federal ministry of aviation aebf white paper 2.0 facilitated by dr aduloju wfg

STIMULATING SUSTAINABLE AVIATION INDUSTRY GROWTH

AVIATION EXECUTIVE BUSINESS FORUM WHITE PAPER

FEDERAL MINISTRY OF AVIATION

2 Aviation Executive Business Forum – White Paper

2015 FEDERAL MINISTRY OF AVIATION

“As we gradually transit into a new era of

aviation business, this government is ready to make

sure that those turning the wheels of the industry do

so with ease. At the end, we want to build an

economic engine that offers a decent ROI to

everyone who has a stake in the industry.

We invite the private sector to take the cockpit

while Government clears you for takeoff”

2015 FEDERAL MINISTRY OF AVIATION 3

AVIATION EXECUTIVE BUSINESS FORUM WHITE PAPER

TABLE OF CONTENTS

INTRODUCTION ................................................................................................................................................................. 4

1.0 NIGERIA’S AVIATION COMPETITIVE ADVANTAGE......................................................................................... 5

1.1 THE GLOBAL AVIATION INDUSTRY ..................................................................................................................... 5

1.2 KEY TRENDS IN AIRLINE OPERATIONS .............................................................................................................. 5

1.3 KEY TRENDS IN AIRPORT INFRASTRUCTURE .................................................................................................... 8

1.4 KEY TRENDS IN AVIATION REGULATION ......................................................................................................... 9

1.5 NIGERIAN AVIATION INDUSTRY IN CONTEXT OF GLOBAL TRENDS ....................................................... 11

1.6 OPEN AFRICAN SKIES: STRATEGIC IMPERATIVES ......................................................................................... 14

2.0 THE REBASED NIGERIAN ECONOMY – IMPLICATION FOR THE AVIATION INDUSTRY ......................... 15

2.1 MAXIMISING THE OPPORTUNITIES OF A REBASED ECONOMY ................................................................ 18

2.2 THE NEED TO ENSURE AVIATION INDUSTRY STABILITY FOR ASSET BASE GROWTH .......................... 18

2.3 GOVERNMENT INTERVENTIONS OPTIONS TO-DATE TO SUPPORT AVIATION INFRASTRUCTURE ............................................................................................................................................................. 19

2.4 INCREASING FOCUS ON ALTERNATIVE FINANCING METHODS .............................................................. 20

2.5 DEVELOPING NIGERIAN AVIATION LOCAL CONTENT AND GROWTH FUND ..................................... 21

2.6 AN AVIATION GROWTH FUND: PRIVATE EQUITY ....................................................................................... 22

3.0 THE NATIONAL STRATEGIC POLICY FRAMEWORK AND ECONOMIC STIMULUS ................................ 24

3.2 AVIATION INDUSTRY EFFECTIVENESS: MANAGING PERFORMANCE AND EXPECTATION ................................................................................................................................................................... 26

3.3 NATIONAL AVIATION INDUSTRY ECONOMIC STIMULUS .......................................................................... 26

3.4 NATIONAL AVIATION INDUSTRY ECONOMIC STIMULUS ACTION PLAN .............................................. 28

3.4.1 AVIATION PUBLIC SECTOR FUNDING .......................................................................................................... 29

3.4.2 MOBILIZATION OF PRIVATE CAPITAL FOR THE AVIATION INDUSTRY ................................................. 30

3.4.3 OTHER BROAD POLICY INTERVENTIONS THAT ENHANCE STIMULUS ACTION PLAN ...................... 31

3.5 JUSTIFICATION FOR NIGERIA’S REGIONAL AVIATION HUB ..................................................................... 32

3.6 JUSTIFICATION FOR GROWING BUSINESS AVIATION ............................................................................. 33

3.7 JUSTIFICATION FOR BUILDING A NATIONAL FLAG CARRIER ................................................................... 35

3.8 NATIONAL FLAG CARRIER SELECTION CRITERIA ......................................................................................... 37

4.0 CONCLUSION ...................................................................................................................................................... 39



Introduction

The objective of the AEBF was to bring together Aviation Industry Business Executives,

Captains of Industry and Heads of Government Aviation Departments and Agencies to

discuss, debate, deliberate and craft strategies for stimulating sustainable industry

growth and development.

The epoch setting event was successfully conducted under the leadership of the Federal

Ministry of Aviation and landmark industry discussions and resolutions were made that

would have a significant impact on the Industry Policies and Strategic Framework

going forward.

This white paper articulates the core elements and critical issues of the AEBF, presented

in thematic areas for the purposes of mobilising stakeholders to action, facilitating

robust policy decision-making, inspiring intergovernmental action and catalysing

aviation business leaders to become key drivers of sector growth and sustainability.

DR. TAYO ADULOJU

Director, Institute of Workforce Development, Workforce Group

Senior Fellow, Harvard University, J. F. Kennedy School of Government

Telephone: 07042444444

Email: [email protected], [email protected]

mailto:[email protected]

mailto:[email protected]


1.0 Nigeria’s Aviation Competitive Advantage

The Nigerian Aviation Industry has the economic, geographic and market traffic

potential to be strategically positioned to be the most profitable Regional

Aviation Hub on the African Continent. This was the unanimous consensus of

leaders of the Industry at the AEBF. The demand of the stakeholders was for a

comprehensive and integrated national aviation strategic policy framework

that specifically leverages the country’s unique potential, supported by a

commitment of the Government to build a World Class National Aviation

System that will rival any other in the Global Economy.

1.1 The Global Aviation Industry

The Global Aviation Traffic represents $2.4trillion (that is, 3.4% of the global

GDP). With world passenger traffic growing by 6%, and world Freight Traffic

growing by 7%, the Global Aviation Industry has undergone transformation

over the last 40 years with an increasing number of passengers and cargo

volumes. There has been a substantial increase in the choice of travel options

by destinations as evidenced by the travel frequency. This accentuates the

need for greater competitiveness, which was brought about by airlines

operating their business models at lower costs, higher safety, higher efficiency

and a smaller environmental footprint per passenger mile travelled than ever

before.

