.

THIS BEING THE PROJECT WORK OF THE NIGERIA INSTITUTE OF TRANSPORT TECHNOLOGY (NITT) AIRLINE MANAGEMENT COURSE 6.

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Team Members:

1. SADIQ ZIRA 2. F.O. ISA 3. OLU BALOGUN 4. NANCY S.E. 5. MUKTAR S.U. 6. BUKAR, H.M. 7. NWALA, I.K. 8. PAM, D.R.

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Aims and objective of study:

The aims and objective of this study are: 1. To establish the problems of Nigeria Airways. 2. To bring out an analysis of the factors responsible for these problems. 3. To recommend realistic and most expeditious solution to the organisations current situation.

Preamble:
In a bid to facilitate effective administration as well as enhance swift monitoring of their huge economic interest in their West African colonies, the British Colonialist seized the opportunity availed them by the post world war II aviation industry. This led to the establishment of the West African Airways Corporation in 1946. The corporation served the present day countries of Nigeria, Ghana, Gambia, and Sierra Leone until 1957 when Ghana attained independence. In 1958 WAAC (nig) was established. It was managed in conjunction with Elder Dempster lines and British overseas Airways Corporation. The equity ratio to the Nigerian Government, the BOAC and Dempsterlines was 51%, 32.66% and 16.33% respectively. The Nigerian government bought out the two foreign partners at the cost of 6000,000 pounds. In 1961 it officially became the National carrier to be known as Nigeria airways. The airline since then went through well defined period of restructuring and growth to become the biggest and the best in Africa in the late 70s.Being proud operators of mixed fleet of 34 aircraft.

Nigeria Airways fleet composition in 1980. Number of aircraft 7 8 3 8 2 2 4 A total of 34 Friday, 12 July 2002 Type of aircraft Fokker 27 Airplane Fokker 28 Airplane Boeing 707 Airplane Boeing 737 Airplane Boeing 727 Airplane McDonnell DC10 Airplane Airbus ind. A310 Airplane

The company also leased some aircraft within the same period to complement the number on its fleet as Follows: 1 No. Boeing 747 Airplane on Wet Lease. 4 No. Boeing 737 Airplane on Wet Lease.

This was an airline that was positioned strategically to play a leading role in the development of African aviation. Gradually, it metamorphosed from the pride of Nigeria to the panacea of shame and abysmal failure. It became home to an avalanche of task forces, committees, panel of enquiries headed by very dignified and credible Nigerians.

How Did We Get Here?

Organizational philosophy and objectives Below are the key objectives for the establishment of Nigeria Airways: Provide adequate domestic network connecting all state capitals and commercial centres. Act as backup for the Nigerian air force as a means of transportation. To provide auxiliary transport services in the event of war or national emergency To provide services as required in time of emergencies and act of God to stranded victims e.t.c.

The philosophy establishing this airline had the provision of social service and national air transport development as the major objective. The economic objective of profit making was not a primary consideration. Hence, consistent and total government funding and management, from 1958 to 1993. This was irrespective of economic performance. Being a developing country with a population of 120 million geographically spread over 923,000 sq miles; this philosophy was definitely on a collision course with 21st century economics. It was just a matter of time. The situation is further exacerbated by the growing financial investments required to operate. Primarily due to technological (advancements), safety and environmental requirements needed to maintain international standards and recommended practices.

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Nigeria Airways selected assets and Liabilities in ($US millions) as at December 31st 1999. ASSETS Land & properties Aircraft engines & spare parts Other fixed assets Gross recievables- due from local and foreign airlines Gross recievables- due from FGN Deferred tax benefit of NOL and capital allowance Cash 143 NET ASSETS= -$320 DEBTS & LIABILITIES Trade debts- foreign 41 Trade debts-other Financial debtforeign financial institutions Financial debts- due to FGN Unfunded pension liabilities Contingent pension liabilities Potential tax liabilities 463 26 286 44

52 23 2 43

12 4

38 15

13

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The causative factors

1. Undue government interference in the affairs of the airline has proved to its Achilles heel. Notable areas of undue interference are: be

Politically motivated appointments. Government interference is generally in the area of appointments into the board of directors, managing director, departmental directors, company secretary and control of day-to-day activities of the airline. These appointments are made irrespective of experience level, track record or any process of due diligence. Continued operations of economically unviable routes for political or social reasons. Culminating in poor returns. The sacred cow syndrome. The failure of the government to effect punitive measures against corrupt and erring personnel. This would have served as a deterrent, and set the precedence to ensure jurisprudence in the airline operations.

