What’s the deal between Ethiopian Airlines and Nigeria’s national carrier?

National carriers are a big deal for countries.

Not only do they represent national pride, but they also create jobs, foster international trade, generate revenue for the aviation sector and support economic growth. For instance, the aviation sector, including two national carriers (Emirates and Etihad), contributes over 25% to the UAE’s GDP.
 

Multiple data points show the importance governments place on national or flag carriers, even when they are loss-making. Think about the Malaysia Airways state fund bailout or the South African government’s resolve to keep South African Airways (SAA) afloat (the airline has not made profits since 2011).

Nigeria is not exempt. Past and present governments have been so obsessed with having a national carrier that we’ve tried 11 times between 1960 and 2021—every single attempt has crashed and burned (pun intended).

Here we are, trying again, for the 12th time, with Ethiopia Airways (ET)—the best airline in Africa—as a strategic investor. The government is revisiting this obsession to achieve its ambitious target of growing the aviation industry’s contribution to GDP to 5% ($14.2 billion annually) by April 2023. For context, the sector contributed 0.08% to GDP in 2021.

We could actually succeed this time. It all depends on whether the government commits to doing things differently in the aviation sector rather than repeating past mistakes.

Today, we will unpack the recent national carrier deal the federal government has made with Ethiopian Airlines (ET) and the implications for the aviation industry. The goal is to determine if the ET deal is what Nigeria truly needs to achieve its long-awaited dream of having a national carrier. 

First, let’s see what national and flag carriers are.
 

National carriers vs Flag carriers

A national carrier is a wholly owned government airline that operates international and domestic routes. An example is Emirates. It can also be owned by the government and privately managed as you have with ET.

In contrast, a flag carrier is a locally-owned airline that has just become famous and popular for its operations (international and domestic) for a country. A good example is United Airlines or Delta in America, and in Nigeria, we can say Air Peace. A flag carrier can also have the full backing of the government to support its operations, so incentives like tax holidays are handy here.

There’s a thin line between both. Even recently, both terms have been used synonymously, but the critical thing to note here is that national carriers are typically government-owned.

An efficient national or flag carrier for Nigeria would contribute to the aviation industry’s growth which has averaged 4% in the last five years. It is sound revenue generation for the country and could mean cheaper passenger flight ticket costs. With a suitable flag or national carrier (done the right way), Nigeria can take advantage of the Single African Air Transport Market (SAATM) that aims to liberalise air travel in Africa. It could also reduce the problems of fund repatriation (Nigeria possesses 36% of stranded airline funds globally—$600 million) and provide more options for passengers. 

Essentially, national or flag carriers have strategic economic importance. They support aviation sector growth and, in turn, economic growth. 

However, as we will soon see, Nigeria Air is neither a national nor a flag carrier, going by our earlier definitions. Still, we will unpack the government’s deal with the ET to see if it has the potential to give Nigeria the same benefits.
 

What’s the deal with Nigeria Air?

In September, the federal government, through the Minister of Aviation—Hadi Abubakar Sirika—announced that Nigeria Air would begin operations by the end of the year.

Ethiopian Airlines has the controlling interests with a 49% stake, institutional investors like MRS have 46%, and the Federal government has 5%. This deal structure shows that Nigeria Air is neither government-owned (national carrier) nor locally-owned (flag carrier).

However,  the federal government’s small stake seems like a good idea as it invariably means less interference—a departure from previous efforts to launch a national airline.

The optimism around reduced government intervention has some merit. Earlier, I mentioned that the government’s heavy-handed involvement in the airline industry was largely unsuccessful. A notable moment was in 1990 when General Ibrahim Babaginda (IBB) set up a presidential task force to revitalise Nigeria Airways (our once successful national carrier that was in operation from 1971-2003).

The task force restructured and put the airline back on track. They even tried installing a computerised check-in system to curb boarding pass malpractices (like staff members selling boarding passes and not remitting the money). The system was installed on a Friday night, but by Sunday, a mysterious fire burnt and blew up the system, taking Nigeria Airways back to handle boarding passes manually. I guess mysterious fires have been around for a while in Nigeria because this reminds me of mysterious fires destroying INEC offices close to elections.

However, the norm of poor management kicked in, costing the airline millions in losses and debt. This caused a severe blow to Nigeria Airways’ reputation as the leading airline in sub-Saharan Africa at the time.

Still, under General Ibrahim Babaginda, the government made another attempt to float the national carrier in 1992/93. This time, Nigeria Airways was going to be privatised and changed to Air Nigeria (led by Captain Mohammed Joji). The head of state wanted to remain in office, and to garner the support of the senate president; he replaced captain Joji with Engineer Agom (a childhood friend of the senate president). This singular action, coupled with severe backlash from industry stakeholders questioning the privatisation move, led to the end of Air Nigeria even before the lift-off.

Interestingly, of the 11 attempts to float the national carrier, only four—Nigeria Airways, Virgin Nigeria, Nigerian Eagle, and Air Nigeria ever took off (i.e. they had aircraft and staff members); the other times were just ideas that never saw the light of day. 

Essentially, poor management, fraud, tiresome government interference and politicking caused the demise of the many national carrier attempts we’ve had in Nigeria.

So, back to the deal with Ethiopian Airlines.

On the surface, the expectation is that Ethiopian Airlines (ET)—the most profitable airline in Africa—will replicate its business strategies for Nigeria Air and make it profitable. From the chart below, ET has consistently grown its net profits by 323% from $30 million in 2010 to $127 million in 2020.

