Former Managing Director of Virgin Nigeria Airways and currently the CEO of Ropeways, Captain Dapo Olumide, believes Nigeria needs to provide the needed infrastructure and maintenance facility before establishing strong airlines, so that the airlines can be profitable and competitive. He said Nigeria does not need a national carrier that has government input, but one driven wholly by the private sector. He spoke to Chinedu Eze.
When you were the Managing Director of Virgin Nigeria Airways you were making more money from the West Coast, but the market seems to have gone done now and Nigerians are not doing so well on the West African routes and other African airlines seem to have taken over. What was the key to your success then?
That is a very good question and I will tell you why. Before I took over Virgin, we were flying to London, Johannesburg and I said we should stop the flights to these routes. Look, this was my philosophy; not that of anybody else and this was because the board had given me the freedom to turn the airline around and I explained to them that Nigerian airline has no business flying long haul. You won’t make a success of it because you can’t compete with the others.
So it is just not going to work. Yes, you will fill the back of the aircraft with your economy passengers and so on, but that is not going to pay for the fuel to London. You can’t compete with them. Your aircraft is so much older than theirs, you don’t have the in-flight services, you don’t have the frequent flier programme and you don’t have the connectivity. When Virgin Nigeria was flying to Johannesburg, how many people were terminating their journey in Johannesburg? I think 60 per cent of the passengers were going to Durban and Cape Town.
But we ended our flight at Johannesburg, so how are you competing with South African Airways?
Now, I stopped all that because I saw that the cost of economy class ticket to London, I could charge the same just with a Boeing 737 to Dakar, from Lagos and that I can actually do that twice a day. So I started making much more money doing regional than doing the long haul with cheaper aircraft. In those days, Virgin Nigeria had B767 and A340s, those things are like $800, 000 a month. And we had good B737s that were leased at the time, very reliable aircraft; expensive but very reliable and we made much more money. And that is how I was able to turn the airline around.
You noticed that I didn’t expand on the domestic, because I have recognised the fact that yield is very low on the domestic market because no airline was charging, even till today, the correct fare based on the cost of its aircraft and overhead and so on. So if you put the correct cost you are looking at about a N100, 000 for an economy ticket but they are not doing that. So, I didn’t want to play in that arena and start losing money, so I focused on the west coast.
The reason we have lost out from that initiative is the Single African Air Transport Market (SAATM). In the old days none of these West African countries had any airline of substance. So they had no airlines. Don’t forget there was a time when Lagos- Accra, we had four Nigerian airlines doing that route, no Ghanaian airline. We didn’t complain then but you have to understand what SAATM stands for and actually it’s a year now since we have been operating that and that was actually on 28th of January 2018, when it came into effect.
And that was as an outcome of a result of a 2015, 24th general session of the African Union Heads of States meeting, where they said that they were going to actually finalise and domesticate the Yamoussoukro Decision. And they said that by 2017 there should be open skies in Africa. It came a year later in 2018.
What did that mean? That means that any Africa airline can fly anywhere like it is in Africa. And that is something I am totally in support of because that is why we were losing so much money. Now our people have complained about that; we didn’t complain about it when we were flying into Accra with four airlines and dominating the West Africa market but we are complaining now. You say that foreign airlines have access to so many airports in Nigeria, if you want to fly to London with your Nigerian aircraft you can go to London, Heathrow, Gatwick, Liverpool, Manchester, Newcastle, so what is the difference. Why are you just going to Heathrow airport? So they can also come to all of our airports.
So, our operators have been complaining about this Single Air Transport Market, saying it is unfair. You have national airlines like South African Airways, Kenyan Airways, Egypt Air, Ethiopian Airlines coming into all these airports and saying we can compete if we go to their countries because they are subsidised by their government. Then have your own national airline. That’s nothing to do with the SAATM, you get your own national airline and subsidise it and then you are competing with them, but until you do that you are not competing with them.
Let’s look at the private airlines, African World Airlines (AWA) in Ghana. AWA is successful because they are operating the right size of aircraft. You noticed that they haven’t gone into all these big Boeing 737s. This is because the problem with an aircraft that has too many seats is what they call ‘over capacity,’ and which is what we have on Lagos-Abuja route. The first flight in the morning is full, the last flight coming back in the evening full, then for the rest of the day you are operating with 50 per cent load factor.