For Nigeria to maximize its full potential and develop national aviation

competitive advantage it must take into account emerging trends in Airline

Operations, Airport Infrastructure and Aviation Regulation.

1.2 Key Trends in Airline Operations

In recent times, global airline business has been characterized by a period of

fierce competition, market consolidation and network expansion with the

underlying volatility of fuel prices.



a) Market Consolidation: Consolidation has been employed by the global

climate as a key strategy for sustained competitive advantage in today’s

mature market. Increasing liberalization and growth of Low Cost Carriers

has resulted in the use of consolidation strategies by airlines in mature

markets in battling competition.

Due to consolidation, revenue share has increased as follows:

- North America (3 mega airlines): 55%

- Europe (3 mega airlines): 57%

- South America (3 mega airlines): 67%

- Middle East and Africa: 58% (this is more likely due to aggressive

growth by gulf countries)

- Asia: reduced to 28% (e.g. Singapore has deregulated and have

more airlines coming in)

b) Growth in Low Cost Carriers (LCCs): LCC penetration into emerging

markets has made air travel more accessible for passengers leading to

increasing air and passenger traffic. The rapid expansion of Middle East

hub carriers has changed intercontinental travel patterns, changing air

connectivity patterns. More people are flying LCCs leading to an increase


in LCC traffic over FSCs. Thus gap in traffic growth between LCCs and Full

Service Carriers (FSC) is slowly closing.

c) Gulf Carrier Expansion: Using its geographical advantage and financial

resources, the Persian Gulf has transformed itself into the main hub for

international air travel. Possessing a commanding presence in the Asia-

Europe routes, big-name Gulf carriers such as Emirates Airlines and Qatar

Airways are poised to expand sharply in other global markets, overtaking

other sixth freedom carriers such as Singapore Airlines and KLM.

The Implications are as follows:

- Traffic has moved from Far West To Far East. They capitalized on

geography.

- It is predicted that by 2020, Dubai passenger traffic will exceed

Heathrow’s.

- Passenger numbers for Singapore Airlines and KLM are less than that

of Emirates.

- UAE and Emirates have signed an agreement with Angola to build an

airport outside Luanda. Ghana has commissioned national carrier

initiative.

d) Volatile fuel prices: Airlines exposure to volatile oil prices greatly

reduces their cost allocation capabilities as fuel costs account for the

bulk of operating cost. The percentage of fuel cost in operations has

been on the increase over the years. This exposes airlines to volatility

in oil prices reducing cost planning capabilities. Hence, the need to

look at how to synchronize supply chain. Be proactive not reactive.



1.3 Key Trends in Airport Infrastructure

The privatisation of Airport infrastructure globally is on the rise as evidenced

by an increase in refinancing activities and the diversification of revenue base.

a) Infrastructure privatisation: Airport privatisation deals were

estimated at $21bn globally from January 2012 to September 2014.

South America has been the main region for airport privatisations

since January 2012, accounting for US$17 billion of the US$21 billion

globally from January 2012 to September 2014. This is expected to

result in improvement of airport infrastructure globally.

b) Refinancing activity: There has been a steady increase in refinancing

activity driven by the recovery in air travel hence the need for

renegotiated debt financing. There has been a resurgence in

refinancing activity, largely to replace acquisition debt raised pre- crisis

as airport owners take advantage of improved trading conditions

driven by recovery in air travel and increased availability of debt

financing. There are economies (e.g. Ireland) whose revenue is largely

based on airline/ air transport revenue.

c)

d) Increasing focus on non-aeronautical revenues: In recent times,

airports are focusing on customer experience by being more creative

with airport services and generation of non-aeronautic revenue. In a bid

to increase internally generated revenue, airports designs are

increasingly including non-aeronautic value-adding services. The Table

below illustrates the migration of Revenue to Non-Aeronautical income

streams.

1970

1990

2014

Goal Handle aircraft and passengers

Increase revenue and profitability

Reduce dependency from aviation business cycles

Target Customer Passengers Passengers Beyond Passengers

Revenue from Non-Aeronautic

<5% >30% >70%


Conclusion Slow growth and reduced margins from cost pressure

Higher margins but still high dependency from aviation business cycles

Broad, risk-reduced portfolio of diverse income streams

1.4 Key Trends in Aviation Regulation

Global aviation regulation has been centred on market liberalisation while also

maintaining a fair playing ground for all stakeholders.

a) Market Liberalisation: The liberalization of international air transport

regulation has continued to evolve aiding increased air network coverage.

In the past decade, about 1,000ASAs (including amendments and/or

memoranda of understanding) were reportedly concluded globally. Over

70% of these agreements and amendments contained some form of

liberalized arrangements. By 2014: 58.9% of flight frequencies offered

are through open skies; 35.5% Offer country-pairs with non-stop

scheduled passenger air services (illustrated in the Table below).

1995 1999 2004 2009 2012

No. of

Frequencies %

31.60 37.50 46.10 57.10 58.9

No. country-

pairs routes.%

6 7.90 22.80 32.10 35.5

b) Competition Policies: As liberalization spreads, the question of how to

maintain and promote fair competition in air transport is increasingly

becoming an issue. The frequency of use of competition laws for air

transport has increased, presenting a variety of issues. This means the

question of how and what regulations to impose will be the key focus of

regulators, while airline operators will need to develop expansion

strategies within the confines of regulations. Biggest Issues:

Capacity dumping

Predatory pricing (the bigger, the easier to absorb shocks and thus kill

smaller competition)

Predatory pricing

Airline coordination & alliances (people gravitate to particular

airlines)



c) Consumer Protection Policies: Ensuring adequate protection of all

stakeholders especially airline customers has become an essential part of

today’s effective regulation. Concerns about the limits of competitive

response have induced a number of States to ask the industry to develop

voluntary commitments (non-legally binding self-regulation) and/or to take

some direct regulatory measures that address consumer interest issues such

as denied boarding compensation, flight cancellations and access for

incapacitated passengers.

d) Safety: The review of safety in the aviation industry due to the recent

spate of crashes has led to an increased investment in state-of- the-art

security equipment and crew trainings. Commercial aviation is in the middle

of its deadliest year since 2010, with the recent spate of air disasters

making an abrupt break from three straight years of decline in airplane

fatalities.

