Many people think Nigeria Air was a failure. I actually think it was a big success.
Using Porter's 5 forces to evaluate the airline industry.
Hi guys,
Hope you're well. I'm doing okay, Alhamdulillah.
I write this at 7:52 am on a cold Sunday morning, on what has so far been a great weekend. An ideal weekend for me would involve some physical activity e.g., tennis (✖️), spending time with family (✅), being far away from big city life (✅), one or two long walks (✅), some downtime for consuming content e.g., a book or movie (✖️), some downtime for publishing or creating content (✅), one or two catchups with friends I care about (✅), and some downtime for work and other personal commitments (✖️).
Even though many boxes are still unchecked, it has been a while since I got this many boxes checked by Sunday afternoon. So I'm taking my small wins and probably fashiing the remaining (except for work, working on a Sunday evening is basically qadar 😭).
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Last week, Festus Keyamo, the Nigerian Minister for Aviation, confirmed that the Nigeria Air project has been suspended indefinitely. To many, this is yet another failure of the Nigerian government. I have to disagree.
For reasons I struggle to understand, the Nigerian ruling class and the older generations (basically everyone born before 1975) are fascinated with the idea of having a national airline carrier. Maybe it is something about national pride, flying into London Heathrow, Paris CDG, or New York JFK on an airline that bears your country's name. I do not share the sentiment.
While preparing for Consulting case interviews in late 2019 or early 2020, I came across the concept of Porter's 5 forces. Initially published in a Harvard Business Review article by Micheal Porter in 1979, Porter's 5 forces is an easy way to assess the attractiveness of an industry. Basically, it is asking five questions before starting a company.
Competition: How competitive is the industry? How easy is it to attain and sustain a high market share? For example, the number of fully functional private refineries in Nigeria is 1 (Dangote), but the number of real estate companies is like 10,000.
New entrants: How easy is it for new players to enter the market and disrupt the status quo? For example, anybody can wake up and start a “day-in-the-life” YouTube channel, but very few people have the expertise and credibility to start a YouTube channel focused on ideal nutrition for Astronauts.
Buyer power: How much power do customers have? Will the company have absolute pricing power over the customer (e.g., a new iPhone 15 is $1,000 whether you like it or not) or is the customer able to switch products easily (e.g., nobody cares about what brand of dustbin nylon they use)?
Supplier power: How much power do the raw material suppliers have? Will the company have a lot of power over the suppliers (e.g., Iya akara can buy beans from any market she likes) or will the supplier have a lot of power over the company (e.g., MTN is in trouble if MainOne decides to close its cable infrastructure)?
Substitute: How readily available are substitutes? Can the customer easily find an alternative solution instead of buying the product (e.g., people will switch to public schools if private schools become too expensive) or is the product a fundamental need with no alternatives (e.g., people will drive cars no matter the price of fuel)?
If we used Porter's 5 forces to analyze the attractiveness of the airline industry, it would look something like this.
Competition [Unattractive]: At any moment in time, there are a large number of companies vying for market share on any air travel route. A route as globally inconsequential as the Lagos to Abuja flight path (0.043% of global daily travel) alone has 9 airlines competing for customers.
New entrants [Attractive]: Running an airline is expensive. The planes alone require a lot of investment (e.g., leasing a single Boeing 737 Max costs about $350k per month), not to mention the numerous operational, safety, and regulatory requirements before receiving the green light. New entrants are welcome, but it would take time to be anywhere near as dominant as existing players.
Buyer power [Unattractive]: Customers are often spoilt for choice when it comes to booking tickets. When Virgin's ticket prices are too high, everyone will fly British Airways. When BA's prices are too high, everyone will fly Lufthansa. When Lufthansa's prices are too high, everyone will fly Air France. Etc etc. Very few people are 100% committed to a single airline provider for their travel needs.
Supplier power [Unattractive]: 88% of all commercial aircraft are produced by just two companies - Boeing and Airbus. Airlines have zero control and are always at their mercy. If I created Hameed Airlines and tried to convince you all to fly my planes sourced from Comac or Irkut, I would quickly be out of business! 🤣
Substitute [Unattractive for local, attractive for long-haul]: Especially for local travel, flying is not an absolute necessity. While not necessarily as convenient, road and rail travel still do a good job of taking people from point A to point B. Intercontinental travel, however, is a different story, and airlines have no viable substitute.
Overall, the airline industry is fundamentally unattractive, and starting an airline is much more likely to lose you money than make you money. While the best operators generally do okay, any minor crisis is enough to turn the industry on its head.
And none of this is new. After the 9/11 terrorist attacks led to a decline in passenger traffic, the US government spent $15 billion on airline bailouts. During the Covid downturn, the German and French governments bailed out Lufthsana and Air France with €8 billion and €6.8 billion respectively. Etc etc.
To be clear, I do not think we should make all our life and business decisions based on the limitations presented by data and frameworks. Achieving anything noteworthy is fundamentally difficult, and society would make very little progress if we did not attempt seemingly impossible things.
But as the Nigerian government does not have a great track record of solving “easy problems” (e.g., road maintenance or electricity generation), I think it is unwise to spend billions (often using $-based international loans) attempting to solve a problem that does not exist while entering a fundamentally unattractive industry.
So was the “failure” of Nigeria Air a failure? Not at all, I say it was a huge success. 😄
** Jara content:
What is unfortunate about this story is that the Nigeria Air project was not killed because someone analyzed its financial feasibility. It was shut down because they could not agree on ownership stakes. 🤣
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أَلَمۡ تَرَ أَنَّ ٱلۡفُلۡكَ تَجۡرِي فِي ٱلۡبَحۡرِ بِنِعۡمَتِ ٱللَّهِ لِيُرِيَكُم مِّنۡ ءَايَٰتِهِۦٓۚ إِنَّ فِي ذَٰلِكَ لَأٓيَٰتٖ لِّكُلِّ صَبَّارٖ شَكُورٖ
Do you not see that ships sail through the sea by the favor of Allah that He may show you of His signs? Indeed in that are signs for everyone patient and grateful.
- Chapter 31 verse 31
Have a great week. ✨
This is educating and inspiring. Kudos.
Lmao, nice bait with the title