15 November 2018 : Analysts initiate coverage on Skyway Aviation Handling Company, with a target price of N5.03. Analysts derived their target price using a Discounted Cash Flow model based on earnings from its Ground handling and Cargo businesses over a 2018-2022 forecast period (at current capacity). Analysts are positive about the long-term growth capacity of the company given the expected growth in its cargo business, increase in the company’s’ client base and improvements in the broader sector. 

Underdeveloped aviation sector provides upside: Though the Nigerian aviation sector has experienced significant growth since liberalization, the sector in the country is still largely underdeveloped with significant room for expansion. This is common with this sector across Africa, with the low level of current air travel passengers compared to the population and size of the economy. Total passenger traffic in Nigeria has declined 4% since 2010 to 13.4 million passengers as at 2017 (7.4% of the population), compared to 19% growth in South Africa. This presents a huge upside for the aviation industry and its support industries. 

Poised to lead air cargo growth: The company’s ultra-modern cargo warehouse, procurement of advanced handling equipment, globally recognized certifications and investments in staff training, has positioned SAHCO as the premier handler in Nigeria’s cargo handling business, posting consistent and significant growth in market share (from 25% in 2013 to 44% in 2017). SAHCO also holds strong margins in the cargo segment of the business, with gross margin in this segment at c.60% compared to the ground handling segment with a gross margin of c.45%. 

Future infrastructure investments to drive expansion: Given the current infrastructural deficit in the industry, Nigeria needs to make provision, in its annual budget, for investments in modern aviation infrastructure in order to cater to the increasing number of air travelers. Analysts highlight the recent commissioning of the new Port Harcourt International Terminal and construction of new terminals at the Nnamdi Azikiwe International Airport and Murtala Muhammed International Airport Lagos. 

Increasing travel routes: Given the exit of a number of international airlines from the country during the 2016 economic recession, air transport data showed that international air traffic in H1’18 remained 19% lower than H1’15 levels. Amid continued recuperation of Nigeria’s economic health, analysts anticipate the return of some international airlines to the industry in the near to medium term. More so, the renovation of airports and aviation infrastructure in the country is expected to support this trend and boost the appeal of currently underserved international routes, creating the possibility of expansion for SAHCO. 

Investment Summary 

Skyway Aviation Handling Company Plc (SAHCO) is a locally owned company engaged in the principal activities of Ground Handling (Passenger and Aircraft Handling) and Cargo Handling operating in close conjunction with the aviation industry. SAHCO was incorporated as a private limited liability company on 22nd April 2009 under the Companies and Allied Matters Act. The Company is a member of the SIFAX Group and in 2009 was the vehicle used by the SIFAX Group to acquire the Federal Government’s 100% equity stake in Skypower Aviation Handling Company Limited (Skypower), an aviation handling services entity, under the privatization programme of the Nigerian Government. Prior to the privatization of the company, it was part of Nigeria Airways Limited (NAL). NAL was liquidated in 1996 and Skypower was separated from the airline as part of the Nigerian Federal Ministry of Aviation’s 1996 reform. Following the acquisition, Skypower became a wholly owned subsidiary of SAHCO. On October 2nd 2018, SAHCO and Skypower merged with SAHCO as the surviving entity. SAHCO is one of the premier ground handlers in the country, along with rival NAHCO, which is already listed on the floor of the Nigerian Stock Exchange (NSE). 

Nigeria’s underdeveloped aviation sector, and similarly weak tourism industry, provide huge growth opportunity for the company. Total passenger traffic in Nigeria has declined 4% since 2010 to 13.4 million passengers in 2017 (7.4% of the country’s population), lagging compared to peer South Africa posting a 19% growth rate over the same period. However, consistent with economic growth, analysts expect growth in trade, foreign direct investments, tourism and migration to power growth in air passenger traffic in the country. Interestingly, the International Air Transport Association (IATA) forecasts a 4.6% CAGR over the next two decades for Africa with Nigeria contributing 35 million passengers to the total number of passengers travelling through the continent as at 2037. Given that the aviation handling sector is a direct beneficiary of this growth, analysts believe SAHCO is poised to capitalize on this growth in the medium to long term. Notably, with Q2’18 GDP numbers indicating a 24% y/y jump in Aviation sector GDP, SAHCO reportedly posted a 37% y/y rise in revenue in its 9M’18 results. 

