Nigerian Aviation Industry Bain PoV 02Sept2015 Fpresented

7/26/2019 Nigerian Aviation Industry Bain PoV 02Sept2015 Fpresented

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

Perspective on the Nigerian Aviation Industry

Aviation Safety Round Table Initiative

Q3 Business Breakfast Meeting

Lagos 2nd September 2015



This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2JOH Nigerian Aviation Industry_Bai ...

Key Questions for Nigerian Aviation Industry

•What does Nigeria want to achieve with its aviationIndustry?

- Develop the local and regional economy?

- Facilitate inbound and outbound tourism?

- Create the largest West African Hub to support future Nigeria growth?

- …

•How much does the industry / the government want

to spend and how much risk does the industry / theGovernment want to take to turnaround the Aviationindustry in Nigeria?

FOR DISCUSSION




Agenda

•Review Air traffic in Africa and Nigeria

•Recent changes to the global airline market

•Discuss Nigeria’s unique challenges

•So what’s next?




In terms of ASM (Available Seat Miles), Africa’s travel isstill significantly less than rest of the world

20%

NorthAmerica Asia

Australia-AsiaSouth

America

CentralAmerica/Carib Africa

MiddleEast

1%

5%

8% 8%

4%2%

2%1%

Europe

3%

<1%

13%18%

<1%

1%

2%

<1%

<1%1%

3%

3%

<1%

1%

2%

Note: Year end December 2013 scheduled capacitySource: Diio Mi

Inter regionflow % of total globalASMs

Intra regionflow % of total globalASMs

Ba r a n d c i r c l e s i ze s a p p r o x i m a t e l y

p r o p o r t i o n a l t o % o f t o t a l A SM s




0

10

20

30M

0 200 400 600B

GDP (Billions in Constant USD, 2014)

Nigeria

Morocco

Algeria

Volume of passengers (Millions, 2014)

Tunisia

South Africa

Libya

Kenya

Ethiopia

Egypt

Nigeria has Africa’s largest GDP – however, Air trafficsimilar to countries with 8 - 40 % of its GDP

Note: Passenger numbers includes all flights (domestic, international inbound and international outbound); Tunisia GDP based on 2013 informationSource: IATA (WATS ,2015); The world bank database (2015); Bain & Co analysis

Tourism contributes~10% to GDP in S.

Africa, Egypt & Morocco




The Nigerian airline market realized strong growthbetween 2001-2006…

0

1

2

3

4

$5B

'01A

0.8

'02A

0.9

'03A

1.2

'04A

1.6

'05A

1.7

'06A

1.8

'07A '08A '09A '10A '11A '12A '13A '14F '15F '16F '17F '18F '19F

Retail Selling Price, Nigeria

Actual

Note: All conversions indexed at 2014 exchange rate; retail selling price is the total price of tickets sold in the Nigerian airline marketSource: Euromonitor; Bain & Co analysis

Closure of Nigerianairways in 2003 after45 years of operations

Arikfounded in

2004

Virgin / Air Nigeriacommenced in

2005

18%p.a.




…followed by a period of stagnation between 2006-2013,driven by multiple crashes and the global financial crisis…

0

1

2

3

4

$5B

'01A

0.8

'02A

0.9

'03A

1.2

'04A

1.6

'05A

1.7

'06A

1.8

'07A

1.9

'08A

2.0

'09A

2.0

'10A

2.1

'11A

2.2

'12A

2.1

'13A

2.3

'14F '15F '16F '17F '18F '19F


Actual


Dana Airstarted

operations

Virgin / Air Nigeriacloses in 2012 (following

two name changes)

18%p.a.

2%p.a.

Multiplefatal

crashes

GlobalFinancial

crisis




… for the future, most analysts have a positive perspective,but pre-requisite conditions may not be matched

0

1

2

3

4

$5B

'01A

0.8

'02A

0.9

'03A

1.2

'04A

1.6

'05A

1.7

'06A

1.8

'07A

1.9

'08A

2.0

'09A

2.0

'10A

2.1

'11A

2.2

'12A

2.1

'13A

2.3

'14F

2.5

'15F

2.7

'16F

3.1

'17F

3.5

'18F

3.9

'19F

4.3


Actual

IATA/ Tourism Econ. Forecast

IATA Forecast

Euromonitor Forecast

18%p.a.