2. Consistent gross Mismanagement and bad leadership. This is evidenced by progressively higher annual losses over a 20-year period with a corresponding depletion of fleet from 34 aircraft in the early 80s to 1 in 2002. Lack of adherence to internal control protocol; no annual financial reports at some points, irreconcilable discrepancies between internal and external audited reports, no feed back on implemented management strategies, e.t.c. Nigeria Airways was laden with over $320m net liabilities and debts; as at December 1999. Organised managerial Fraud. This has been uncovered at investigative panels notably the Nwazoatas panel. These scams are organised in the fact that they involved more than one active conspirator and are usually continues operations. Areas of prominence are in aircraft maintenance contracts, insurance and to a comparatively insignificant degree, ticketing. Data and information mismanagement

3. Managerial instability resulting in lack of continuity in policy implementation. This also creates a window of opportunity for the perpetration of fraud as a CEO who has not yet come to grips with the details of affairs is expected to commence handover to another new CEO. The airline has passed through 27 different management teams over a 42-year period, with one administration lasting only 20 days.

2. The endemic proportion of corruption within the Nigerian polity, made it difficult for the decline to be arrested even when it became apparent. From 1986, government has been making efforts in the direction of Task forces and special

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committees that will fashion a policy guide to stem the trend of decay. However, corruption has stood in the way of any recovery. Unethical and sharp practices pervade the top and middle management cadre but employees who attempted to blow the whistle were victimized, threatened and sometimes summarily dismissed. 3. National economic constraints adversely affected employees real earnings (inflation). Unlike the private sector, the government is not quick to respond with improved welfare or salary adjustment. This results in the government employees degraded economic power compared to their private sector counterparts. This usually dampens working morale and erodes Company loyalty. The results, always impact negatively in productivity and an upsurge in misdemeanours and acts of sabotage; staff pilfering of aircraft parts and company resources. Typical cases are: A310 ADC missing, two complete engines unaccounted for, e.t.c

Government position.
Nigeria Airways is one of over 100 public enterprises that have experienced similar history of shameful decline. Resulting in the following government submission, and I quote; It is estimated that successive Nigerian Governments have invested up to 800 billion naira in public-owned enterprises. Annual returns on this huge investment have been well below 10 per cent. These inefficiencies and, in many cases huge losses, are charged against the public treasury. With declining revenue and escalating demand for effective and affordable social services/ the general public has stepped up its yearning for state-owned enterprises to become more efficient. State enterprises suffer from fundamental problems of defective capital structure, excessive bureaucratic control or intervention, inappropriate technology, gross incompetence and mismanagement, blatant corruption and crippling complacency which monopoly engenders. Inevitably, these shortcomings take a heavy toll on the national economy. The problems associated with state-owned enterprises and monopolies are not peculiar to Nigeria. It is true, however, that many developing countries have overcome the problems through a well-designed and single-minded pursuit of privatisation programme. The rationale is that privatisation permits governments to concentrate resources on their core functions and responsibilities, while enforcing the "rules of the game" so that the markets can work efficiently, with provision of adequate security and basic infrastructure, as well as ensuring access to key services like education, health and environmental protection. The objective is to assist in restructuring the public sector in a manner that will affect a new synergy between a leaner and more efficient government and a revitalised, efficient and service-oriented private sector. (End of quote)

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What then is privatisation?

Privatisation is the process of changing the ownership of government companies (public enterprises) to private ownership through the sale of the shares of such companies to private individuals who will manage the companies efficiently and profitably.

What is the difference between Privatisation and Commercialisation?