Through the construction of its ultra-modern import and export cargo warehouse, investments in cutting-edge handling equipment, certifications by globally renowned agencies and fortifying human resources through trainings, SAHCO has cemented its position in the Nigerian cargo handling sector and has consistently and significantly grown its market share in the segment – with revenue share rising from 25% in 2013 to 44% in 2017. Moreover, a more inclusive economic and trade picture for Nigeria will support air freight volumes in the near term even as stronger development across non-oil industries drives more two-directional trade flows for the country. This development will also support cargo route diversification as air cargo currently accounts for less than 5% of Nigeria’s trade by. 

Analysts value SAHCO at N5.03/share using Discounted Cash Flow (DCF) model based on earnings from its Ground Handling and Cargo handling businesses. Key assumption underlying their valuation is a beta of 0.5, equity risk premium of 5.5%, debt:equity ratio of 30:70, risk-free rate of 14.6% and an after-tax cost of equity of 17.4%, all which translate to a Weighted Average Cost of Capital of 17.0%. 

Company Background 

SIFAX Group, through Skyway Aviation Handling (SAHCO), acquired the Federal Government’s 100% stake in Skypower Aviation Handling Company Limited in 2009. Skypower used to be part of the now defunct Nigeria Airways, prior to the airline’s liquidation, but was separated from the airline during the Nigerian Federal Ministry of Aviation’s 1996 reform. Since privatization, the company has readjusted its vision and is commitment to focus on efficient service delivery through investment in personnel development, infrastructural development and state-of-the-art fleet replacement. SAHCO recently underwent a business combination with Skypower Aviation Handling Company Limited with SAHCO as the surviving entity, effective October 2nd, 2018. SAHCO’s current client portfolio includes about twenty-four clients in Nigeria and is looking to expand into two other West African countries. The company has a presence in eighteen commercially operated airports within Nigeria with services that span across all the actions that take place from the time an aircraft touches down on the tarmac to the time it is airborne for its next flight. These services are in the broad categories of Ground handling and Cargo handling. 

Ownership & Clientele 

SAHCO is majorly owned by the SIFAX group (40.6%). Other owners include the Chairman of the Board of Directors, Barrister (Dr.) Taiwo Afolabi (37.2%), and Mrs. Folashade Afolabi (22.2%). The company has a vast number of domestic and international clients, ranging from commercial passenger airlines to cargo/mail companies. Some of their clients can be seen below: 

Allied Air Cargo

Aero

Dana Air

MEA

Air Cote d’ivoire

Ehiopian

South African Airways

Kabo Air Ltd.

Max Air

Med-View Airline

Camair-Co

Arik

Air Peace

Aero

Air France KLM

BADR AIRLINES

DHL

Emirates

TARCO AIR

Air Namibia

ETIHAD AIRWAYS

BRISTOW

FLY MID AFRICA

SKYROUTING AVIATION SERVICES

Key Board and Management Personnel 

Barrister (Dr.) Taiwo Afolabi, Chairman 

Barrister (Dr.) Afolabi is a law graduate of the University of Lagos (called to bar in 2009). He subsequently obtained a Masters’ degree in International Law and Diplomacy from the same university in 2014. He started his career as a young manager in Shipping Operation and Port Management at Nigerian Express Agencies Limited. He left the company in 1988 to start SIFAX Nigeria Limited, which has grown over the years into a leader in ports, shipping and bonded terminal operations in the shipping and maritime services sector. Dr. Afolabi is the Chairman of the Board of SAHCO and the Group Executive Vice Chairman/CEO of SIFAX Group. He is also the Chairman of Mac-Folly Hospitality Limited and Ocean & Cargo Terminal Services Limited, evidence of his diverse interests in multiple sectors of the economy. 