And overall, on a yearly basis you are losing money. But look at AWA; they have the right size aircraft 50 seats. And then, in fact, with 50-seat aircraft you can fill that aircraft every day. But remember with those 50 seats they only need a 70 per cent load factor to be profitable; that means they only need 30 passengers. That one doesn’t need business plan, so they are profitable and hence you see that they are buying more aircraft. And guess what type of aircraft they are buying? It’s the same thing, regional aircraft. But in Nigeria it’s Boeing 737 and all that and you are using this B737 to Benin. So we keep getting ourselves into this quagmire of inefficiency.
I believe that SAATM is going to be the stimulus for Nigerian airlines to get their act together. It is going to do two things to them, one, they are going to be pushed out of the market if they don’t modernise their fleet with younger aircraft. Younger aircraft means more efficient engines, cheaper fuel consumption, greater reliability. Number two; they are going to have to assess their maintenance cost by putting maintenance facilities right next door to them here; that is to bring the maintenance cost down and not to spend dollars on it.
They are going to have to negotiate with the spare parts vendors who have added all sorts of cost to them, political risk, currency exchange risk, so you are paying more anyway for these spare parts. You’ve got to pull with several airlines that have the same type of aircraft and let’s order plenty of spare parts and get a discount on it because we are ordering in bulk.
It is just like when you go and by tomatoes in the market, if you buy a basket it is cheaper than buying the ones on the roadside. Then you have another issue- there is a ratio between leased aircraft and owned aircraft. You can’t lease all your aircraft because the problem with leasing is that it is a short-term thing but it is also good because you are building a new route. There are reasons for leasing, in building a new route, let’s say from Lagos to Sao Tome, you won’t buy an aircraft because you don’t know if the market will be successful.
So you start with a leased aircraft and use it for three years until the market is sustainable then you sell the aircraft or convert it to an outright purchase. But then you also have further challenges and that is of the structure of the lease, it is very punitive for Nigerian operators. First of all, in spite of the fact that the Cape Town Convention has been domesticated by Nigeria, it is not enforced.
And I am not knocking the agency that should enforce it, but what you do by not enforcing it is you create a problem for operators who want to lease aircraft at favourable terms. Why? Because the lessor knows that the aircraft is likely to be impounded in Nigeria, therefore they need to increase the lease rental rate and they are going to ask for longer-term tenure on the security deposit. A European airline leasing an aircraft will probably have a two months’ security deposit. A Nigerian operator has nine months if not a year by now. Now, imagine that kind of money in Escrow abroad, in dollar terms earning nothing for you, that is just a waste of money. But that is because the lessor perceived your environment as high-risk environment. And so you are going to pay a premium for that and therefore you get a leased aircraft at a higher rate than your competitor.
Many people in the industry feel that the proposed national carrier which has since been suspended, will not succeed the way they want to do it, by establishing it with government funds and then inviting the private sector. Do you think we can have private sector driven national carrier?
Let me answer your question with a short yes and no. Yes, it can work but there is always a ‘but’ in everything, but it has to be done properly.
And that is, it is about the chicken and the egg. If you set up a national airline now, I am not talking about ownership at this time; you bring in 10 aircraft where are you going to park them? Where are you going to maintain them? Where are the pilots coming from? Where are the engineers coming from? Maybe we should make sure that the infrastructure is in place first or maybe make sure we have the hangars ready and let’s get the pilots for training and so on and so forth.
When you have all those things, then you can bring in the aircraft. In terms of the investors, you have to remember that an investor comes in two forms. There are investors in the stock market, so they don’t even need to know there is an airline, they just invest in it because they want a return. Then you have a strategic investor; that would be, for example, another airline which has the technical expertise to manage the airline. But then you have to be careful that you are not bringing in a technical partner who also has his own airline and he would use your airline to feed his airline with passengers or he will scale back your operations so as not to compete with his.
So that has to be considered as well in terms of the investor. But we also have what they call investor apathy and the more you talk about something and don’t deliver the more apathy you create. If I tell you that Lagos Ibadan expressway is going to be ready in six months and every six months they tell you that it is going to be ready next month, after a while you stop listening and you take your mind off the Lagos Ibadan expressway completely. We have been talking about the national airline since the demise of Nigerian Airways with so many ministers coming with their own plans but it hasn’t happened yet. So investors are cautious and thinking well is it going to happen this time?
