Nigeria Air and the downsides of state-owned enterprises
Tagged Nigeria Air, the minister said the airline will be the new flag carrier for Nigeria with plans to start operations by December of this year and operate 30 aircrafts within the next three to four years.
The announcement was received back home with a lot of polarization, with people either strongly in favour or strongly against the venture.
I am in the ‘strongly against’ camp, mostly because in most instances state-owned enterprises tend to be damaging, not just to government finances, but to sectoral growth as well.
Of course, technically, the government will allegedly own only five per cent of the airline.
The private sector who will own the remaining 95 per cent are yet to be identified.
Still, the minister is negotiating aircraft purchase or lease deals, and the airline will obviously receive preferential treatment from government so, to all intents and purposes it is a state-owned enterprise, or at least state-backed.
So how are state-owned enterprises (SOE) damaging? The first thing to think about is the demand for whatever service the SOE will provide.
The introduction of a new SOE doesn’t really change the demand for the service. SOEs therefore tend to kick private sector operators out of business.
In the context of airlines, the introduction of Nigeria Air will not somehow miraculously increase the number of passengers who fly in or through Nigeria.
What this means is that with the introduction of Nigeria Air, some private airlines will close up shop.
You may say that Nigeria Air is going to displace international carriers like British Airways, but the truth is the bulk of flight originating from or landing in Nigeria are domestic flights.
According to the National Bureau of Statistics, in 2017, over 70 per cent of air passengers were domestic travellers.
Nigeria is currently not a major tourist or business destination and currently does not have the infrastructure to serve as a transit hub to anywhere.
The domestic private sector airlines are the ones who will suffer the brunt of the competition from Nigeria Air.
Why can’t the private sector players effectively compete with Nigeria Air?
Well, first, none of them has pockets as deep as the Nigerian government.
There is no private aviation player who can cough out $300m without financing.
But that is not where the troubles end. SOEs in general tend to have appetites for losses.
Because SOEs have government support, they typically have the ability to carry losses significantly longer than private sector players.
This is mostly because they know that government funding will be made available to manage those losses.
This is particularly true in the aviation sector where profits are rare.
The South African government has had to bailout South African Airways multiple times with guarantees of up to almost R30bn, about $2.2bn using current exchange rates.
Kenya Airways as recently as 2015 required a $500m bailout from government to keep operating.
Rwandair has made losses every single year since 2013 and has only been kept afloat by government grants and government loans of more the $500m over the period.
In fact, of all the government-backed airlines in Africa, only Ethiopian Airlines is allegedly making any money, and even they are trying to sell off stakes in the entity.
The loss-making nature of state-backed airlines is not an African problem either.
European countries from Italy to Spain have all gone through the pain of bailing out national carriers and the smart ones have privatized or sold them off completely.
The eventual outcome for many sectors where SOEs venture is predictable.
They start backed with deep government pockets and kick out private sector operators.
Then eventually collapse under the weight of heavy losses once the government gets tired of financing their operations, leaving the sector comatose.
This is my predicted outcome for the Nigerian aviation sector if Nigeria Air eventually kicks off.
Of course, this time could be different. This could be the 1 in a 100 option where the Nigerian government is able to successfully go into a venture.
But this is the Nigerian government we are talking about.
The odds of that happening are very small. Still, it seems they are determined to go on this adventure, so I wish them the best.
Hopefully the idea fails and fails quickly without causing significant damage to the rest of the sector.
Dr. Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa.
The opinions expressed in this article are the author’s and do not reflect the views of his employers.
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