Barrister Chike Ogeah, Vice Chairman 

Barrister Chike Ogeah is a 1983 graduate of Psychology and a 1988 graduate of Law, both from the University of Lagos. After working as a Legal Practitioner for a number of years, he started his own Legal practice, Ogeah & Co. With a keen interest in Governance and International relations, Mr. Ogeah worked in the National Planning Commission, in the capacity of Special Assistant to two Chief Economic Advisers to the President. In 2006, he was appointed as Managing Director/Chief Executive Officer of Skypower and the successful privatization of Skypower in 2010 occurred during his tenure. In 2011, he was called upon to serve as the Commissioner for Information for Delta State till May 2015. He is presently the Vice-Chairman of SAHCO. He is also a Director of Paelon Memorial Clinic. 

Dr. Oluropo Owolabi, Non-Executive Director 

Dr. Oluropo Owolabi is a Fellow of the Institute of Transport Administration of Nigeria and the African Institute of Enterprise Development and management. He holds a Higher National Diploma and a Diploma in Airline Management obtained in 1970 and 1978 respectively with specialization in Passenger and Ground Handling Services. He is also a graduate of Lufthansa School of Transport and Aviation (2003) and has a Doctorate degree in Sciences from the Commonwealth University, Belize (2015). Dr. Owolabi started his career at the erstwhile national career, Nigerian Airways Limited, he served numerous roles within the company from 1978 till 1997 including General Manager, Nigeria Airways, Canada and United States of America. On October 1, 1999, Dr. Owolabi became the General Manager of Skypower, then a subsidiary of the Nigerian Airways. He currently serves as a Non-Executive Director on the Board of Directors of SAHCO. 

Captain Shehu Usman Iyal, Non-Executive Director 

Captain Shehu graduated from the School of Basic Studies, Ahmadu Bello University (ABU) Zaria in 1977. He also attended Nigeria College of Aviation Technology, Zaria (formerly Nigerian Civil Aviation Training Centre, Zaria) in 1982. He subsequently left to the Air Wing of the Nigeria Police Force. He is an alumnus of London Business School, where he studied Aviation Management. Captain Shehu holds a Commercial Pilot License and Private Pilot License which has culminated in an extensive flying experience of over 3000 hours including fixed-wing and rotary-wing aircraft. Shehu is currently the Managing Director/Chief Executive Officer of AFRI-AIR international Ltd, a Charter /Aviation Handling Company and also offers Aviation Consultancy Services, which he started in 2001. In recognition of his exemplary contribution to the aviation industry, he was appointed Special Assistant to former President Olusegun Obasanjo on Aviation Matters where he rose to the post of Senior Special Assistant in 2003 and subsequently served two (2) successive Nigerian Presidents. 

Basil Agboarumi, Managing Director/CEO 

Mr. Agboarumi is the Managing Director/Chief Executive Officer of SAHCO. 

Basil, who was recognized as Aviation Spokesman of the year, 2014/2015, is an alumnus of the School of Media and Communications of the Pan Atlantic University. He joined Skypower, then subsidiary of the Nigerian Airways Limited as the Head of the Public Affairs unit. After privatization and subsequent takeover of SAHCO by the SIFAX Group in 2009, he was appointed as the Head of Corporate Communications. In 2013, he was promoted to the position of General Manager, Corporate Communications and Information Technology before becoming the acting MD/CEO in 2017. In 2018, he was confirmed as the substantive MD/CEO of the company. 

Service Offerings 

SAHCO’s operations span the two main areas of aviation handling: ground handling – which includes passenger handling and aircraft handling – and cargo handling. Its activities cover all services rendered in anticipation of the arrival of an aircraft, those carried out while the aircraft is on ground, and the handling and warehousing of cargo. 

Ground Handling 

SAHCO provides an array of Ground handling services to both local and international airlines. Ground Handling involves all services rendered to the airline’s passengers as well as activities carried out on/for the aircraft itself. SAHCO controls 40% (2017) of the Nigerian market – according to management - and has earned 47% of its revenue from this segment over the last 5 years. Ground handling can be sub-divided into two categories: Passenger Handling and Aircraft Handling. 