Recent air crashes in recent months, all involving Asian airlines, have cast a

shadow following a record year for air safety in an industry that has

invested heavily on crew training and modern security equipment.

Table: Scheduled Commercial Flights Accident Records

2009 2010 2011 2012 2013 2014

Number of accidents 102 104 118 99 90 12

Number of fatalities 655 656 372 388 173 761


1.5 Nigerian Aviation Industry In Context of Global Trends

Currently the Nigerian Aviation accounts for 14.6 million Passengers handled by

the airports in 2013. There have been 17 entrants with 7 defunct in the past

(10) years. The Aviation Sector is 1.4 % of GDP Estimated contribution to

Nigeria’s GDP and 159,000 estimated jobs supported by the industry. The

current cargo traffic is estimated at 219,300 Tonnes of cargo lifted in 2013,

with 10 scheduled domestic airlines with 3 Nigerian airlines operating on

International Routes and 21 foreign airlines operating in Nigeria.

a) Airline Operations: The Nigerian Aviation, Foreign Airlines dominate

International travel in Nigeria and account for 90% of passenger traffic. (92%

of passenger traffic is international, 8% domestic; traffic originates in Kano,

Port Harcourt, Abuja, Lagos and others; majority is Lagos). The Domestic



Market centers around two major players (Arik, Aero) who account for 89% of

seats.

b) Airport Infrastructure: Majority of airport infrastructure in the country are

Government owned with most being significantly under-utilized. Only 4 airports

are privately owned out of the 22 existing in Nigeria. 75% of passenger

traffic is from 3 airports - Lagos, Port Harcourt and Abuja in the past 5 years.

In 2011, over 90% of the revenue earned was from 2 airports – Lagos and

Abuja. This indicates that majority of the airports in Nigeria are significantly

under-utilized.

c) Regulatory Services: Over the years, strategies are being developed to

strengthen the role of regulators in aviation with an increasing focus on safety

and consumer protection. Some areas of regulatory reforms include: The

Aviation Master Plan to provide strategic focus for the industry; the Nigerian

Civil Aviation Authority Consumer Protection Unit establishment of consumer

protection desks across airports; Increased acquisition of modern airport safety

and security equipment in all airports. The Aviation Master Plan also proposes


legislative changes to enhance regulator enforcement powers. Regulatory Focus

of Nigerian Aviation Master Plan include:

Safety and Security

Consumer Protection

Bilateral Air Service Agreements

National Flag Carrier

To be competitive, Nigerian Aviation must benchmark global players that have

exploited the Hub Potential that the country seeks to optimize. Some of these countries

and their general industry outlay are illustrated below:

These cases point to focus of Government in creating very specific national competitiveness.

a) UAE: Increased government focus on aviation. 15.2% growth; highest

passenger traffic growth in the world.6.8% growth; Highest Cargo traffic

growth in the world.

DUBAI (UAE) ETHIOPIA BRAZIL

Proposed capital investment

$7.8 Billion airport expansion plan

• $300 Million airport expansion plan

• Fleet expansion

-

GDP Contribution $26.7 Billion (2013), 27% of GDP

$17 Billion (2013), 37.5% of GDP

$ 31 Billion (2014)

Jobs Supported 416,500 (21% of Total employment)

- 845,000

Active Airlines Over 150 21 -

National Carrier Emirates Ethiopian Airlines TAM Linhas Aereas

Hub Airport Dubai International Airport Bole International Airport • Guarulhos International

• Congonhas-São Paulo

• Brasília International

• Viracopos International Airport

Infrastructure Ownership structure

Government Owned Government Owned Government and PPP

Success Factor • Government Funding

• Government awareness of aviation’s economic importance

• Aviation policy favouring open competition among airlines

• Well-structured investment strategy

• Focus on growth and underserved markets.

• Government awareness of aviation’s economic importance

• Non-interference of the government in the operations of the airline

• Establishment of ASAs

• Increasing investment in Aviation Infrastructure

• Privatisation of Aircraft manufacturing industry which resulted in increased productivity

• Easy access to Aviation infrastructure



b) Ethiopia: Increased focus on domestic aviation capability development. 77% of

Seat capacity provided by Domestic Airlines. 77 Passenger planes; 2nd

strongest fleet in Africa.

c) Brazil: Increased focus and investment on aviation manufacturing capability.

37% of all new aircrafts ordered domestically. 4th Largest Aircraft

Manufacturer in the world in deliveries.

1.6 Open African Skies: Strategic Imperatives

Open African Skies holds strategic regional competitive industry advantage for

Nigeria, with attendant commitments of the Federal Government to develop

Africa’s leading and most competitive Aviation Hub. Currently, African aviation

share of global traffic is very small at around 3%. The West and Central

Africa region is the worst served in terms of connectivity and tourism. None of

the major airline hubs feature in West and Central African region. Industry

Consolidation and Strategic Partnerships maybe the key to halting the failure

rate of Nigerian and indeed African Airlines.

It is a foregone conclusion by Regional Stakeholders that Nigeria is punching

below its weight, as it is geographically and socio-economically positioned to

take on the leading aviation industry role in the Region. The Federal Republic

of Nigeria is the largest economy in Africa with over 170 million people. In

terms of aviation, it does not correspond with the size of the economy or the

size of the population. For example, the Murtala Muhammed International

Airport is only the 5th largest in Africa based on the number of passengers, so


the potential is here. To achieve this leading regional role, the Federal

Government must lay out a more ambitious Aviation Vision, supported by the

building of a World Class Aviation Industry System that caters for Africa’s

need.

This potential must be fully developed. Beyond building World Class Airline

Operations, Infrastructure (which need to match those from other regions, e.g.

Dubai, Singapore, Paris and Amsterdam), Nigeria may need to play a leading

role in West African Economic Integration that removes the Barriers to the

movement of traffic such as visa requirements and onerous customs clearance

procedures for cargo need to be streamlined, ensure that African States need

to attain and maintain global safety and security standards (The poor safety

perception in some African States tarnishes the image of all States).

