fuel use than the first Next-Generation 737s and the lowest operating costs: 8 percent per seat less than the A320neo
The A320neo is Airbus version of the Max if you like which was launched in 2014. Qatar Airways has reportedly ordered 50 of the A320neos (out of more than 4,000 orders in total) while Southwest Airlines has ordered about 56737 Max out of around 3,000 orders in total.
A320neo
Both planes cost roughly the same amount as well. The A320neo is listed at$106.2m while the 737 Max starts at $90m and goes up to $117m.
All this got me thinking about Nigeria and its attempt to get a national carrier in the air again. What should the government be doing — providing an enabling environment for business to thrive or trying to run businesses itself?
I’ll always go with the former.
If Capital Is The Problem…
Looking at the cost of these planes, it’s clear that the biggest obstacle to starting and running an airline successfully is finding the capital to buy these planes. And you can tell easily because even ‘new’ airlines in Nigeria start operations with planes that have seen their best days in Eastern Europe or somewhere else.
If a government is interested in boosting aviation and getting more Nigerians flying, what should it do? Here’s a simple idea.
- Set up a company whose sole purpose will be to own buy and own aircraft. This company can be 50–50 owned with pension fund backed companies. The startup capital can be anywhere from $500m to $1bn.
- Once seeded, this company will then buy new and modern passenger airplanes like the 737 Max or A320neo (or both).
- These planes will then be leased out strictly to Nigerian airlines on say, 5 year leases at a time. So Arik can lease a brand new 737 Max with monthly payments without having to put down a deposit or large capital payment.
- Whatever conditions are needed can be added to the terms of the lease. Africa is there for the taking so perhaps a condition that they launch new routes in African countries or get rid of some of their really older planes. The key condition will be the expansion of the airline in terms of fleet and routes served. Other conditions can be specified such as completely independent and professional management with the owners not interfering with the running of the airlines in any way.
- The airline gets an option to buy the plane after 10 years. Or something like that.
Erm, that’s it really. Rather than intervention funds that end up disappearing into private pockets, perhaps you help an airline reduce the biggest cost of entry into the business in a way that allows it focus on their core business.
Pension fund backed business are by nature long term businesses that require steady income over a long period of time. In that sense, signing long term leasing contracts with fixed incomes over a long period of time ought to align with their incentives.
Finally, it should allow the airlines focus on their core business since their ability to make a profit will be determined by how much the revenues from the new planes exceed the lease payments for them. Newer planes are also much cheaper to run which should (hopefully) bring down the cost of flying and bring more people into air travel in Nigeria.
I still don’t think a national carrier or anything to do with airlines is a priority for the government at this point in time. But it might be a new and different way to think about how government can enable things to happen in the economy as opposed to doing things itself.
FF