Passenger Handling 

This covers services rendered to airlines for the purpose of facilitating the smooth operation of passenger air travel. Passenger handling roughly entails the services provided within the airport terminal, and includes: 

• Ticketing 

• Baggage reconciliation: This includes baggage management services offered to airlines as well as to passengers on behalf of client airlines. 

• Check-in services: This includes customer service agents assisting passengers with the ticket prices, verifying documentation, tagging and processing checked baggage, etc. 

• Lobby Management: Passenger service agents ensure that the appropriate number of check-in desks are available, staffed and have the appropriate identification signage as well as directing and controlling the flow of passengers in an orderly and efficient manner. 

• Aviation Security: This includes reconciling the manifest with passengers’ identity, as well as screening passengers and their luggage. It is a specialized service line which is focused on the provision of robust security solutions for airlines. 

• Lounge Management: for priority and upper-class travelers through its world class Premium Lounge 

• Gate Assignment 

• Boarding services: Announcing and conducting passenger screening and boarding as well as ensuring passenger safety to aircraft via buses, ramps, etc. 

Aircraft handling 

SAHCO performs aircraft handling operations across major airports in Nigeria, covering all services rendered directly to the aircraft. These include: 

• Marshalling: This is the process where on-ground personnel direct aircraft to its designated parking location through signals. 

• Aircraft towing: When an aircraft is moved to or from a maintenance facility, remote parking stand, or from one gate to another. 

• Aircraft grooming: Refers to the cleaning and restocking of aircraft in preparation for flight. 

• Ad-Hoc operations: This includes handling services provided for Christian and Muslim (Hajj) pilgrimages. 

Cargo Handling 

Cargo handling is a major part of the aviation handling industry. It entails cargo loading and off-loading, sorting and labeling, transportation and storage. SAHCO is a major player in the cargo sector, providing its cargo handling services at its four dedicated warehouses in Nigeria: Lagos, Port-Harcourt, Kano and Abuja, and can adequately service all types of cargo aircrafts and freighters with facilities built up with the best available technology (equipment and logistic systems). Currently, SAHCO offers cargo/freight services to 5 freighters and 1 mailing company. Clients are billed at a fixed rate per kilogram depending on the nature of the cargo; for example, handling of cargo containing animals has a fixed rate of N58.50/kg while regular cargo has a fixed rate of N46.60/kg. SAHCO currently handles 57% (according to management) of the cargo moving through the country by air and gets about 52% (2017) of its revenue from cargo handling (from 39% in 2013). 

The segment is the fastest growing revenue line in the company (7% CAGR since 2013), with management attributing their success to its modernized warehouses - the largest in West-Africa, making SAHCO the premier cargo handler in Nigeria, using Hermes computerization systems which ensure safe storage and easy retrieval of cargo. The warehouses also have features such as cold rooms (including a freezer room) which allow for the storage of temperature sensitive cargo such as pharmaceuticals and other types of cargo. 

Business Model 

Ground Handling: SAHCO generates revenue from its Ground Handling business in different ways. The first of these are the monthly payments for handling services by airlines. Clients are billed monthly on an accrual basis for ground handling services rendered to them in the period. These services and fees are usually stipulated in a contract signed by both parties, with an average tenor of three years. The prices for handling vary depending on the size of the aircraft, scope of travel and flight frequency. Also, SAHCO offers handling services for unscheduled flights – such as private jet flights. Such ad-hoc operations are billed per flight at prices that vary based on the size and model of the aircraft. 

Cargo Handling: Freight and cargo carriers are billed a fixed fee upfront (instant cash payment) and then subsequently charged at fixed rates for cargo passing through their warehouses according to the size and weight of the freight or cargo. The type of cargo (high risk vs. low risk) also determines what the fixed rate will be; for example, animals are billed at N58.50/kg whilst regular cargo is billed at N46.60/kg. 

