20-Sep-2012 9:10 PM

West Africa movers and shakers: Air Nigeria shuts down; EgyptAir and South African look to expand

Analysis

The once-sleepy market in west Africa continues to prove dynamic, even if occurrences are two steps forward and one step backwards. In the category of the latter, once promising Air Nigeria has suspended operations after a high profile few months that included staff strikes, rumours and two groundings by the regulator. Political interference was thrown into the mix, with a police raid over taxes unpaid from a previous owner. The airline leaves a gap in the high demand Lagos-London market as well as domestic and regional routes.

The situation is more stable in Ghana, whose smaller market but stronger regulations have attracted new carriers. And more may be on their way: South African Airways wants to establish a regional hub in Accra as well as export its lower-cost units in a bid to have a pan-African network. EgyptAir has proposed investing in a small Ghanian carrier to further its reach, a growing sign that Africa will see robust competition rather than the obscure and surprise announcement in 2010 from EgyptAir, Ethiopian Airlines and SAA to seek broad cooperation with each other.

Summary

Air Nigeria has suspended operations after a series of issues including staff strikes, rumours, and two groundings by the regulator.
Ghana's aviation market is more stable, attracting new carriers and potentially becoming a regional hub for South African Airways.
EgyptAir has proposed acquiring a 50% stake in Ghanaian domestic carrier CTK - CiTylinK, potentially tapping into the growth in West Africa.
The collapse of Air Nigeria leaves a gap in the Lagos-London market and the domestic and regional routes it served.
South African Airways is considering establishing a regional hub in Accra, Ghana, and exporting its low-cost units to West Africa.
African carriers are looking to expand and compete independently, leading to a more competitive market in the region.

Air Nigeria shuts down after colourful few months

Air Nigeria's Sep-2012 collapse follows its Jun-2010 re-launch from when it was known as Nigerian Eagle Airlines and, previously, Virgin Nigeria when the carrier had a shareholding from the Virgin Group. Ownership was transferred to Nigerian businessman Jimoh Ibrahim, with interests across West Africa, and for some time the carrier showed promise, avoiding the mistake of bygone African carriers in opening prestigious but loss-making long-haul routes.

Air Nigeria chairman Ibrahim has said the carrier is merely temporarily suspending its operations as a result of staff disenchantment. "We had to take this step in order to address the continued disloyalty of our staff…we need fresh blood and as soon as we have that in place the airline will resume operation," Mr Ibrahim said.

The larger scenario is convoluted. Engineers around Jun-2012 started contesting aircraft were not safe to fly and they were being forced to release them for duty, which the carrier denied. Subsequently engineers and pilots went on strike for a week to protest salaries and benefits not being properly paid. Nigeria's safety regular then stepped in to assess the aircraft following the strike and cleared it to return to operations, which it did on 14-Jun-2012.

Air Nigeria pointed out it was the first Nigerian carrier and only carrier in west Africa to pass three consecutive IOSA audits since 2007. As for claims aircraft were not safe, Air Nigeria alleged in a statement such claims "are fabricated propagandas by those groups that felt 'threatened' by the successful turn around of Air Nigeria over the last two years".

But a week later on 21-Jun-2012 the regulator grounded the airline, citing "financial distress" as the carrier owed NGN4.871 billion (USD30 million) in tax claims dating back to 2007. In the lead up to the suspension, Nigeria's taxation authority, the Federal Inland Revenue Service (FIRS) had greatly heightened its interest in claiming back supposed taxes. That culminated in what Air Nigeria titled in a 18-Jun-2012 statement as "Invasion of Air Nigeria office by FIRS". The FIRS, Air Nigeria alleged, "stormed" Air Nigeria's office despite parties attempting to sort out the taxes, which were allegedly owed not under Mr Ibrahim's tenure but rather the Virgin Group, leading Air Nigeria to suggest the matter was about corruption and its unwillingness to pay a bribe, as it said in a statement:

The FIRS is however not patient with such reconciliations but resorted to a military approach in a civilian era. Air Nigeria is not indebted to the government on current taxes since the acquisition of the airline by Dr. Jimoh Ibrahim, OFR. We therefore consider the FIRS action as uncivilized and condemnable. We are at a loss as to what the FIRS has been doing for the past 8 years without collecting the taxes from previous management of the airline. We assure the general public that Air Nigeria cannot be intimidated by this crude approach and will not be ready to give bribe to any person no matter how highly placed.