2%p.a.

Multiplefatal

crashes

GlobalFinancial

crisis

FUTURE GROWTHDRIVERSAnalysts

projections of growth vary, butshould exceedactual from last

7 years

4-11%p.a.

• Stronger economy

• Improved safety of theairline sector and thecountry to attract more

business and tourists

• Increased investment & infrastructure in theaviation sector

• Growing interest by leadingairline regional & international players





Agenda








Major global trends in the past few years

Airline Consolidation National Carrier Vs FlagBearer Emergence of Low CostCarriers

Middle East Champions New Customer Experienceat the Airport

New Customer Experiencein the Air




4.82.94.2

M e r g e d

w i t h U n i t e d

A i r l i n e s

M e r g e d

w i t h A i r F r a n c e

M e r g e d

w i t h D L

A c q u i r e d

b y D L

A c q u i r e d

b y L H

B a n k r u p t c y p r o c e s s

B a n k r u p t c y p r o c e s s

There have been many changes over the last 15 years:airlines growing, shrinking, appearing and disappearing

Market cap (€B) as of 1 Jan 1999

4.04.34.84.96.1

6.46.46.5

28

21

14

7

1.71.81.81.9

7.09.3

2.12.52.7

35

1.5

0

Public/Private

Mostly Stateowned

Low CostPublic/Private

Airline consolidation


4.25.1 5.1

7.1

5.4 5.2

2.63.3**

Note: AMR is parent company of AmericanAirlines, Sairgroup of Swissair, **British Airways is a sub. of IAG, market cap includes Vueling, IberiaSources: Capital IQ, Bloomberg, Datastream, Analyst Reports, ECB, Bain & Co analysis, ICAO privatised airlines

DIRECTIONALAnimated




There have been many over the last 15 years: airlinesgrowing, shrinking, appearing and disappearing

35

21

14

7

28

0


Public/Private

Mostly Stateowned


5.4

8.49.1

7.16.3*

5.3 5.2 5.2 5.1 5.1 4.8 4.6 4.2 3.3** 2.6 2.5 2.22.1 2.0 2.0

12 Airlines left the top20 list:

•

American Airlines• Alitalia• British Airways• US Airways• Japan Airlines• Air France• KLM• Swissair• Comair• NWA•

Continental• Thai Airways


Market cap (€B) as of Aug 2015

11.6

7*9.3

16.4

6.69

31

2218.2

5.8 5.1

14.9**

6.38.7

9.1

6.4

Note: *Market value of Emirates estimated, LAN/TAM shown as combined entity, **British Airways is a sub. of IAG, market cap includes Vueling, IberiaSources: Capital IQ, Bloomberg, Datastream, Analyst Reports, ECB, Bain & Co analysis, ICAO privatised airlines

DIRECTIONALAnimated




31 11.614.9** 6.49.3 6.6922 18.2 5.8 5.116.4 6.3 6.28.723.3 11.8 5.610* 9.1

Market cap (€B) as of Aug 2015

There have been many over the last 15 years: airlinesgrowing, shrinking, appearing and disappearing

35

21

14

7

28

0

Public/Private

Mostly Stateowned


Less State ownedairlines in the top20 whilst many

LCCs now feature


4 Airlines left the top20 list:• LAN & TAM• Qantas• Air Asia• Copa Airlines

Note: *Market capitalisation estimated: Emirates based on comparisons against listed companies and calculating EBIT multiples while African playersestimated by comparing their Available Seat Kilometres (ASKs) against Kenya airways, British Airways is a sub. of IAG, market cap includes Vueling, IberiaSources: Capital IQ, Bloomberg, Datastream, Analyst Reports, ECB, Bain & Co analysis, ICAO privatised airlines

African playerstoo small to

appear in thischat, despite thegrowing traffic

volume

DIRECTIONALAnimated




Largest global airlines by capacity include mostly privatelyairlines

0

100

200

300

400B

Airlines by Scheduled Capacity

(Available Seat Kilometers)