One of the imperatives of an African Aviation Hub is to make Air Travel

Accessible to all. The operating cost of Aviation is very high and Nigeria still

needs to do a lot to reduce the cost of doing business. Passenger charges at

many stations in Africa vary between $40-$80 which is way above world

average. The price of fuel in Africa is about 21% above world average, which

negatively affects the competitiveness of African aviation. The cost of air

transport has a direct influence on the cost of tourism products and indeed on

the consumer’s choice of destination. Aviation is a critical tool for the social and

economic development of states. Nigeria with its fast growing economy, middle

class and population stand to significantly gain from safe, reliable and

economical air transport services.

2.0 The Rebased Nigerian Economy – Implication for the Aviation Industry

The Nigerian Aviation sector contributed 0.09% (NGN 59 billion/USD 450mn)

to Nigeria’s GDP in 2013 compared to 5.4% of Singapore's GDP and 0.5% of

India’s GDP. Air passenger traffic in Nigeria has more than tripled between

2004 – 2013, from 4 million passengers a year to approximately 14.64

million a year. USD 870m has been invested over the last 5 years in

upgrading/remodeling airport infrastructure across the country, with over



US$5 Billion in Aircraft Investments. The Nigerian Aviation Sector is in Need of

Investment, the sector is largely under-budgeted for as illustrated by the

annual budgetary allocation below:

2014 2013 2012 2011

Min. of Aviation (Bn NGN) 31.29 51.81 41.55 26.30

FAAN Allocation (Bn NGN) - - 4.12 21.07

Provision of airport / aerodromes (Bn NGN)

19.68 24.90 32.25 0.39

Table: Federal Government Budgetary Allocation to Airports*

Comparatively to other Aviation Economies as already noted. The Nigerian

Aviation Industry is doing less than its potential.

Country No of Airports / Airfields **

Nigeria 54

South Africa 566

Kenya 197

Egypt 83

United States 13,513

Table: Number of Airports (2013)

Nigeria’s GDP increased by 89.22% in 2014 to USD509bn (rebased) from

USD269.5bn in 2013. This makes Nigeria’s economy the 26th largest economy in

the world, and the largest economy in Africa, ahead of South Africa. The

percentage contribution of the Nigerian Aviation Sector to GDP is still very low

when compared to the Aviation sector in Brazil, India, Singapore, Egypt, and

South Africa.


The sector if properly optimised should contribute more to GDP, than its current

US$0.45bn GDP Contribution, given the population of Nigeria and also the fast

growing economy, which has increased business and leisure travel across the

country.

Country Absolute Contribution to GDP

% Contribution to GDP

Contribution to GDP utilizing Nigeria’s GDP

Singapore US$10.36 5.4% US$27.54bn

South Africa US$2.8bn 0.8% US$4.08bn

Brazil US$10.45 1.0% US$5.1bn

India US$5.3bn 0.5% US$2.55bn

Egypt US$1.98bn 1.2% US$6.12bn

Table: A comparative analysis of Aviation’s contribution to Nigeria’s GDP vs. other emerging and African economies *



2.1 Maximising the Opportunities of a Rebased Economy

While the rebased economy holds its inherent opportunities including an

economic environment that correlates with growth in the sector, it will take a

more proactive Aviation Policy Framework to increase economic output, create

opportunities and increase the attractiveness of the sector to investors.

Notwithstanding the rebased economy, Nigeria still faces the impact of

monetary and fiscal challenges. The combination of the Naira devaluation and

falling Global Oil Prices will continue to have a significant impact the sector, as

expenses are US dollar denominated. It is imperative for industry stability that

the aviation sector and specifically the Airline companies develop a stable FX

plan. On the other hand the decline in Naira affects business as revenues are

denominated in Naira.

2.2 The Need to Ensure Aviation Industry Stability for Asset Base Growth

Asset Base growth is driven by the capital inflow into the sector. Capital inflow

requires a range of attractiveness indicators, hence dependent on the stability

of the economy. In a growing economy, there will be increase in assets as

8.1

8.3

8.2

5

8.4

5

10

.8 1

2.5

13

.98

14

.75

14

.11

14

.64

0

2

4

6

8

10

12

14

16

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Annual Passenger Traffic by Air, 2004-09


passengers grow. Funding to expand assets will also be cheaper and easier to

access in a growing economy. Hence, the rebased economic benefits will accrue

to the sector through deliberate interventions to create a more sustainable

aviation industry.

A notable Aviation Industry Intervention by the Federal Government of Nigeria,

as Crisis protection measure. The Federal Ministry of Finance on the request of

the Ministry Aviation, through its vehicles in a bid to protect the Nigerian

aviation sector from crisis have intervened in the past by providing low interest,

long term funding to finance operations. The 300 Billion Intervention fund is

governed and regulated by the Central CBN and managed by Banks/

Development banks:

Disbursed – N116.9bn

Fund Size – N300bn

Interest Rate – 7%

Manager – BOI

Year – 2009

In an earlier intervention the Asset Management Corporation of Nigeria

(AMCON) under the CBN’s risk based regulatory response to toxic assets and

bad loans in the Banking and Financial Sector saw the Aviation industry receive

some financial intervention estimated at about $1Billion.

2.3 Government Interventions Options To-Date to Support Aviation Infrastructure

The Federal Government has also

implemented on interventions to support

Aviation Infrastructure. They include:

a) Public Private

Partnerships (PPP): The PPP model has

been applied by the Ministry of

Aviation with some success towards

building up airport infrastructure in

Nigeria;

Asaba International Airport



b) Concession: Concessioning of aviation infrastructure to the private sector

by the Ministry of Aviation has achieved modest gains;

c) Contracts: This has been the traditional means of building up infrastructure,

but has proven very expensive as government bears all the funding

responsibility

2.4 Increasing Focus on Alternative Financing Methods

The aviation industry globally has seen record aircraft orders driven by the

operational needs of airlines as global travel increased over the last decade.

Airline financing was hitherto expensive as regulatory changes globally and

prevailing economic conditions made available capital for airlines scarce,

however, the current economic environment of low interest rates globally and

economic uncertainty has made the aviation sector an attractive alternative to

new investors.