Air Nigeria again suggested a conspiracy theory, saying the carrier had "become the object of an orchestrated attack that show clearly that this is a case of the voice of Jacob and the hand of Esau". Taking its message to the extreme, it predicted further shenanigans. "We suspect that one other line of action will be coming in the coming week to further attempt to damage us in the public eye."

Such action never occurred although the carrier in 23-Jul-2012 sought to placate general concerns by saying, in another unusual statement, "employees of Air Nigeria have reaffirmed their loyalty to safeguard the airline from external forces that have been trying to sabotage the airline's achievements". The carrier kept a low profile until its 10-Sep-2012 suspension of operations.

Void to London and around West Africa

Virgin Nigeria had operated long-haul routes to London and Johannesburg but dropped them in 2009, leaving a small domestic and regional network that became sizeable. At the time of its collapse it served from its Lagos base the domestic destinations of Abuja, Kano, Sokoto, Port Harcourt and Owerri. Regional destinations served were Abidjan, Accra, Banjul, Brazzaville, Cotonou, Dakar, Douala, Libreville, Monrovia and Sao Tome.

It was only after a relative bedding down of operations that the carrier elected to re-open the routes to London and Johannesburg served during its Virgin Nigeria days. The route, unlike past long-haul attempts from start-ups, had justification: the Nigerian government since 1999 has expanded its air service agreement with the United Kingdom by only four additional weekly flights for a total of 21, which British Airways and Virgin Atlantic use. Of the 21 flights for the Nigerian side, only seven, from Arik Air, were in use.

Demand and fares run high, to the point that the Nigerian government - in another example of meddling - called for BA and Virgin in Apr-2012 to reduce their fares or be banned after it concluded Lagos-London fares were higher than Johannesburg-London. BA responded by showing how the government's statistics were off - different fare classes were compared - but it also gave a lesson on supply and demand, noting that it would happily expand services, which would see average fares fall.

Lagos to London Heathrow capacity by carrier (seats per week, one way): 19-Sep-2011 to 10-Mar-2013

Air Nigeria's Lagos-London Gatwick route - operated daily with A330s leased from EgyptAir - had a sound proposition, but the carrier got ahead of itself with discussions to quickly expand its European network to Paris and Rome, services which never materialised.

Passengers were stranded in London and the UK-Nigeria market looks unlikely to grow with British carriers restricted and the only long-haul Nigerian carrier, Arik Air, not giving indications it will expand soon. Air Nigeria also leaves a gap in the small - and promising - domestic market, where its largest route (based on historical timetables on its website) was the 42 return trips between Lagos and the capital, Abuja. Arik Air and Aero will fill the gap, with some additional capacity uplift from First Nation Airways. Air Nigeria's second-largest domestic route, from Lagos to Port Harcourt with 27 weekly return trips, also sees existing capacity from Arik Air and Aero.

Regional routes will also see capacity decreases. Many regional routes were served less than daily and via a third country's city, including Accra, Banjul, Contonou, Douala and Sao Tome. Many routes will revert to an Arik Air duopoly, or in less common instances, a duopoly by a foreign carrier (such as ASKY from Lome to Lagos). With the Nigerian market adjusted to having international services stop in an intermediate country, foreign carriers from those intermediate countries could build sixth freedom traffic. A transfer of aircraft and possible longer layover will not be as convenient to the market as an Air Nigeria flight that merely stops on the tarmac, but options in the region are few.

A beneficiary will be Ghana, as its capital at Accra was the stopover point for four of Air Nigeria's eight services that transited in an international city. The wave of LCCs in Ghana could offer lower connecting fares than those of Air Nigeria, potentially compensating for any inconvenience lost by Air Nigeria's short stopovers. Additional capacity over time will come from foreign carriers. Besides the activity in Ghana, there are a number of new carriers being established around west/central Africa, including Air Côte d'Ivoire and Korongo Airlines.

Further international capacity could come from within Nigeria. There is a room in the country for a strong carrier to share the market with relatively formidable Arik Air. Air Nigeria's Mr Ibrahim will face significant challenges in accomplishing his stated goal of re-launching his carrier, including if he can have a valid AOC after a few dormant months. Nigeria's fluid political scene will also be influential.

Nigeria international capacity (seats) by carrier: 17-Sep-2012 to 23-Sep-2012

Nigeria domestic capacity (seats) by carrier: 17-Sep-2012 to 23-Sep-2012

In an ideal market scenario, the passing of Air Nigeria would make way for a low-cost carrier to establish in Nigeria, replicating the growth in neighbouring Ghana. While Air Nigeria did, in its final months, bring needed capacity onto the London route, a LCC supporting the growth of intra-Africa movement and trade could bring far greater benefits than a legacy carrier with associated prices that brings competition on long-haul routes. No doubt a prospective LCC will find the political weight to be heavy.