Privatisation involves the sale of a government owned company to private Investors or individuals who now become the new owners, while commercialisation involves changing the way Government owned companies operate to ensure that they run commercially and that they make profit. The basic difference is in their ownership structure. The objectives of the Privatisation and Commercialisation programme are: i) To restructure and rationalise the public sector in order to lessen the dominance of unproductive investments in the sector; ii) To re-orientate the enterprises for privatisation and commercialisation towards a new horizon of performance improvement, viability and over all efficiency; iii) To raise funds for financing socio-economic developments in such areas as health, education and infrastructure; iv) To ensure positive returns on public sector investments in commercialised enterprises, through more efficient management; v) To check the present absolute dependence on the Treasury for funding by otherwise commercially oriented parastatals and so, encourage their approach to the Nigerian Capital Market to meet their funding requirements; vi) To initiate the process of gradual cession to the private sector of such public enterprises which are better operated by the private sector; vii) To create more jobs, acquire new knowledge and Technology and expose the country to international competition.

Looking critically at the Federal Government submission in the Presidents speech, the funds that have been put into these public enterprises would have paid off over 20% of our National debt. The sad irony is that a good chunk of our current national debt was incurred trying to run these enterprises. So to salvage these enterprises will mean

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probably a fresh debt of another $50billion, since Nigeria Airways alone will need a 3 year cash injection of about $billion to be turned around and positioned to compete internationally.

Is Commercialisation an option?
1. In the 1980s the airline industry began the process of guided liberalisation and deregulation. This has eliminated monopoly and brought in competition. The airline being owned by the government never had to compete. It had monopoly of Nigerias BASA, and govt. guarantees for leasing agreements, e.t.c. This was uncharted territory for the Airline. Instead of compelling the National carrier to brace up and improve, its rate of decline increased due to weak or absence of management strategy. They were now losing both manpower and equipment. 2. From 1986, government initiative was aimed at positioning Nigeria Airways as a viable commercial enterprise, at least with a view to self-sustenance. By 1993, government had suspended direct funding in order to compel the airline to run on its own resources; this in essence is commercialisation. Any subsequent funding was given as loans, and still the airlines portfolio showed no signs of improvement. Thus, we should not make the same mistake now in principle, when we have actually already implemented in practice. Commercialisation is not an option. 3. The current lack of clear-cut demarcation between government commercial policy and social responsibility has resulted in commercialisation of Nitel and NEPA being unsuccessful. Both utilities are now being partially privatised. Excerpts from the BPE archives. . The Government found out that commercialisation alone was not enough to solve the problems of NEPA and NITEL, which are still unable to satisfy the citizens due to the poor service they render to the public. Thus, since Government want the companies to be managed properly and also make profit, it felt that the best way is through privatisation which will give the citizens opportunity to be part - owners of the companies and at the same time assure them of better services. These utilities are local in outlook and operation, therefore international requirements are not as stringent or numerous as in aviation, which is global in outlook. The level of funding and market structure also cannot be compared. 4. Federal government insolvency. Nigeria as a country is struggling with a debt profile in the region of $34 billion. As such, even if it the Federal government has the political will to retain its 100% ownership of the national carrier; it cannot afford to devote the required $1billion at this time, to salvage Nigeria Airways. Below is an excerpt of a memo from Nigeria Airways management to the Federal Govt. through the minister of Aviation in late 1998. It is in this light that the present Management of Nigeria Airways appeals to the Federal Government to kindly intervene in the following areas to save the National Carrier from imminent collapse;

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1. Take over of Nigeria Airways debts totalling USD104, 585,751.50 as part of the National debt by Government. 2. Government's assistance for the recovery of debts owed Nigeria Airways by various organisations totalling USD15, 855,987.00 and N326Million and uses same to commence the settlement of troublesome creditors. 3. Release of the sum ofUSD127.87million by Government in the short run for the immediate commencement of meaningful activities by the airline. 4. The medium/long term programme of re-equipment amounting to US$860 Million be made on annual budgetary issue and the funding released in equal instalments in the budgets of the following three years commencing from 1999.

Guided partial privatisation

This is the only viable option available for Nigeria Airways -given the current economic and socio-political environment. However, it has to be done in a structured, legislated and transparent manner. For space and volume constraints we refer our listeners /readers to the privatisatisation handbook produced by the National Council on Privatisation. However, we wish to input the following points:

Share structure
It is international practice in aviation that most countries restrict foreign ownership of local airlines to 40%. In order to preserve some measure of control on the privatisation exercise, we recommend that the Federal government; divest 40% to the core investor; however the Federal government maintains 30% and the Nigerian public is sold the remaining 30%. The BPE had recommended a 40 - 40 -20 sharing formula respectively.