Source: CBO Research, Central Bank of Nigeria, Debt Management Office, Nigerian Stock Exchange, Ex-Rate: NGN156 to US$1

Despite the importance of the Mezzanine class of financing, it has experienced limited acceptance primarily because of an absence of domestic institutions that can drive its use.

Page 13

Corporate

and Project

Funding

Equity

Private

Equity

Mezz

Equity

Mezzanine Debt

Stock Market

Listing

Private

Placing

Bonds

Bank

Debt

Lease

Finance

Mezz

Debt

Despite the importance of this class of financing, it has experienced limited acceptance primarily because of an absence of domestic institutions that can drive its use

Priv

ate

P

ub

lic

Priv

ate

P

ub

lic

Very Active

Lukewarm

Cold

Africa focused PE raised US$3.3 bn in 2013. Funds expected to be channeled towards Equity / Mezzanine opportunities

Increased valuations in Nigeria / African capital markets. NSE Market Cap currently US$50.86bn

Although popular, it is quite expensive (18% – 27%). Nigerian bank balance sheet - > US$118bn

The rise in bond yields to 15% from c. 13% in 2014 has muted the call for increased corporate bond listings. The FGN currently has US$26.9bn of Bonds outstanding.

Mezz Debt Is gaining popularity. Most investing institutions in airline companies however still prefer the use of Lease financing

The aviation industry globally has seen record aircraft orders driven by the operational needs of airlines as global travel increased over the last

decade. Airline financing, was hitherto expensive as regulatory changes globally and prevailing economic conditions made available capital for

airlines scarce, however, the current economic environment of low interest rates globally and economic uncertainty has made the aviation

sector an attractive alternative to new investors

Lease financing requires the producers of the aircraft to partly finance the purchase of the aircraft and is common in developed markets

Government and the Aviation: Sector Financing Status

Source: CBO Research, Central Bank of Nigeria, Debt Management Office, Nigerian Stock Exchange, Ex-Rate: NGN156 to US$1

Increasing Focus on Alternative Financing Methods

No listed airline company on the NSE


2.5 Developing Nigerian Aviation Local Content and Growth Fund

The Federal Government of Nigeria is already reaping the benefits of Local

Content in the Oil and Gas Sector and it is the view of stakeholders that the

Aviation Sector is ready for a similar type of Intervention. A range of Nigerian

Aviation Content Development interventions have been recommended:

a) Enact laws to protect advantage/provide opportunity for local airline

companies

b) Create incentives for companies with indigenous manpower

c) Create framework for technical knowledge transfer to local companies

d) Create special educational institutions to cater to the industry

The envisaged impact of these interventions would include:

a) Job opportunities: Will create employment opportunities Nigerians

b) New Markets: Local technology tailor-made for the Nigerian aviation industry

will create a new market for these products thereby boosting the economy

c) Knowledge Transfer: Dollar based transactions will be curbed as local

companies take advantage of the knowledge transfer

d) Technical Education: Will encourage the building of aviation technical schools

around Nigeria thereby building up local knowledge

Alternate Financing to Drive Upgrade and Expansion will include leveraging Sector

Gaps to provide quite funding solutions that are tailored to meet Aviation Industry

requirements.



2.6 An Aviation Growth Fund: Private Equity

Growth entails risks

a) Debt is too expensive and short termed for the airline companies

b) Prevailing FX risks in Nigeria makes debt unattractive

c) PE firms provide more long term and strategic approach

d) PE funds nurture/grow these companies thereby creating value for

investors and the Nigerian economy

National Equity Investments - GDP % is still very low

1.62%

0.89%

0.12%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8%

US UK Brazil India China Turkey SA SSA MENA


Private Equity Impacts in Companies

a) Matures: Helps companies to mature

b) Multiplier: Companies can raise additional capital

c) Sustainable: It ensures alignment of interests.

d) Reduces Risk: Reduce a company’s leverage

e) Reduce inflation/ asset bubbles

f) Develop Equity Ecosystem: Equity is Smart Risk Taking

The proposed Aviation Equity Fund could be arranged as follows:

a) The MOA, MOF and CBN will provide seed capital of USD x m from the debt

fund as a 10 year loan;

b) Annual Income: The MOA would invest additional amount for 6 years

c) Third Party Investors: The managers of the fund will seek 3rd party investors

(PFA’s, Institutional Investors) of up to 5 times x to scale investments up rapidly;

d) Motivating Lenders: Lenders will be encouraged to lend to AEFs investments

typically offering Debt to Equity at 60/75%, so a multiple of 2 to 3 times.

e) Developmental Interventions: Provide equity capital aimed at facilitating

development of baseline capacity.

f) Fund Management: Fund to be SEC registered and PENCOM compliant.

Managed by a rated local manager.

g) Capacity Development: A portion of the fund will be set aside annually for

capacity development across the entire sector

The Nigerian Aviation Equity Fund can have 20 times the impact of the debt fund. It

will direct funds toward indigenous players and will be accountable to the MOA. A

successful Equity Fund will also attract more capital.

As at 2013, over $5.1 Billion in Aviation Financing came from Private Equity, and

experts project an upward trend in this regard.



3.0 The National Strategic Policy Framework and Economic Stimulus

The AEBF rallied tangible consensus amongst National and Global Aviation

stakeholders that the Nigeria Industry must do things differently. They pointed

to the need for the Federal Government to put in place appropriate policy

interventions, programme initiatives and incentives to simulate sustainable

growth.

Central to the policy interventions of Government is the urgent need to ensure

that there is sufficient economic stimulus to trigger the emergence of Nigeria as

the leading Regional Aviation Hub on the African Continent.

