The IFC, an arm of the World Bank, was commissioned by the Nigerian Government to advise it on the options for restructuring and privatising Nigeria Airways. Its mandate included a strategic review and due diligence of the airline, sale preparation and implementation.
Like many African airlines, Nigeria Airways has suffered from corruption, bad management, economic recession and huge debts. Most of the airline's former management are facing a judicial panel over corrupt practices, which the new civilian government of Olusegun Obasanjo is determined to curb.
From a fleet of 32 aircraft in 1984, Nigeria Airways today has barely three serviceable aircraft, a DC-10 and two Boeing 737s. None are European Union or Federal Aviation Administration noise compliant. The airline's domestic and international route network has shrunk accordingly, carrying just 109,214 passengers in 1999, down from 2.2 million in 1983. Load factors have been running at only 34%.
In its report, the IFC noted that Nigeria Airways is technically insolvent with trade debts of $67 million, financial debts with the Paris Club of $330 million and pension liabilities of $38 million.
The IFC suggests three options:
liquidate the airline and give its traffic rights to any of the 15 independent Nigerian airlines to start services; hire a management consultant with a mandate to turn the airline around within three to five years to prepare it for privatisation. A government commitment to settle all outstanding debts is required for this option; create a new company with a strategic partner (40%), other Nigerian institutional investors (25%), the airline employees (5%), and the government (30%), as shareholders. This new company would have to settle the outstanding debts.For the last option to work the IFC insists that the government must also provide indemnity to all pre-existing debts and liabilities, agree that the strategic partner will take over the management of the airline, including labour issues, and grant the new airline exclusive or grandfather rights on some key routes for the first three to five years. These routes are Lagos to London, New York, Jeddah, Amsterdam and Paris.
Nigerian independent carriers have lobbied for traffic rights on dormant routes not served by Nigeria Airways, but their inexperience and inadequate capital base has discouraged the government from granting their requests.
Awwal Tukur, Chairman of the Aviation Committee House of Representatives, said the IFC's report is merely transforming a public monopoly into a private one. "We believe that the independent airlines should be given the opportunity to offer services on these routes which the IFC wants preserved," he said.
The IFC insists on the grandfather rights, arguing that the Nigerian market is too small to accommodate more than one national carrier. International passenger traffic in 1999 was less than 400,000 passengers.
However, a joint venture with British Airways on the Lagos-London route since 1998 is an extra source of revenue. Under the arrangement, BA bears the operating costs of a Boeing 747, while Nigeria Airways has 80 free seats with another 50 at below cost.
The IFC said it is recommending the option for a new company with a strategic partner. This meets the aspirations of the Nigerian Government for the industry, and has "minimal adverse impact on investor interest and commitment".
The Ministry of Aviation supports this option, Aviation Minister Dr Kema Chikwe told Airline Business. However, the government does not want to privatise the airline in its present state. "We want to improve the state of the carrier, make it a respectable and creditable airline, after harmonising our position with the IFC," she said. Her ministry has formed a committee to bridge the gap between the government's position and that of the IFC.
In its financial outlook for the new company, based on initial capital of $65 million and offset by the sale of selected aircraft worth $12 million, an airline with five aircraft - two DC-10s and three 737s on key routes - has the potential to make a return on equity (ROE) of 10-12% per annum with five years of grandfather rights, said the IFC. With three years of grandfather rights there is a single digit ROE, while it is negative if Nigeria Airways has to compete with one or more Nigerian carriers on any or all of the routes.
The IFC said the sale and selection process can be completed in a year from the date of government approval. It said the best partners are major airlines that have practical experience in the Nigerian market. Lufthansa, Virgin, British Airways, Air France and Swissair are all considered likely candidates.
Source: Airline Business