Its passengers have grown 5x to 12 million from 2.5 million, and cargo services by 7x to 525,000 tonnes from 73,000 in 2008.

In a nutshell, ET has been a significant success story since it began operations 76 years ago. This success has been mainly due to well-executed and thorough plans like its Vision 2010 and Vision 2025, where it set out to become the dominant airline in Africa. One of the airlines’ goals was to increase its fleet to 120 by 2025, but by 2020, it surpassed the goal by 5% (126).

Similar to the deal with Nigeria Air, ET has signed multiple deals with other African countries like Togo’s ASKY airline in 2008 (Side note: ASKY airlines is privately owned), Malawian Airlines in 2012, and Ethiopian Mozambique Airlines in 2018 (the airlines ceased operations in 2021 due to low passenger demand amid the covid-19 pandemic).

From this, we see that it's just business for ET, which makes sense (remember, they plan to become Africa’s aviation hub). But national carriers are more than just business for countries; they inspire national pride; for the citizens, flying their country's airline has a patriotic ring attached. 

So far, we’ve highlighted the difference between national and flag carriers, and we’ve shown that the Nigerian government’s track record doesn’t inspire confidence that it can successfully run Nigeria Air. We’ve also seen that ET is focused on maximising profits as it expands to other African countries. Let’s go on to the implications of the deal.
 

What's wrong with the ET deal?

We already established that Nigeria Air is neither a flag carrier nor a national carrier.

Instead, Nigeria Air is a foreign-owned and controlled airline that can operate on domestic routes and international flights from and to Nigeria. Thanks to ET’s 49% stake and government support, like Ethiopian Mozambique Airlines, Nigeria Air will be a subsidiary of ET.

ET having a significant stake is not the problem. The issue is that the government is presenting Nigeria Air as a national carrier (which it isn’t) and fully supporting ET, giving the airline an unfair advantage over other players in the domestic aviation industry.

In the article 7 clause of the international civil aviation (ICAO) convention document that guides airline operations worldwide, foreign airlines shouldn’t run operations with special privileges exclusively in a state. It’s called cabotage, and the ET deal breaches this law.

Regarding the exclusion mentioned above, a justification is that ET has more than double the fleet (126), passengers (12 million), cargo (525,000 tonnes), and destinations (130) than any domestic player in Nigeria. For context, Air Peace (the largest airline in Nigeria) only covers 20 destinations and has 30 planes in its fleet. By extension, Nigeria Air may have access to ET’s international networks (considering Nigeria is the largest aviation market in Africa), which is not bad.

However, the critical thing is that through Nigeria Air (with the extensive support of the government), ET will also have access to Nigeria’s domestic routes. With its vast resources, it can muscle out small players in the domestic aviation industry. The airline business has high barriers to entry (due to high costs, e.g. buying a Boeing 737 aircraft costs between $89 million and $135 million), so any player with government backing and money spells trouble for others. Essentially, it is unfair competition.

ET already has some undue advantages in Nigeria’s domestic aviation industry. For instance, as an international airline, ET has access to three airports in Nigeria (Abuja, Lagos, and Kano), which shouldn’t be. The ideal situation is ET lands in one major airport (say MM1 in Lagos), and domestic carriers connect passengers from Lagos to their respective states.

The Nigeria Air deal will only give ET more privileges. Already, the government intends to start ET’s Nigeria Air with a 15-year tax moratorium which the domestic players don’t enjoy. Imagine what an incentive this big given to an airline with better aircraft and the tendency to honour more bilateral air service agreements (BASA) will do to domestic players. BASA is an air transport agreement between countries to allow the free movement of international flights.

Nigeria currently has 92 BASA agreements, but only a few are reciprocated. Other foreign airlines fly into our major airports, and some (like ET) fly into three significant airports (costing domestic airlines money). At the same time, we have only a few domestic airlines flying into significant airports overseas or internationally. 

This tax moratorium means Nigeria air can charge lower ticket prices in the domestic market, which other domestic players cannot match with their high operating costs. It’s worth noting that ticket prices are already not cost-reflective.

Considering how challenging the operating environment is with high jet fuel costs and increased charges (the FG recently reviewed airline MDA revenue contribution from 25% to 40%), domestic players will likely incur more losses than they already are—as demand shifts to Nigeria Air. Eventually, if the losses are too much,  domestic airlines could fold up, leaving ET’s Nigeria Air as the dominant market-controlling player. 

Essentially, the new national carrier deal might not bode well for the domestic aviation industry. This is why the Airline Operators of Nigeria (AON) have filed a lawsuit against the government, ET and the minister of Aviation—a similar trend with the now defunct Ethiopian Mozambique Airlines.

Having a national or flag carrier is a good thing. The issue is that this approach by the government has too many loopholes that do not favour the domestic aviation industry.

Some necessary steps for the government to take going forward will be to always involve key aviation industry stakeholders before making decisions (like it did with the Startup bill). Another is to ensure that our BASA with other countries is honoured in detail. Maybe we can eventually have an erstwhile flag carrier (not a national carrier) in the future.

Ultimately, the government’s national carrier obsession should not come at the expense of domestic players. It will be better for the government to focus on creating an enabling environment for airlines rather than fulfilling this pipe dream. Besides, that’s the primary role of the government. So, it doesn’t hurt for them to focus on doing just that.