Economic Stimulus for Aviation will involve a package of financial incentives

and support across the aviation value chain. It will involve having a robust

National Aviation Industry Strategy Framework that will impact on key industry

areas. Including:

a) Aerodrome Infrastructure and Operation

b) Airline operation & safety

c) Aviation allied services

d) Airspace Management

e) Manpower development

3.1 National Aviation Industry Strategic Policy Framework

The commitment of the Federal Ministry of Aviation to create a “One Aviation”

National System that is founded on an integrated set of strategic choices about

how the Nigerian Aviation Industry will be uniquely positioned within the

Regional and Global Economy. These choices include:

a) The Winning Aspiration to be the Leading Regional Aviation Hub on

the African Continent;

b) To commitment to Build World Class Aviation Infrastructure and

Maintenance Operations to cater for World Class Airline Operations,

which will include Nigeria Carriers, supported by World Class Aviation

Workforce;


c) To implement an Aviation City/Regional Hub Model that leverages

Aviation traffic and its corresponding economic value beyond tradition

passenger income and aviation business cycles to a broader, risk-

reduced portfolio of diverse income streams.

The envisaged National Aviation System within the current Strategic Policy

Framework must meet and possibly exceed International Civil Aviation

Organization measures, standards and requirements. Hence the Medium Term

Sector Strategic Framework will address all matters of “One Aviation”

including:

a) Aviation Safety

b) Aviation Standards and Compliance

c) Licensing and Certification

d) Airspace Management

e) Aviation Security

f) Aerodome

g) Aviation Sector Economic Performance (Contribution to GDP, Sector

Multiplier effect etc.)

The implication for Aviation Industry Governance is that a more performance

and result-oriented sector is essential. Therefore, expanding our National

Capabilities in tracking and improving Airline Operational Efficiency, Aircraft

Maintenance Operations and overall industry performance is critical to success,

as Nigeria expands its fleet and infrastructural capacity.



Key Public Impact Areas that the Strategic Policy Framework will deliver on

include:

a) Aviation Safety

b) Passenger Comfort and Rights Protection

c) Industry Compliance

d) Total Aviation Domain Surveillance

e) Regulatory Operational Efficiency

f) Aviation Security Threat Response Readiness

g) Fleet Airworthiness

h) Industry Standardization

i) Industry Growth and Significant Contribution to GDP

j) World Class Aviation Labour

3.2 Aviation Industry Effectiveness: Managing Performance and Expectation Driving Aviation Industry Effectiveness will include:

a) A Clear Vision for the Industry that articulate a winning aspiration

b) Effective Leadership in Business and Government

c) Effective Implementation

d) Effective Performance Management (Systems, Processes and Tools)

e) Resources

f) Strong Communications Systems

g) Public Expectation

3.3 National Aviation Industry Economic Stimulus

Global Aviation is a heavily stimulated Industry. Delta Air Lines, American

Airlines Group and United Airlines collectively received over $40 billion in

subsidies in the last decade. In the ongoing debate about National Aviation

Competitiveness, US Airlines have pointed to the degree of economic

stimulation that their competing counterparts around the world are getting.


a) QATAR Breakdown of government subsidies:

i. $8.4 billion in

government “loans”

and “shareholder

advances” with no

obligation to have to

repay them;

ii. 6.8 billion in subsidies

from government

loan guarantees

iii. $616 million in airport fee exemptions and rebates

iv. $452 million in free land

b) ETIHAD Breakdown of government subsidies:

i. $6.6 billion in

government “loans”

with no repayment

obligation

ii. $6.3 billion in

government capital

injections

iii. $3.5 billion in

additional

undisclosed government funding in 2014

iv. $751 million in government grants $501 million in airport fee

exemptions

v. Unquantified subsidies from purchases of more than $11

billion in goods and services from other government-owned

companies at not-at-arm’s-length prices

vi. $2.4 billion from government assumption of fuel hedging

losses

vii. $2.3 billion from subsidized airport infrastructure



Even though the Emirates Airline is putting together a top team from its legal, strategic

and financial departments to respond to allegations made by US airlines that it had

used unfair business methods to become one of the leading forces in global aviation,

one thing is clear from these figures. In whatever form or structure, Global Aviation has

received significant government economic stimulus.

Nigerian Aviation Industry is under performing, with our current GDP = N80.3 trillion

($509.9bn), Aviation contribution is $0.7 billion. This is due to aforementioned gaps:

Untapped regional opportunities to become hub of West Africa; Weak corporate

governance in the industry; Poor incentives for Private sector participation; Under-

utilized BASA agreements and under financed domestic airlines. Compared to other

Aviation Economies, Nigeria lags behind Dubai: (27% Contribution to GDP) and South

Africa (2.1% Contribution to GDP). It is therefore overstated that Nigeria as a nation

with comparative advantage is underfunded.

Strategically located Nigeria with is rich domestic market size and demography is:

a) 5.5hrs to UK

b) 7hrs to UAE

c) 9hrs to Brazil

d) 13hrs to USA

To maximize these advantages, Nigerian Aviation must attract at least $15 Billion over the next three years. Nigerian Aviation Investment climate: Current Opportunities

Short-Term (2018) Mid-Term (2020) Long-Term (2043)

Projected Traffic 19 million passengers 25 million passengers 110 million passengers

Investment Requirement

USD 15 billion USD 25 billion USD 50 billion

3.4 National Aviation Industry Economic Stimulus Action Plan

Specific Government Interventions with respect to stimulating the Aviation

Industry going forward will include:

a) Stimulate increased Foreign Direct Investment into the industry;


b) Reduce Industry Risk and expand Credit and Aviation Finance tailored

to Sector Requirements;

c) Stimulate Equity Investments through attractive and competitive

Incentives across the Aviation Value chain;

d) Stimulate and facilitate Local Direct Investment into the industry;

e) Facilitate Government intervention and Guarantees to boost Industry

Performance.

3.4.1 Aviation Public Sector Funding

To achieve the above stated interventions, the Federal Ministry of Aviation

working with relevant Ministries, Departments and Agencies of Government will

explore the most exhaustive funding vehicles available to the Industry from

time to time. In terms of Public Sector Funding, the basic levels of government

capital funding will be explored (however, since this has already been deemed

insufficient, will not be the mainstay of the focus on this administration). As

noted from how other nations have stimulated the aviation sector. Government

will explore the following:

a) Stabilized financing of Infrastructure from government budget;

b) Effective Use of the resources of the Sovereign Wealth Fund (SWF) for

direct investment in aviation infrastructure projects and use of these

funds to leverage resources from other sources as already stated

earlier in this submission;

c) Concerted efforts to increase revenues from infrastructure services by

improving substantially the recovery costs of service provision from

service users;

d) To meet some needs of the Aviation Infrastructure Programme,

Government could raise funds through the capital market through the

issue of bonds, and apply the associated proceeds to fund critical

aviation infrastructure projects.



