Background
The Nigerian government is planning to launch a national carrier called Nigeria Air. The government intends to hold just a 5% equity stake in the new entity, leaving 95% to the private sector, with 49% to be held by a single investor, Ethiopia Airlines. The Nigerian government intends Nigeria Air to be privately run, profit-driven, albeit somewhat subsidised, compared to other private air carriers operating within the Nigerian market.
However, the launch of Nigeria Air has been stalled due to concerns of competition transparency, amongst others, in the bidding process.1 Fola previously wrote about bid-rigging and its anticompetitive effects, so that won’t be the subject of this post.
Instead, this post will discuss the potential anticompetitive dimensions of Ethiopian Airlines’ investment in Nigeria Air. In the Nigerian airline industry, impediments to effective competition, such as infrastructure deficit, FX controls, operating and maintenance costs, regulatory fees, and aviation fuel, compound the airline’s problem. It often leads to their crumbling or almost crumbling, consequently making the sector less viable for more efficient players to compete. The introduction of Nigeria Air into the market may be a good thing. But how Nigeria Air is coming into the market is what has raised competition red flags, needing a VAR to double check.
How do airlines compete?
Three main areas where air carriers compete are the expansion of a global route of networks (to attain network economies of scale), customer/marketing-orientated strategies (including leveraging technology) to improve service quality and secure brand loyalty, and cost-control strategies.
Network economies of scale play significant roles in attaining profit for airline operators, and reaching various routes and airlines is a goal for air carriers. Network economies exist when a carrier that operates over two routes, for example, AB and BC, faces more favourable demand or cost conditions than a second carrier that operates on route AB and a third carrier that operates on route BC.2 Carriers with more extensive route networks would then enjoy competitive advantages relative to carriers with less extensive route networks because flyers typically prefer full-connection flights to stopovers.
A network of routes is a significant competitive edge for airlines and impacts airline margins. Airlines typically operate two major models in terms of transportation routes which are (i) fully connected networks; and (ii) hub and spoke networks. A fully connected network, as explained above, illustrates a situation where all passengers fly nonstop from their origin cities to their destinations.3 Meanwhile, a hub and spoke network is a situation where all passengers flying from City A, except those whose city of origin or destination is City B, fly indirectly and stop at the hub City B for a flight to City C. Most domestic airlines flying locally in Nigeria operate a hub and spoke model with hubs at the Murtala Muhammed International Airport, Lagos, and the Nnamdi Azikiwe international airport, Abuja. Nigeria Air aims to operate flights within the domestic and international markets.
Currently, the Nigerian government has limited oversight over the aviation industry. The launch of Nigeria Air will give the government a front seat to the problems faced in the industry. Based on its skin in the game approach, the government may offer holistic solutions that would allow Nigeria Air to thrive, which may have a ripple effect on other airlines operating in the domestic market.
Potential anticompetitive conduct
What could be anticompetitive, however, is the government recognising the problems and creating solutions only for Nigeria Air to thrive, i.e., using the federal government’s equity stake in Nigeria Air to negotiate for favourable concessions from domestic airports and regulators. For example, the lack of slots at airports amid Nigeria’s limited infrastructure deficit could distort competition in the aviation market if Nigeria Air leverages its position as a national carrier to secure airport slots domestically, leaving limited or no slots for other private airlines. Nigeria Air is a private venture and must operate as one with equal access to the competitive segments of the market as other private airlines.
On the other hand, concerning international flights, bilateral agreements between individual member states and third countries could favour Nigeria Air as a national carrier and discriminate against other private airlines.4 This type of discrimination is potentially anticompetitive, given that Nigeria Air is on the same footing as other eligible airlines. Suppose there are bilateral agreements with individual countries by the Nigerian government. In that case, the Nigerian government must negotiate bilateral agreements on the basis that air carriers properly licensed in Nigeria have access to such air slots, and this must not be the exclusive preserve of Nigeria Air.
Potential Ethiopian Airlines monopoly
Ethiopian Airlines operates in Nigeria through international flights to jurisdictions such as London Heathrow Airport from Nigeria. With the custom in international air flights, Ethiopian Airlines would have been assigned slots for direct international flights from Nigeria at London Heathrow or Gatwick as necessary.
For example, suppose the UK assigns Nigeria with 4 slots at its airport. In that case, Ethiopian Airlines may have taken two as an airline licensed to fly from Nigeria to London by the Nigerian government.
Now, if Nigeria Air launches its entire operations for fully connected flights from Nigeria to the UK, Lagos to London, Nigeria Air would seek to take up the additional two slots as the national carrier and one of the few fully connected flights out of Nigeria. This situation will be different from an airline that flies from Nigeria to a hub destination such as Qatar and from Qatar to London, and there is no need for Nigerian airport slots in London as Qatar slots will be used.
Ethiopian Airlines has a majority shareholding in Nigeria Air and this makes Nigeria Air its subsidiary. Accordingly, the additional airport slots assigned to Nigeria Air as a fully connected route carrier will indirectly be to Ethiopian Airlines, giving Ethiopian Airlines’ monopoly over the hypothetical four slots. And since Ethiopian Airlines' already has significant market share over the particular route, this situation presents a prospective monopoly or market dominance abuse concern to competition in the Nigerian aviation market.
Arik Air was the only other airline from Nigeria that passed international flight tests and was licensed eligible for international flights to destinations such as London Heathrow. Ethiopian Airlines established a competitor for West Africa, ASKY Airline, flying out of Lomé, Togo to these destinations, and Arik could not compete regionally. Ethiopian Airlines is garnering significant regional power as the primary airline for international flights. Nigeria should be competing for this position. A 49% shareholding by Ethiopia Airlines in Nigeria Air pushes Ethiopian Airlines towards monopoly over international air travel in West Africa and rules out Nigeria as a competitor.
Further, this foreign direct investment situation deserves an assessment by the Federal Competition and Consumer Protection Commission. New areas of merger control and abuse of dominance are an area of competition law I have been thinking about, and it is one where regulators need to begin to look at. Typically, regulators will raise competition concerns in a merger between undertakings with significant market share, leading to a significant impediment to existing competition.5
However, an aspect of competition deserving additional scrutiny is the prospective anticompetitive effect of a new undertaking upon market entry. For example, while Nigeria Air will be a new undertaking in the Nigerian aviation industry, its existing and prospective market goodwill should accord it a status that warrants a higher level of competition scrutiny, notwithstanding that it is not yet a dominant player in the market. Ethiopian Airlines currently has a significant market share in Nigerian air travel, and its investment into Nigeria Air, which is supposed to be a competitor in the same market, notwithstanding that it has yet to accumulate its market share, should raise competition concerns.
Suit no FHC/L/CS/2159/22 - Airline Operators of Nigeria & Ors v Nigeria Air Limited & Ors
Pustay, M. W. (1980). Airline Competition and Network Effects. Transportation Journal, 19(4), 63–72 (accessible here)
Berechman, J., S. Poddar, and O. Shy. 1998. “Network Structure and Entry in the Deregulated Airline Industry.” Keio Economic Studies 35: 71–82
For example, see the EU Open Skies Judgment – Case C-466/98, Commission v United Kingdom
Section 92 of the Federal Competition and Consumer Protection Act, 2018