Many in this new crop of west African carriers style themselves as low-cost carriers. While achieving a cost base respectable to global peers will be very challenging, any effort to be leaner, offer lower fares and stimulate travel is welcome. In the long term, these carriers and any forthcoming ones may be more efficient than Air Nigeria was. Regeneration can be healthy.

Air Nigeria collapse leaves question if Nigeria can realise potential west African hub

The widest implication from Air Nigeria's collapse is the growing scenario that a west Africa aviation hub will form in Ghana instead of Nigeria. The numbers are stacked in Nigeria's favour: it is a physically larger country with greater domestic route possibilities, its GDP is larger, as is its population, whose combination of entrepreneurialism and tenacity to travel could be a greater catalyst for trade and finding new markets; while much of the world slowly learns about Guangzhou, there has long been a Nigerian population. (And flights from Ethiopian Airlines and Kenya Airways followed to support sixth freedom traffic.)

Despite goodness at the local level there is deep corruption and a steering of the country that is not supportive of the population, let alone the needs of air transport. Ghana has its share of challenges, including infrastructure, but so far the reception is warmer. Africa World Airlines, Fly540/FastJet and Starbow have all established in nearly a year, adding to incumbent carrier Antrak Air, and the country may take on greater prominence as EgyptAir and SAA look to enter the market as well.

EgyptAir proposes 50% stake in CTK - CiTylinK

EgyptAir has proposed acquiring around 50% of Ghanian domestic carrier CTK - CiTylinK, according to a confirmation from the Ghana Civil Aviation Authority in local reports. On 20-Sep-2012 EgyptAir signed a MoU with CTK but provided few details, saying the two sides begin the process of "activating this partnership as well as planning the operational schedules".

EgyptAir quoted Ghanian Minister of Transport weighing in on the Ghana versus Nigeria debate with an unsurprising opinion: "Accra is now the hub of aviation and the preferred destination in the west Africa sub region."

CTK in Aug-2012 suspended passenger flights, which it commenced in Sep-2003 after previously focussing on charter and private flights. By some accounts it is the oldest carrier in Ghana. Its hub was at Accra, the only sizeable city in Ghana, and indications are that the re-born carrier will remain there.

The value is squarely in its AOC and potential to tap into the growth occurring around west Africa and opportunities to later feed traffic into EgyptAir's Cairo hub. If EgyptAir wanted a Ghanian affiliate it would otherwise have to establish a new airline or invest in another carrier, which could be receptive to funding but not management oversight. CTK's position of suspended operations makes it more lightly to yield to EgyptAir management influence, which could be beneficial.

Fares do not appear to have been revenue managed and a flat USD60 one way was offered from Accra to Kumasi and Takoradi, USD130 from Accra to Sunyani and USD100-130 to Tamale when the service was active. These fares - for very short flights - are considerably more than those offered by Fly540, whose booking engine shows typical flights to Kumasi and Takoradi being USD40 with some USD8 special promotion fares. Fly540 has fares to Tamale for USD80. Fare levels are still critical in price-sensitive Africa.

Its fleet, which is also used for charter services, is listed as having an undisclosed number of eight-13 seat Hawker 800XPs, 109-seat Fokker 100s and 33-seat Saab 340As. Competitors Africa World Airlines operate 50-seat ERJ145LRs, Fly540/FastJet ATR72-500s with approximately 72 seats and Starbow 94-seat BAe146s. The larger-capacity ATRs and BAe146s are seen as more ideal than the ERJ145s.

The carrier's schedules indicate that prior to its collapse CTK operated 42 weekly return services on three routes, all domestic, from its Accra hub: 19 between Accra and Kumasi, 17 to Takoradi, and six to Sunyani. It also had schedules for a daily Accra-Tamale flight, which was "inactive" at the time the other flights were suspended. Africa World Airlines has also decided to launch services from Accra to Kumasi, Takoradi and Tamale but has not decided on frequency yet.

Ghanian weekly domestic schedule flights: Sep-2012 including CTK prior to collapse

	Accra-Kumasi	Accra-Takoradi	Accra-Tamale	Accra-Sunyani
Africa World Airlines	Undecided	Undecided	Undecided	n/a
Antrak Air	35	14	7	1
CTK	19	17	7	6
Fly540/FastJet	20	5	7	n/a
Starbow	21	10	7	n/a

EgyptAir's plans for CTK in the short term would be for it to catch up to competitors by entering international routes around west Africa. The GCAA says it is awaiting further details before making a recommendation to the Transport Ministry.