And they are all sitting back and saying well, I don’t know let’s see if it happens or if it doesn’t happen. This is because we have heard this stories so many times.
Your question to me is, do we need a national airline? Well, I don’t want to use the word national because national means like its owned by the government. We don’t need that; what we need is an airline that makes Nigerians proud, and that Nigerians will willingly fly over a foreign airline. So it doesn’t have to be a national airline, it can be an airline that is actually 100 per cent privately owned with no individual entity owning more than 10 or 15 per cent; so they don’t have majority control. But the government’s intervention must be in the form of sovereign guarantees. Where they guarantee the loans on the purchase of aircraft for example. They can provide subsidies in terms of tax reduction on fuel; they can make sure that the authorities reduce their tariffs and charges, navigation charges for the airlines, for the first 5, 7 to 10 years.
That is where you need the government intervention and that is what an investor is looking for, where the government give supports in that regard. It is the same thing in terms of acquisition of aircraft; nobody is going to bring in 10 Boeing 777s or something, that is a lot of money. But with your government supporting it, like I said with the excess crude account (ECA), providing guarantees. The government doesn’t even need a stake because it benefits nothing from the stake, what they should provide, like I said, is to incentivise. They should provide soft landing for the airlines to survive. Because they know that it is going to compete with well-established international operators, which have been operating for years.
If government supports one airline, won’t it have an edge over others?
I agree with what you are saying but then at the same time if you want to have the equivalent of a national airline, as opposed to a flag carrier, you must meet certain conditions. They will be like legacy airlines. It will have advantage because you want to make it strong carrier and it will fly international destinations. You can make flag carriers fly domestic routes. If you don’t designate them that way it is not going to work.
Although private airlines never say never, but it is unlikely that they will be able to acquire the type of equipment that will make them competitive with the partners that they will be operating with internationally. So there got to be a difference between how you want to compete. You can’t compete based on the name of your country. You can only compete on service delivery and you can’t afford service delivery if you are not profitable. And even if the government gives guarantees to the local airlines, for example, to guarantee their purchase of aircraft, it is not guarantee on the operation of the aircraft.
This model you are proposing has it been implemented in any country?
Yes. Again let’s look at Ethiopian Airlines; Ethiopia Airlines is 100 per cent government owned but not government run. You can see that it works there. But what I am saying is that you don’t need the government to run it. The model you have in Ethiopian Airlines is no different from the model of Nigerian Airways; it is just that the government interfered. If they hadn’t interfered, it would have been managed by the private sector. When I say private sector, in the military era, the managing director were all from the military. But in principle, it was run by people who are not in government.
Ghana with Senegal seems to be having headway because they are more coordinated. In the long run, say in the next 10 years, if Nigeria does not wake up what do you envisage will happen in the sub region?
Well, first of all, it is not about 10 years, is the next five years. I don’t want to be a soothsayer, but I will certainly say if we carry on the way we are going now, I can guaranty you, if we carry on this way in the next five years, we will become totally irrelevant in the sub- region. As it is now, South African Airways is departing flights from Accra to Washington. They would have done it if we had a hub in Lagos.
They don’t need to go through Accra because there is no market there. But because those people have thought about the future and you hear all the remarks from the Ghanaian government on the reason they want a hub and how much they charge for fuel for foreign flights and the visa waivers and other things, it is because they want to bring traffic into Accra, which creates employment for the Ghanaian citizen.
If they have the hub they need more duty free shops, more car hires, they are going to need more people handling the fuel and drivers for the buses to take people to hotels. The hotel occupancy will go from 50 per cent to 70 per cent and they make more for the government by paying tax.
Why don’t we do that? Because we are not proactive, we are reactive; we do things after it has happened not before it happens. People have been clamouring for making Lagos a hub, that was what Virgin did when they came here. It was a hub, it was done in a way that you come in from Accra into the international airport, walk into the next gate off to Port Harcourt. That is how it works in Heathrow airport and in every airport in the world you have been to. I don’t know anywhere in the world that you have to go and change terminal drive to the other terminal. But here we still do things like in the 1860s.
So it is not 10 years from now, it is five years from now and it is not having the terminal that solves your problem. It has nothing to do with the terminal; it is due to the system that processes it. Having a terminal is just half of the problem.