347 342

302

257

199 176 173161 154

132 130 123 123 121 121 119 118100 97 93

Public/Private

Mostly Stateowned


Sources: ATW World Airline Report, World Air Transport Statistics (2015)


African playerstoo small to

appear in thischat, despite the

growing trafficvolume




A thriving airline industry can be achieved throughGovernment partnering with private companies

LESSONS LEARNT FROM

STATE OWNED AIRLINES

HOWEVER THERE ARE

SOME SUCCESSES

WHAT COULD

GOVERNMENT DO

• Industry has moved awayfrom state owned airlines

• Most state owned airlineshave been characterised by

corruption and poorcorporate governance

• Airlines are a ultracompetitive and veryrisky business, far awayfrom Government logics

• Emirates is a successfulstate owned airline

• Airline’s success is part of alarger economicecosystem

- Large ship to air business- Several tax free zones that

encourage business travel

- Large push to encouragetourism

- Hub for service industriessuch as IT & Finance

• Government couldencourage privateinvestment & airline usethrough

- Open skies policy

- Investing ininfrastructures (runways,airport facilities, trainingfacilities, etc.)

- Reducing costs to makeuse of airports

• Private companies couldrun airlines

National Carrier vs FlagBearer




Morocco is a great case study in how open skiescan increase air traffic and boost GDP growth

AIR TRAFFIC HAS INCREASED 1.7X

SINCE 2005 DRIVEN BY OPEN SKIES POLICY• Morocco signed open skies agreements

with US in 2002 and with EuropeanUnion in 2005

• Morocco’s air industry has grown by 1.7Xwith positive impacts on ticket prices,economic growth and employment1

• Morocco’s Mohammed V InternationalAirport in Casablanca is now the 4th

busiest in Africa

• Inbound tourism directly contributes 9%to GDP and 8% to employment2

Source: Euromonitor International (2015); 1. The Impact of International Air Service Liberalisation on Morocco (2009), 2. Travel and Tourism EconomicImpact Morocco (2014); 3. Transforming Intra-African air connectivity (2014)

National Carrier vs FlagBearer

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

-0.5%p.a.

+7.6%p.a.

Open skiesagreement

signedwith EU

Impact of globaleconomic crisis

+0.4%p.a.

The national airline, Royal Air Maroc,has competed with foreign airlines and

increased its total seats by 47%between 2005 and 2013




Low Cost Carriers have emerged as formidable competitorsacross the globe, including also Africa

LCC share in world revenue (2014)

Due to the specific features of the business model, LCCs will growfaster than legacy airlines and enter new markets

LCC’S HAVE GROWN SIGNIFICANT

IN MANY MARKETS

MANY LCC’S HAVE ESTABLISHED

THEMSELVES IN AFRICA

Growth of LCCs 2X

legacy airlinesin 2014

Notes: LCC – Low Cost Carrier; Flyafrica is a Zimbabwean airline; Fastjet is based in Tanzania and expanding (it acquired Fly540); Jambojet is asubsidiary of Kenya airways; Dana Air is Nigerian; Kulula and Mango are South AfricanSources: WATS world air transport statistics (2015), ATW World Airline Report, Bain & Co. analysis

Emergence of LCC




Middle Eastern carriers grow ahead of the market primarilydriven by their location and lower costs

Sources: ATW World Airline Report, WATS world air transport statistics 2015, Reuters, Forbes, Aerotransport Databank, Bain & Co. analysis

Middle East Champions

0

100

200

300

400 Fleet

Orders

Growth rate of Middle East Champions revenues(CAGR FY12-FY14)

Aircraft number(2014)

TRANSIT MODEL ENABLES GROWTHMIDDLE EAST AIRLINES ACTIVELY

PURCHASE AIRCRAFT




Modern airports are convenient to access and havefacilities to make layovers productive and enjoyable