National considerations.
We regret to mention that our reservation with this option is that the core investor may end up being either a complete foreign organisation, or if it is a Nigerian outfit, it will be in partnership with a foreign organisation. Thus, in order to prevent a blatant case of capital flight that will defeat the aim of the exercise, proper legislation has to be put in place to guide the process. Checks have to be put in place to monitor transfer of shares that may compromise national interest. Our major interest after all is the national interest.

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Public allocation.
We recommend the public share ownership plan (PSOP) that was implemented by Malaysia during their privatisation exercise. In this method it was not only the government employee that will benefit but also all Nigerians. The transaction may not require financial input from the citizenry as their dividends over a period of say five years are used to pay for the share purchased. After, the five-year period, they can now be entitled to future dividends. This strategy requires detailed approach beginning with a national population and identification data.

Strategic alliances
The trend now in globalisation is to establish strategic alliances. This has become expedient considering the enormous financial investment required in international aviation and the response of the industry to economic and political factors. A look at the worlds 10 largest airlines will show that all of them are in serious intercontinental/ Global alliances. It is hoped that a strong strategic alliance for African carriers will evolve out of the current Yamoussoukro declaration.

AIRLINE

N0: OF CONSOLIDATED A/C REVENUE($billions) United 594 18 American 697 18 Delta 584 15 British Airways 357 14 Lufthansa 298 13 Japan Airlines 338 12 Northwest 409 11 Air France 223 10 Continental 363 9 US Air 393 9 TOTAL 4256 129

ALLIANCE Star Oneworld Air France /Delta Oneworld Star Air France AA Wings Air France /Delta Various NA

Gov. empl 0 0 0 0 0 56 0 0 93 73.7 60 38.094 25.712 64.717 48.4

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Examples of successful Privatisation programmes

In 1986 the Transport Commission of the EU started a three-stage liberalization policy, forcing European governments to abandon the heavy regulation that had protected their national airlines from competition while keeping airfares artificially high. In the United Kingdom, some of the most radical reforms in the privatization programme occurred in the transport industries, notably air and road. British Airways, the British Airport Authority, National Freight, Sealink ferries were transferred to the private sector. In 1979 the British government announced its intention to sell British Airways and enacted the civil aviation act of 1980 to achieve this objective. BA was an attractive candidate for privatization because it was relatively profitable and a change of ownership raised fewer problems. BA was brought to the market at the end of 1987 with the sale of 720.2 million shares at a price of 125 pence, capitalizing the company at 900 million pounds. Singapore Airlines was incorporated in 1972. The Singapore government wholly owned it. Employees and directors of the company acquired approximately 23% of its issued shared capital. In November 1985, the government sold 300 million shares at five Singapore dollars per share. The experience of other airlines like Kenya Airways, Lufthansa, KLM, Air Madagascar, South African Airline that opted for privatization are presently posting profit. Factors that will encourage Core investor. We wish to remind the Federal Government that such exercises are of international consequence and hence of interest to the international community. We have to be seen to be both fair and transparent. It is expedient to the process that we also express to the authority the concerns of a potential investor. I believe we have learnt from our initial insensitivity to the concerns of the GSM operators. In retaliation they have slammed the Nigerian public with tariff structures that translate into 50% of the countrys minimum monthly wage in order to maintain monthly access. A core investor will be very interested in the following: 1. Clear and stable civil aviation policy. 2. Political stability and general security. 3. Significant investment and commitment by the government to related infrastructure (airport, navigation systems). 4. Management control. 5. Exclusivity on key intercontinental routes for a defined period of time. 6. No unrestricted open sky policy (Yamoussoukro excluded). 7. Clean opening balance sheet.

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Conclusion.
In the formative years of Air transport almost all of the Airlines of the World enjoyed one form of patronage from its government or the other. Some were even outright extension of government service. In recent years most government under the weight of fiscal difficulties are divesting from certain of its state owned enterprise (SOE) and are embracing private sector involvement in business activities, thereby reducing government ownership. Instances abound to show the gains of privatization of Airlines as evident in the course of this research. In this fast changing industry, only the airlines that are able to adapt quickly to new trends will survive.

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