Commercial Property: Although it technically does not add to topline, SAHCO generates income from leasing out office spaces to its clients. This venture pays off for them in a few ways; i) It keeps their clients close to them as these offices are right beside SAHCO warehouses and in some cases, in the same building as SAHCO HQ ii) It provides an affordable office for SAHCO’s foreign clients, a form of incentive to stay with the firm and iii) It generates other income for SAHCO. 

Equipment Rentals: Though accounting for 6% of revenue, SAHCO rents equipment to competitors. The prices are determined by the type of equipment and the duration of use of the equipment. 

Aviation Handling Key Industry Players 

Airlines & Freighters 

Airports & Points of Operation 

Equipment Manufacturers 

Licensing & Regulators 

SAHCO has a number of partners that it interacts with in carrying out its services. One of the most important are the handling equipment producers. SAHCO purchases its equipment from international ground handling equipment manufacturers. They control the prices of equipment which are mostly expensive to purchase and import into the country. Airlines and carriers are SAHCO’s customers and the company’s primary source of revenue. These are the partners SAHCO offers their core services. 

SAHCO also offers handling services to cargo and courier companies. SAHCO also sorts and stores mail and cargo for these partners for added efficiency in the delivery and management of cargo. For avenues of operation, SACHOL typically operates at passenger and cargo airports. They are the gateway for the ground handlers to interact with their client carriers. All aviation processes take place at airports and thus efficient management of airports is crucial to the proper functioning of SAHCO to carry out their operations. 

In Nigeria, there are a number of regulators in the aviation industry, one of the most important of these is Federal Airports Authority of Nigeria (FAAN). FAAN is licensed to handle operations of airports around the country and thus regulate the activities of the ground handlers at each airport. They determine the number of handlers that can operate at a given airport in the country, ultimately controlling the productivity of handlers at airports. 

The Global Picture 

Aviation Handling: Birthed from air travel 

The business of aviation handling covers all services provided to an airline during its flight cycle — from preparation for takeoff to handling on arrival at its destination. Aviation handling is a derivative of the aviation industry as handling services are necessary for both passenger and cargo air travel. Basic services such as catering, refueling and cargo handling are essential for airlines and airports to operate and demand for aviation handling services is what is known as derived demand — it arises as a consequence of demand for a more basic service (passenger and cargo air transport). As a result, the health and dynamics of the aviation handling industry are driven by developments and evolution in the broader aviation space. To illustrate this, technological advances in the aviation industry have led to advances in the handling industry. An example is the capability of passengers to check-in online, this required handlers to make provision for passengers that use this feature. 

Who does the handling? 

Aviation handling services can be provided inhouse by airlines themselves or by independent third-party handlers. Airlines outsource their handling services as this can lead to reduced overheads due to the specialization and economies of scale enjoyed by third-party handlers. In doing so, airlines are able to avoid or reduce the high fixed cost component of aviation handling including the purchase and maintenance of expensive equipment which would not have been used frequently enough to justify the expense. 

It is more efficient for airlines to outsource handling services to third-party providers at smaller airports or any airport where they do not have significant air traffic as this would save them the labour and capital costs associated with aviation handling. In addition, airlines would also outsource handling services in larger (non-hub) airports as third-party handlers are usually local and are therefore more able to secure the operational licenses or imported equipment needed for aviation handling. 

The importance of hub airports 

In-house handling remains most common with large airlines operating in their hub airports where it is more cost-effective as their frequency and scale of operations compensate for the high fixed costs involved in aviation handling. Furthermore, these airlines also benefit from being able to tailor handling operations to suit their unique needs. For example, British Airways provides its own handling services at its hub airport (Heathrow Airport in London), but relies on third-party handlers in heavily-frequented destinations in Europe and the United States. 

However, smaller airlines are likely to outsource most, if not all, handling services even at their home base as their frequency and scale of operations do not make it cost effective to employ the required staff and purchase equipment necessary to provide their own ground handling. John F. Kennedy airport in New York City is one of the busiest airports in the world. This airport has 22 entities carrying out handling services, with 8 of these being large international airlines who provide their in-house handling, while the rest are specialized third-party handlers catering to the many other airlines that use the airport. 