There is a high degree of respect around Africa afforded to EgyptAir, Ethiopian Airlines, Kenya Airways and SAA as African carriers that have succeeded and offer hope to smaller counterparts. Attaching the EgyptAir name gives weight to CTK, although with such large ownerships not always managing well, it is early days to see how the two, if the stake selling proceeds, will mesh.

EgyptAir in some regards will be following Ethiopian's move in taking a stake in Togo's ASKY in a bid to tap into west African growth. Ethiopian has described the venture as successful. Air France is also an investor in Air Côte d'Ivoire, and Brussels Airlines in Korongo Airlines.

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SAA looks to go big in west Africa with full service and low-cost brands

A far larger involvement from an established carrier in the west African market is coming from SAA, which is reported to be considering a two-pronged strategy for the market.

First SAA, according to CEO Siza Mzimela's address to parliament, is considering a regional hub in Accra for its SAA brand. While there is much activity in Ghana, it is heavily concentrated on carriers positioning themselves as LCCs and serving the west Africa region. Connections to other parts of the continent are weaker.

There is long-term potential for SAA to use a more geographically convenient hub like Accra for intercontinental flights. SAA, being at the foot of Africa, is susceptible to great sixth-freedom competition. Its situation however is far healthier than another end-of-line carrier, Qantas, whose country has promoted liberalisation; South Africa is more restricted. But times are changing and SAA has dropped London Heathrow-Cape Town services.

Ghana has a checkered history of national carriers, and none of its current regional carriers are in a position to open intercontinental or even medium/long-haul flights around Africa. While Ghana may want to preserve long-haul traffic rights for a homegrown carrier, it will need to weigh that benefit - if it becomes realised in the medium term - against the loss in the interim period of not having SAA establish a regional presence, or worse see SAA establish elsewhere in the region (although Accra is clearly the preferred base).

Establishing a pan-African presence

The second element would see SAA exporting its regional SA Express or low-cost Mango operation to west Africa with SAA holding a 49% stake. Candidate bases were not disclosed, but Accra is quickly becoming a crowded market, although SAA's far greater experience could see it push out weaker players. Mango is SAA's LCC subsidiary covering southern Africa while SA Express is more of a full-service operation within South Africa and regional countries.

Expansion of SA Express, or more likely Mango, would see SAA form a pan-African strategy similar to that of Fly540, which will be re-branded as FastJet following an investment from easyJet founder Stelios Haji-Ioannou.

Mango however may be first exported to other markets, with Ms Mzimela saying she wants to see the operation grow leisure routes into popular tourist points including Livingstone, Mauritius, Mombasa, Kilimanjaro and Zanzibar. It is a tall - and long term - order and Mango would encounter competition in many markets.

While creation of SA Express or Mango affiliates will grow local traffic, Ms Mzimela highlighted to parliament that they would pose opportunities for SAA to grow sixth-freedom traffic transiting through its anchor Johannesburg hub. But with Johannesburg being geographically convenient to Australia and lower South America, opportunities are fewer than connecting traffic to a hub better positioned to capture Asian, European and North American traffic.

A narrowbody aircraft order for the SAA group is likely, with Ms Mzimela expressing displeasure with the number of widebodies that operate on domestic and regional routes due to fleet constraints. Ms Mzimela said SAA had to catch up, likely in reference to Ethiopian Airlines and especially Kenya Airways, which has set a target of serving every African capital city. To achieve that goal Kenya Airways is acquiring Embrarer 190 to facilitate opening thinner routes or permit greater frequency than A320/737 sized aircraft would allow.

African carriers looking to go at it alone

Long-overdue growth aspirations are finally taking foot in Africa and in many forms, whether it is the pan-African LCC concept FastJet is pushing and SAA considering, service into every capital as Kenya Airways is working towards achieving, cross-equity or new bases.

Not all will succeed but they are guaranteed to encounter Africa's slow liberalisation, infrastructure challenges and political hurdles. But this growth is still exciting as it promises a more competitive market - and Africa needs fare stimulation - than the vision of EgyptAir, Ethiopian Airlines and SAA working deeply together. That was born quickly and appears to have died quickly as well. Hopefully the new and more competitive growth proposals will be realised.