AIRPORTS ARE WELL LAID OUT ANDPROVIDE EASY ACCESS FOR TRAVELLERS

ONCE INSIDE, THERE ARE SEVERALSHOPS & FACILITIES TO MAKE LAYOVERS

PRODUCTIVE & ENJOYABLE

Airport CustomerExperience




In the air customer experience has been improved byleading airlines companies

ADDITIONAL SPACE & ERGONOMICS

IN FLIGHT FACILITIES & ENTERTAINMENT

BETTER FOOD & BEVERAGES

In the Air CustomerExperience




Agenda








Nigeria Airline industry is facing unique challenges

Sub-Scale players Poor Efficiency & Profitability Skills & Maintenance

Safety Customer ExperienceAirport Infrastructure




0

20

40

60

80

100%

Arik Air

Kenya Airways

Egypt Air

South AfricaAirways

Ethiopia Airlines

Royal Air Maroc

Tunisair

Libyan Airlines

RwandAir

ASKY

46K

Fleet Size(Jan 2015)

Arik Air

Kenya Airways

Egypt Air

South AfricaAirways

EthiopiaAirlines

Com Air

Royal Air Maroc

Air Algerie

Tunisair

Libyan Airlines

451

Top 10 intra-Africa airline operators

Weekly Seat Capacity(Jun 2014)

Regional & International airlines have a larger presencecompared to Nigerian players and dominate lucrative routes

AIRLINES FROM OTHER PARTS OF AFRICAARE LARGER THAN NIGERIAN PLAYERS

INTERNATIONAL AIRLINES HAVE LION’SSHARE OF LUCRATIVE INTERNATIONAL

OUTBOUND ROUTES FROM NIGERIA

Arik has operatedon this route

since July 2014but stopped in

May, 2015

Note: Market share based on Jan to June 2015 ASMs, USA includes New York, Houston and Atlanta while Middle East includes Dubai, Abu Dhabi and DohaSource: UBM Aviation worldwide; Airline Ratings (www.airlineratings.com); Literature search; Nigerian Civil Aviation Authority; Company website; Bain & Co. analysis

Sub-scale players




Air travel in Africa is 5X more expensive than travelling inEurope

Note: Flight cost worked out by obtaining cheapest, most direct flight from website, all flight prices based on same travel daySource: Expedia.com, specific airline websites

Poor efficiency & profitability

Amsterdam

London

MadridRome

Paris

$561068km

$461100km

$56400km$62

344km

LomeAccra

Abidijan

Douala

Lagos

$259240km

$177412km

$282831km

$211748km

Ticket prices are higher due to:

• Lower occupancy

• High levels of taxes, fees and charges

• High costs of borrowing and risks due to country andsafety risk

• Higher operational costs

• Reduced competition due to limited liberalisation of airspace

AVERAGE COST OF 42 US $ PER 100KM AVERAGE COST OF 8 US $ PER 100KM

BENCHMARKS




Note: 1. Nigerian College of Aviation Technology in Zaria; 2. A & B checks are scheduled maintenance that are done based on flight hours – A checksare done every 30-45 days while B checks are done every ~6 months; 3. C & D checks are more maintenance intensive and are referred to as heavymaintenance- it requires specialised facilities (at a Maintenance Repair and Overhaul base), tooling and skills. C checks are normally done every 2 yearsand is an extensive check of individual components and systems while a D check is an overhaul that is done every 6 years.Source: Literature search; Africa competitiveness report (2013); Industry expert interviews (2015)

Lack of skilled resources and heavy maintenanceinfrastructure increases cost to industry

ONCE OFF PILOT &

TECHNICAL TRAINING

RECURRENT PILOT

TRAINING

HEAVY MAINTENANCE

FACILITIES

• Only one college exists inNigeria to train pilots & technical personnel1

• Specialised training takesplace overseas

• Training effectiveness canbe improved by upgrading

and aligning with industryrequirements

• No pilot simulators existin country requiringbi-annual simulatorrefreshers to be doneabroad

• Only basic A & Bmaintenance checks2

take place in Nigeria

• Major C & D checks3 haveto take place in otherparts of the world at

great expense

Skills & Maintenance




~75% of national passenger traffic driven by airportswithin the ‘Golden Triangle’ (Lagos, Abuja & Port Harcourt)

