The Nigerian federal government has reveal that it will provide $55 million upfront grant/viability gap funding to finance start-up capital and pay commitment fees for air-crafts to be leased for initial operations in Nigeria Air and deposit for new air-crafts whose delivery will begin in 2021.
After the first year of operation, the government intend to do an initial public offer (IPO) on the Nigerian Stock Exchange subject to approval from Securities and Exchange Commission (SEC).
According to the Government, at launch date, Federal Government will own 100 percent stto 95 percent stake in the company through the Initial Public Offer. Majority of the shares will be sold to Nigerians and some strategic investors. Nigeria Air requires $300m which is the entire airline cash flow funding requirements over the next 3 years and the airline promoters have said there are on-going plans to raise this fund either through equity or debt.
The cash flow estimates contains a 20 percent buffer that was baked into the assumption that the airline may suffer an operating loss in its first year due to competition and need to build a brand.
The assumption that Nigeria Air will only make a loss in its first year of operation seems more like wishful thinking than plausible expectation as many airlines around the world have barely managed to be profitable in the past few years especially airlines in Nigeria which have struggled with significant losses and mounting debt.
To convince investors to take the risk, investors must be convinced that they are buying into the new airline at a big discount to the value of investing in other African government established airlines.
There are currently seven government owned airlines in Africa. They are Kenya Airways, Ethiopian Airways, Royal Air Maroc, South African Airways, Rwandair and Tunisair established in Kenya, Ethiopia, Moroestablished in Kenya, Ethiopia, Morocco, South Africa, Rwanda and Tunisia respectively.
Excluding Kenya Airways, Rwandair and Tunisair, the government owns 100 percent stake in the other four national carriers. However, since the government own 99 percent of Rwandair, the company is not publicly traded and is dominantly controlled by the government.
Kenya Airways and Tunisair are both publicly traded companies and as such are useful in determining a fair value estimate for Nigeria Air.
Kenyan government own a minority stake of 48.9 percent in their national carrier.
Kenya Airways has a market capitalization of around $782m boasting a fleet of 39 planes which cover more than 50 destinations. On the other hand, Tunisair has a market capitalization of around $23.7m with a fleet of 29 aircraft that cover 101 destinations.
While the average age of the fleet owned by Kenya Airways is 6.5 years, the average age of Tunisair planes is 16.2 years which may explain the premium investors are willing to pay to invest in Kenya Airways rather than Tunisair.
Currently, Kenya Airway has been posting losses annually since at least 2015. This makes Sen. Hadi Sirika, Nigerian Aviation Minister to remark that Nigeria Air will be profitable in the first three years of operation a seemingly impossible task.
If Nigeria Air first year losses are larger than expected due to major economic headwinds in the aviation space, the planned IPO may be very difficult to launch successfully.