3.4.2 Mobilization of Private Capital for the Aviation Industry

As already noted, the main sources of private capital will be equity of the

participating investors, and debt mobilized in the domestic and international

markets at concessionary rates that are in tandem with the long term funding

requirements of the Aviation Industry.

a) The aforementioned Aviation Equity Fund will be fully explored and a

range of sources of equity will be mobilized including: venture capital,

special purpose Aviation infrastructure funds designed by large global

insurance and pension fund managers;

b) Pragmatic expansion of Aviation Industry Funding Frameworks. A

number of options are available in this respect to facilitate the

involvement of the domestic banking sector in the aviation economic

stimulus programme:

i. Creative engagement with Asset Management Corporation of

Nigeria (AMCOM) to provide more proactive financing

intervention across the Aviation Value Chain;

ii. Encouraging a Consortium of domestic banks to issue aviation

infrastructure bonds with a Central Bank Guarantee and lend

the proceeds directly to aviation project entities that have

acquired the same as Public Private Partnerships;

iii. Expanding the Role of Development Finance Institutions (DFIs)

in Nigeria;

iv. Expand Current Aviation Intervention Fund Model: which is

basically Central Bank investing in the Bank of Industry to on-

lend through Deposit Money Banks (DMB) to qualified

borrowers at a concessional interest rate;

v. The Bank of Industry and the Infrastructure Bank Plc. could

issues Aviation Infrastructure Bonds on behalf of the Federal

Government or with a government or CBN guarantee, and on-

lend the proceeds to PPPs and Infrastructure companies;

vi. DFIs may provide concessional loans for on-lending to PPP,

Concessionaires of Aviation Infrastructure Projects;


vii. SWF could consider the provision of guarantees to commercial

banks for extended loan maturities to say 15-20 years, along

with funding that covers the cost differential between the

market-based prime interest rate and discounted rate that

would be available for long term investments in aviation

infrastructure;

viii. Commercial Bank Groups have expressed the desire to issue

long term (10-15 year) bonds in the domestic and foreign

market on commercial terms to provide relatively longer-term

financing for aviation infrastructure development. The

Commercial Banks will require the CBN to provide credit

enhancement in form of credit guarantee.

c) Leveraging the National Pension Fund: The revised regulations on the

investment of pension fund assets includes in its list of allowable

instruments, infrastructure funds registered with the Securities &

Exchange Commission with a Portfolio limit of 5% of the infrastructure

funds.

3.4.3 Other Broad Policy Interventions that Enhance Stimulus Action Plan

Broader Policy Intervention with respect to sustainable Industry growth will include:

a) Setting up Aviation Corporate Governance and Enterprise Risk

Framework to reduce the probability of Aviation Corporate Failures

due to moral hazard;

b) Creation of a more robust and conventional national/flag carrier policy

framework to develop a national aviation fleet that can rival the huge

consolidated global players;

c) Review Current Intervention Fund Model and Facilitate a more robust

Aviation Financing Framework;

d) Create a robust regional hub/ aviation city model that drives

commercialization;

e) Stimulate Volume of Funding required to leapfrog the Aviation Industry

into the future;



f) Liberalize the Skies: Implementing the Yamoussoukro Declaration;

g) Achieving Significant Aviation Nigerian Content Development.

3.5 Justification for Nigeria’s Regional Aviation Hub

West African Aviation Industry provides the Nigerian Hub Model the impetus it

requires for the justification of the strategic investments it has committed to

pursuing and the development of National/Flag Carrier that will guarantee

that economic benefits accrue to the Nigerian economy. Nigeria as a key

supporter of the Open Skies policy must position aggressively to benefit from

the same. The West African Market consists of:

a) Inter-Continental: the most lucrative market, dominated by foreign

carriers (42% of total market of roughly 8 to 10 million passengers

annually);

b) Intra-Africa: (22%= 4-5 million PAX) market dominated by South

African, Ethiopian and Kenya Airways;

c) Domestic: small market, except for Nigeria with 14 million domestic

passengers (most countries do an average of 10 million domestic

passengers per year).

Market shares (seats) of ECOWAS-registered airlines on intra-ECOWAS flights without domestic Nigerian market, Jan. 2013. Source: SRSAnalyser


3.6 Justification for Growing Business Aviation

Business Aviation is perhaps the most elegant aspect of air travel with high

premium on comfort, taste and flexibility. It is usually regarded as luxury flying.

However, the fast-pace of some of today’s businesses necessitates fast travel.

Business Aviation has become a necessity in Nigeria that must be effectively

harnessed to tap its full economic benefits.

According to the NBAA Definition, “Business Aviation is the use of any “general

aviation” aircraft for a business purpose. The Federal Aviation Administration

defines general aviation as all flights that are not conducted by the military or

the scheduled airlines. As such, business aviation is a part of general aviation

that focuses on the business use of airplanes and helicopters.”

Though the Nigerian aviation marketplace has been dominated over the years

by Scheduled Commercial Aircraft operation, Business Aviation has made a

significant impact in the market over the last 5-10 years. It is estimated that

close to 150 business aircraft exist in Nigeria today owned by government,

corporate organizations and individuals. According to the NCAA:



a. Over 200 business and private flight clearances are processed by

NCAA monthly;

b) Over 50 percent of the civil aircraft registered in Nigeria are used for

business and general aviation operations;

c) More than 80 percent of helicopters registered in Nigeria are used

for business aviation operations;

Aircraft manufacturers, trip management companies and aircraft management

companies have described Nigeria as a market with huge potentials. Business

Aviation activities in Nigeria are most notable at major economic hubs like

Lagos, Abuja, Port Harcourt, etc. Nigeria is laying new emphasis on

establishing dedicated facilities for business/general aviation at major business

aviation hubs including Lagos and Abuja. Helicopter activities are most notable

in on-shore and offshore oil and gas producing regions. The growth in Business

Aviation in Africa most remarkable in Nigeria prompted the setting up of the

African Business Aviation Association (AfBAA) though its counterparts were set

up many years ago in other regions e.g. the EBAA, NBAA, and MEBAA

Overall, however, Nigeria remains one of the largest business aviation markets

in Africa with continued growth expected over the next 15-20 years. Demand

for Business Aviation is principally fuelled by activities in the oil and gas sector.