• Nigeria has ~22 airports including 5

international airports (Lagos, Abuja, PortHarcourt, Kano and Enugu)

• Golden triangle of airports (Lagos, Abuja& Port Harcourt) well served withcompetition amongst domestic airlines

• ~17 domestic airports have a smallamount of traffic and are not well servedby domestic players

• In 2013 the government renovated 11federal airports1 with another 11 to berenovated by 2015

• Majority airports are owned and operatedby FAAN2

• Nigerian airports’ security improving witha recent average score of 90% in ICAO3

audit

Mallam Aminu (Kano)

Nnamdi Azikwe (Abuja)

Enugu

Port

Harcourt

Murtala Muhammed (Lagos)

Calabar

Jos

Kaduna

Maiduguri

Sokoto

Yola

Akure

Bauchi

Benin

Ibadan

Ilorin

Katsina

Makurdi

Minna

Owerri

Warri

Zaria

Bayelsa

Kebbi

Kogi

Nasarawa

Ogun

DomesticInternational Proposed

Legend

Note: 1. Upgraded airports are Lagos, Kano, Abuja, Yola, Port Harcourt, Enugu, Owerri, Jos, Kaduna, Calabar and Benin; 2. Federal Airports Authority of Nigeria; 3. Audit conducted in June 2015 by International Civil Aviation Organization and goes through the Universal Security Audit (USAP) ContinuousMonitoring Approach (CMA)Source: Federal Airports Authority of Nigeria; Literature search

Airports




Aviation safety in Nigeria is improving – NCAA, Arik andAero certified by international safety organizations

AFRICAN SAFETY IMPROVING BUT

STILL 3X GLOBAL AVERAGE

NCAA AND SOME AIRLINES HAVE BEEN

ACCREDITED WITH FAA AND IATA

Note: * stats shown are for accidents and do not show associated fatalities; only accidents for commercial operations involving aircraft > 5,700 kg takeoff weight are recordedSource: International Civil Aviation Organisation (2013 & 2014); Africa competitiveness report (2013); Bain & Co. analysis

NCAA certified by US Federal Aviation Administration (FAA)and is a member state of UN’s International Civil Aviation

Organisation

Two Nigerian airlines have registered with IATA and passedtheir Operational Safety Audit (IOSA)

IncludesMalaysian

Airlineaccidents

Safety

Arik certified by US Federal Aviation Administration (FAA)




Nigerian Airlines & Airports customer experienceimproving, but still far away from international Standards

BOOKING OF AIRLINE

TICKET

CHECKIN PROCESS AT

AIRPORT

CONVENIENCE OF AIRPORT

FACILITIES

ON TIME DEPARTURE & ARRIVAL

COMFORT & CONVENIENCEFROM NEWER AIRCRAFT CUSTOMER SERVICE

Customer Experience

• Airlines have websites for online

booking & online travel websiteslike Wakanow exist

• Checkin processes not efficient

• Often insufficient space for peakpassenger traffic

• Airports have minimal facilities e.g.

Wi-Fi, restaurants, recreationalservices

• Airlines often delayed across theAfrican Continent

• Some airlines have invested innewer aircraft with increasedcomfort & functionality

• Customer service can be improved(call center, online, apps, …)




Agenda








So what’s next?

D e f in e t h e l o n g

t e r m r o l e o f t h e

A v i a t i o n i n d u s t r y i n

t h e f u t u r e p l a n s o f

N i g e r i a

K e e p a s t r o n g f o c u s

o n e f f i c i e n c y &

p r o f i t a b i l i t y ,w i t h o u t f o r g e t t in g

t h e sa f e t y

i m p e r a t i v e s

U p g r a d e t h e

i n d u s t r y Cu s t o m e r

Ex p e r i e n c e t o b e t t e r s t a n d a r d s

( i d e a l ly t h e b e s t

o n e s )

Role of the NigerianGovernment is key in both thedefinition and the long term

support to the Nigerian industrydevelopment and grown

1 2 3

Documents

Nigerian Aviation Industry Bain PoV 02Sept2015 Fpresented