Why Aero Airlines collapsed

David O. Kuranga; Ph.D.  Managing Director Kuranga & Associates Limited

David O. Kuranga; Ph.D.
Managing Director
Kuranga & Associates Limited

David O. Kuranga

The administration of President Buhari announced over a year ago that they plan to overhaul Nigeria’s aviation sector. Waiting for the government to act on their announcement, Aero announced recently that they are halting operations and will likely cease to exist. Presently the Nigerian owned Arik Airways remains heavily indebted to NEXIM (Nigerian Export Import Bank) and AMCON (The Asset Management Corporation of Nigeria), owned by the government. Aero Contractors Limited is also largely owned by AMCON through its debt acquisition. Given that the government already has heavy interest in the largest indigenous airline in Nigeria, Arik Airways and also in Aero, through their heavy debt burden to two government banks, AMCON & NEXIM. It is in the interest of the government that they become profitable again so that they can repay their debts. Having the two airlines working separately for so long was nonsensical and was not in the interest of either airline or the government, to whom they are both heavily indebted. Accordingly what trade and aviation ministry, AMCON and NEXIM needed to a year ago to save Arik Airways and Aero was to merge them together into one enterprise. It makes no sense for the two of them to have been operating separately for the past year, which is likely why Aero collapsed. The incompetence of AMCON, and the Aviation Ministry in the face of this calamity speaks volumes. Whether or not the government formally nationalizes the carriers will have little to no impact on the matter.

Since the 90’s, with the guidance of major private equity investors as well as investment banking and management consultants, major airlines throughout the world have begun to consolidate and merge into larger carriers. In this time the United States has gone from having 10 major carriers to only 4. European carriers have also taken a similar path with KLM and Air France merging, as well as British Airways and Iberia. Even before the merger phenomenon, in the global front airlines began to form alliances with one another forming what is now the 3 major global airline alliances consisting of what is now 62 member airlines. The alliances of SkyTeam, Star Alliance, and OneWorld now account for over 60% of total air travel worldwide. The market share of these three major alliances continues to grow making it harder for those outside of this to compete and run profitable airlines. Further the trend of airline mergers as a means of increasing efficiency is continuing and showing no signs of slowing. By joining an alliance, individual airlines receive immediate benefits including, shared booking, maintenance, and baggage facilities that helps lower the overhead cost of operation. In addition passengers are able to traverse a wider array of intercontinental routes seamlessly on flights operated by other carriers within the alliance.

Aside from merging Arik and Aero into 1 firm, the two need to expand their route offerings further by merge and/or acquiring a majority stake in a third airline, and code-sharing with as many others as possible. This would increase their destination capacity and enhance its global market share. As it stands Arik and Aero are a bit too small at a combined fleet of just over 30 world class aircraft and offers too few routes to be taken seriously as a partner by any of the major alliances. There are several other airlines in Arik Air’s position that are yet to merge and do not yet cooperate with any of the major alliances. Perhaps most significant among them is Caribbean Airlines, a fledging airline largely owned by the government of Trinidad and Tobago. Arik/Aero offers very few flights to North American destinations, while Caribbean flies through much of the US and Canada as well as the Caribbean and South America. A merger between the two would expand Aero/Arik Air’s reach to both North and South America and would allow the two to increase market share on flights to various African destinations that Aero/Arik service. Together the two airlines will be a major player in the global air industry with almost 60 aircraft and will offer unique routes that no other airline in history has ever serviced or offered. This is the same strategy that South African Airways took when it purchased Ethiopian Air, Kenyan Airways did when it merged with KLM. To ensure Aero/Arik maintain a healthy market share in Africa they also need to code-share flights with as many African airlines as possible. Code sharing would enable Aero/Arik to offer flights to more African destinations that it currently does. Code-share partnerships with African airlines like Air Cote D’Ivoire, Equatorial Congo, Daallo Airlines, Africa World Airlines, East African Airways, and Libyan Airlines would enable Aero/Arik to fly passengers to virtually every destination in Africa. It would also position Aero/Arik as one of the leading airlines servicing African routes along with Kenyan Airways and South African Airways. It is worth noting that both Kenyan Airways and South African Airways are members of 2 of the 3 major global alliances, namely Star Alliance for South African Airways, and Sky Team for Kenyan Airways.

(One World Route Map)
The only major global airline alliance that does not have an African partner is OneWorld. Once Nigeria merges Aero/Arik Air, executes a strategic merger most likely with Caribbean Airlines, and codeshares with other African carriers, the next logical step would be for it to become the strategic African partner in the OneWorld air alliance which badly needs a solid African partner. By doing this Aero/Arik Air will be able to deliver Nigerian and African passengers to virtually any destination in the world and connect travelers throughout the world with Africa. Just as South African Airways, Kenyan Airways, Emirates, and Quatar Airways have become very profitable when teamed with an air alliance, Aero/Arik/Caribbean Air when structured this way will be able to do the same. While this rough-sketch blueprint for revitalizing Nigeria’s aviation industry is light on specifics and details, it is informed by trends in the aviation industry coupled with an understanding of the state of the industry in Nigeria and Africa as a whole. It is this kind of strategic economic planning that leads nations to succeed in the fast-paced and increasingly complex global economy.

The Buhari administrations economic team, whenever they realize that the world is moving while they sit on their hands, must have strategic planners within their ranks that have experience both in corporate finance and management consulting but who also are strategic national planners that are hungry for change. In the past, Nigeria has fielded some of the most incompetent decision-makers that when compared to their counterparts in the rest of the world have no business occupying the positions they boastfully occupy in Nigeria. Even among the ones that can compete globally, many of them are too old and/or are often comprised by their records and longstanding ties which prevents them from making the drastic shifts like this, that are needed. If you look at some of the major deals and leading global firms that are reshaping our world, they are led and executed by talented young people with little to no connection with the “old guard” they are eclipsing.

Just as is the case with revitalizing Nigeria’s aviation industry, above all what I want to demonstrate is that the solutions to move our country forward were within reach. It does not require a miracle to turn-around the conditions on the ground in Nigeria immediately. Anyone who believes this is likely unqualified and thus unable to see, or is obsessed with chasing stolen funds that may never be recovered, or has a vested interest in maintaining the status quo. The administration are to blame for the collapse of Aero, and Nigeria’s diminished profile in the Aviation sector in Africa. They have failed to act and develop world class solutions to the challenges that the sector faces. Meanwhile as they sit on their hands, collecting salaries and boasting about their titles, Nigerian industry like Aero is crumbling before their eyes. The challenge today is to hold decision makers accountable, and to no longer let them get away with low-levels of achievement, distracting the public with stories of corruption, in order to pass blame and make excuses for their total incompetence and lack of qualifications.

The author is the Managing Director and Principal of Kuranga and Associates, a full-service investment, political and economic risk consultancy, and asset management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press. .