There are expectations that growth in business aviation in Nigeria would


marginally slacken after the General Election since political activities would wind

down post-elections.

Opportunities exist in all areas of business aviation. These Opportunities in

Business Aviation in Nigeria are yet to be fully exploited. Business Aviation has

potentials to contribute billions of dollars to operators and the Nigerian economy.

This exploitation of available Opportunities tend however to be dominated by

foreign operators, and crew.

The Federal Government therefore intends to accentuate the Business Aviation

Market. Business Aviation is a major contributor to economic growth and

development and should be given adequate political support to thrive. This will

necessitate Business Aviation Policy and Regulation review, supported by

effective enforcement of licenses and Certificates and complete elimination of

illegal operations. The Federal Government will implement necessary strategic

capabilities upgrade to ensure that the technical capacity for effective

regulatory oversight is in place. While providing for adequate capacity, security

regulation should be beefed up in the face of emerging threats.

3.7 Justification for Building a National Flag Carrier

A National Carrier is a Government Owned Airline that has the privileges of being the

International Representative Aviation Carrier of a Country. A Flag Carrier is a

Private/Publicly Owned Airline that represents a country.



A representative national flag carrier is key and strategic to national aviation success.

The significant consensus of National Aviation Stakeholders, including the Aviation

Operators of Nigeria and the Dominant Domestic Airlines at the AEBF was that State

owned, run and managed Airline Carriers was not a viable business model for Nigeria,

as this particular model had been tested and it had already failed. Built on the back

of good and strong private enterprises, Government must focus organizing the

architecture. The key debate against a government controlled National Aviation

Carrier was that it was already a tried path, we in Nigeria and Africa have come a

long from State-Owned Enterprises.

Several cases of National Carriers failures abound, the AEBF citing cases from India,

Kenyan Air and Brazil experiments, similar to that of Nigerian experiment with the

Nigerian Airways. Some of the largest Airlines in Global Aviation are Flag Carriers

with little or no direct involvement of government in its ownership and management.

Kenyan Airlines is the first successful National Carrier that privatized and transited to

a Flag Carrier Model – Entrepreneurial Efficient Airline System. The National

Conference also recommended that the National Carrier Option is not viable.

The nations that currently run successful national carriers leverage it for tourism

development, have economies where there is not a strong enough private sector that

can venture and participate. United States deregulated Aviation in the 1970s; Europe

deregulated Aviation in the 1990s. The general impediment to the National Carrier

Model is the fact that Government has complex interests.

It is an established that the Government Owned Carriers a far behind their Flag

Carrier counterparts, in terms of performance, across all business indicators. The

Industry data clearly shows: Flag Carriers significantly outperform National Carriers in

terms of Return on Investments, Return on Capital, Sales Volume, Organizational

Effectiveness, Operational Efficiency and Business Growth. But successful National

Carriers in Africa do not have viable domestic market.

The Industry Stakeholders asked the Federal Government to set criteria for Flag

Carriers and airlines that meets the criteria. Such criteria will achieve the following

things:


a) Improve Airline Corporate Governance and Enterprise Risk

b) Set the framework for Local Content Development;

c) Set the framework for National Flag Carrier Ownership Structure;

d) Improve the Aviation Operational Business Model;

e) Motivate Domestic Operators to Recapitalize to achieve National Flag Carrier;

f) Raise the Minimum Requirements for Airline Operations in Nigeria;

g) Free up the Government Funding from focus on Airline Ownership to Critical

Aviation Infrastructure

In this regards, the Federal Government will explore a National Flag Carrier Policy

that will include has the following prescribed Airline Operations Structure:

a) Private Owned Domestic Airlines (for example a minimum of 3 Aircrafts);

b) Publicly Owned Flag Carriers (for example a minimum Airline Fleet of 25

Aircrafts);

c) Business Aviation Airlines.

3.8 National Flag Carrier Selection Criteria

The Resolution of the ABEF on National Flag Carrier Selection Criteria consisted of the

following:

a) That Government should not run as a National Flag Carrier Airline;

b) That Private Owned Airlines should not run as a National Flag Carrier Airline;

c) The objective of a) and b) is to ensure that the Ownership Structure that

engenders Corporate Governance, Accountability and Transparency;

d) That a Diversified Ownership that reflects a combination of Institutional

Investors, public investors and private ownership that has an interest in going

public is a major requirement in becoming a National Flag Carrier;

e) That there can be as many National Flag Carriers at meet the set criteria;

f) That the National Flag Carriers will espouse certain inherent national values

that align to the Nigerian Brand.

g) That National Flag Carrier Must Operate an Effective Model.


4.0 Conclusion

The AEBF therefore successful added value to the Strategic Policy Framework

of the Federal Ministry of Aviation in creating the needed contextual realities

that would form the basis of Government Interventions across the value chain. In

driving performance, the Right Strategy, supported by the Right Structure,

through the Right Process, by the Right People, with the Right Information and

the Right Reward is the key to success.

The AEBF having provided the industry the opportunity to exhaustively review

sector strategies for growth; assess aviation sector structure across all the

industry segments; debate the industry processes that have not worked in the

past; rethink the plans for delivering a world class aviation workforce; clarify

sector information that support evidence-based policy decision making and

outline the incentives for mobilizing stakeholders into action, has been a

resounding success.

Going forward the Federal Ministry of Aviation will be expected to respond to

the debates, discussions and resolutions of the AEBF with a reviewed and more

Robust Strategic Policy Framework that is articulated to effectively stimulate

sustainable aviation industry growth.

federal ministry of aviation aebf white paper 2.0 facilitated by dr aduloju wfg

Documents