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Doomed To Fail: Arik Air- Ethiopian Airlines’ Agreement

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On 28 September 2004, the Nigerian government and Virgin Group signed an agreement to establish a new airline for Nigeria, to be called Virgin Nigeria Airways. Nigerian institutional investors owned 51 per cent of the company and Virgin Atlantic Airways the remaining 49 per cent. The airline’s inaugural flight was on 28 June 2005 from Lagos to London Heathrow, using an Airbus A340-300 aircraft. Virgin Nigeria quickly became one of Nigeria’s largest airlines, carrying its 1,000,000th passenger and 4,000th ton of freight within two years of operation. The airline had also received accolades including THISDAY Award, 2006 Airline of the year, and a nomination for 2006 African Airline of the year by ASATA (Association of South African Travel Agents). Virgin Nigeria had plans to make Nnamdi Azikiwe International Airport in Abuja its second base, where, in addition to its Lagos base, Murtala Muhammed International Airport, it would serve all countries in West Africa.

The Nigerian government set a deadline of 30 April 2007 for all airlines operating in the country to re-capitalize or be grounded, in an effort to ensure better services and safety. Virgin Nigeria satisfied the Nigerian Civil Aviation Authority (NCAA)’s criteria in terms of re-capitalization and was re-registered for operation.

On 19 August 2008, Virgin Atlantic announced that it was “in talks to sell its 49 percent stake in Virgin Nigeria” and reviewing “whether it was appropriate that the Virgin brand should remain linked to Virgin Nigeria”. This followed a dispute which arose after Virgin Nigeria’s domestic operations were moved against its will by the Ministry of Aviation to Terminal 2. The airline had twice refused the directive to relocate its domestic operations from the international terminal, citing the Memorandum of Mutual Understanding it had signed with the previous (Olusegun Obasanjo) administration, and pending appeal in a Lagos High court, as reasons for not complying.

On 9 January 2009, Virgin Nigeria announced it would suspend all long haul flights to London Gatwick Airport and Johannesburg, effective 27 January 2009.

On 2 June 2010, following the acquisition of a majority share in the airline, Jimoh Ibrahim, the new Chairman, announced that the airline had undergone a further name change to Air Nigeria Development Limited, branded as Air Nigeria. On 13 June 2012, the carrier was grounded by regulators for safety checks.

On 6 September 2012 Air Nigeria announced that the management had fired its staff ‘for being disloyal’ and the airline will cease all its local, regional and international operations. Operations ceased on 10 September 2012.

When Virgin Nigeria commenced operations in 2004, most of us predicted that the airline would survive for just six years or less. The prediction came to fruition when, suddenly, the Virgin group decided to park and leave in 2009—less than six years after its establishment. Why was there certainty that a foreign, well-established airline wouldn’t operate for long in Nigeria as a flag carrier?

The answer to this question lies in the unusual nature of business in a country riddled with corruption, unnecessary bureaucracy, cost of funds, and a ridiculous monetary policy. Nigeria’s business climate is the most unfriendly environment in the world, especially in airline business. Virgin Nigeria had access to all the experts and airplanes to run a successful air carrier, modelled after its internationally acclaimed parent company, Virgin Atlantic. The brand “Virgin” has propelled two successful carriers in two different countries— Virgin America and Virgin Australia. The two carriers are not just successful but highly profitable enterprises. The brand had not attained profitability, and couldn’t effectively take off in Nigeria in the five years of its existence. The hurdles were insurmountable; from outright demand for money by the staff of the Nigerian Civil Aviation Authority, the Federal Airports Authority of Nigeria, and the Nigerian Airspace Management Agency to unconducive, unethical behaviours of Nigerian employees. The politicians did not help matters either; time and time again, requests for complimentary flights by senators, house members, and other top government functionaries became unbearable for Virgin Nigeria’s management.  When it became known to all the bureaucrats that the airline wouldn’t budge to their demands, concerted effort to move its base from Murtala Mohammed International wing to the domestic wing was their last resort. Despite the lingering court case, Virgin Nigeria was muscled out.

It is not unusual in Nigeria that government is not a continuum; once President Obasanjo administration came to an end, the next regime could not guarantee Virgin’s operational base at the international airport. Therefore, in reality, Virgin Nigeria came and left with the government of Obasanjo, its protector.

The same thing would have happened to Ethiopian airlines, had it not wisely turned down the offer when its management sensed the one-sided agreement with the Asset Management Corporation of Nigerian (AMCON), Arik Air’s current owner. In addition to loss of revenue, Ethiopian would have had to deal endlessly with the regulatory authority’s unnecessary antics and other hindrances associated with airline business in the country.

It is needless to continue to explain to AMCON that as of today, Arik Air is a complete liability, and the carrier will either drag AMCON into more severe mud of debts, or it will soon terminally come to a halt. With Arik’s debts in excess of $1billion, the two choices for the asset management corporation are to either write off the debts, or sell the airline below its market value of less than $70m (this is a highly generous price).

Ethiopian Airline was featured by The Economist as an example of excellence in late 1987, and economist Paul B. Henze recognized it in 2000 as being “one of the most reliable and profitable airlines in the Third World”. In July 2011, Ethiopian was named Africa’s most profitable airline for the year 2010 by Air Transport World, and it has also been praised by AFRAA for its sustained profitability over recent years.

As a long -term company policy, in addition to the carrier’s main activities, revenues are also generated by providing aircraft maintenance to foreign airlines, and specialist training for both Ethiopian and foreign trainees. Every year, pilots and technicians graduate from both the Pilot School, inaugurated in 1964, and the Aviation Maintenance Technician School, established in 1967. The American Federal Aviation Administration accredited the airline’s maintenance division with license to maintain U.S. registered aircraft—mainly Boeing products.

Ethiopian Airlines started “Vision 2010” in 2005, which aimed to increase passenger traffic to three million, revenue to US$1 billion, and employees to 6,000 by 2010. By the year 2010 Ethiopian had exceeded all goals set in “Vision 2010”, and the company’s net profit for the fiscal year 2010 was US$121.4 million. The results were attributed in part to an aggressive marketing campaign and major cost cutting measures.

In 2010 Ethiopian adopted “Vision 2025”, a 15-year development strategy, under which the airline anticipates increasing its fleet to 120, the number of destinations to 90, carrying more than 18 million passengers and 720,000 tonnes (710,000 long tons; 790,000 short tons) of cargo, with 17,000 employees. ″Vision 2025″ also considers a four-fold expansion of the capacity building for trainees in the airline’s aviation academy.

Ethiopian signed in July 2013 a deal for the acquisition of 49 per cent of the Malawian carrier Air Malawi. The new airline will be named Malawian Airlines. The remaining shareholding will be held by the government of Malawi and private Malawian investors. Malawian Airlines started operations in January 2014. For the operation year 2013-14, Ethiopian Airlines was ranked the most profitable airline in Africa and 18th most profitable airline in the world with a profit of $228 million.

The carrier has been in existence for more than 69 years, and has consistently and successfully expanded its operations.   Ethiopia as a country is not only flexible for business, but its sovereign guarantee is as solid as all major Western countries. These are the best incentives for an airline business to thrive. It is therefore, not surprising that Ethiopian Airline turned down the offer to manage Arik Air out of its protracted predicaments.




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