According to the International Air Transport Association (IATA), there is a rough 50/50 global split between in-house handling and third-party handling, from 75/25 in favor of in-house handling just 10 years ago. The IATA expects this ratio to move in favor of third-party handlers, estimating that the group would account for 70% of the aviation handling industry by 2022. 

The shift towards third-party handling has been driven by increased globalization which takes airlines further away from hub airports and encourages them to seek cost-effective alternatives to in-house handling. The industry is expected to continue to expand in the same direction, with third-party handlers taking up significant market share from the airlines and airports. This is as the industry becomes more specialized and possibly more costly for airlines and airports to administer these services themselves. 

There are some regional differences with respect to the penetration of third-party handlers. Most of the growth in air travel in recent years has come from Asia and airlines there have leaned towards third-party handling in order to keep up with the increased demand for air travel. As a result, the handling industry in Asia is dominated by larger third-party handlers who are best able to benefit from economies of scale and increased specialization. In Nigeria, aviation handling is carried out by third party handlers at most of the airports in the country with NAHCO and SAHCO consistently in a battle for market share. In the country, international airlines are not permitted to carry out self-handling by law, so they have to outsource to one of the two operational handlers in the country. 

Local Monopolies or Oligopolies 

Most aviation handling companies are local businesses that service entire airports. Smaller airports are often covered by one aviation handler whilst larger airports are typically covered a few handlers. As such, the global handling industry is made up of many regional monopolies and oligopolies. The Middle East, for example, is dominated by the Emirates Group’s Dnata whilst the Menzies Group controls 70% of the UK handling industry. Likewise, NAHCO and SAHCO form a national duopoly in Nigeria, accounting for majority of the Nigerian market. 

The existence of few players within a particular region can be attributed to relatively high barriers to entry in the aviation handling industry. These include a high capital intensity which necessitates a high fixed cost of operation; costly operational licenses; and other bureaucratic or regulatory barriers that may favour domestic firms over international handling companies. Furthermore, these regional monopolies or oligopolies are an economic outcome. According to a 2013 analysis conducted by Chris Smith Aviation Consultancy, the number of handlers at an airport is inversely related to the efficiency of handling, i.e. the more independent handlers operate at an airport, the less productive each operation would be. 

Although the industry status quo is a national oligopolistic structure, some handling companies operate outside their home country. Dnata, one of the world’s largest aviation handlers, operates in over 120 airports, providing the full range of handling services in a number of them and providing niche services in others; for example, Dnata was awarded a catering license for Vancouver Airport (Canada) in early 2018. Dnata dominates the Asian handling market, and the current iteration emerged after a succession of mergers and takeovers among national monopolies. The company’s operations outside its Asian stronghold mainly consist of lighter handling services that do not require as much capital for equipment or high technical skill. Another example is Swissport, a Swiss handling company that also operates in Trinidad & Tobago and Nigeria. The Swissport model is to license its equipment to local companies who then run operations using their own staff; in doing so, Swissport is able to share the cost of operations with its partners.

Liberalization breeds increased specialization 

Recent efforts to liberalize the aviation handling business—largely in Europe and the United States—has created a market with many more players, particularly at larger airports. In Europe, the market structure of the ground handling market is governed by the European Commission 1996 Council Directive on access to the ground handling market at Community Airports. One key feature of the directive is that it mandates at least two independent ground handling companies (not owned by the airport or a major aircraft) in any EU airport that carries at least three million passengers a year. The result of this liberalization has been two-fold: i) a steep increase in the number of handlers operating at larger airports (Heathrow in London, the world’s busiest airports, has 30 handlers) ii) greater specialization in the industry with ground handlers focusing on increasingly niche services to maintain a competitive edge (for example, Air Total specializes in refueling services at Heathrow, but cargo handling in Heathrow is carried out by Cargo Airport Services). 

Globalization offers growth route 

The global third-party ground handling industry has grown by 26% in the last decade, slower than overall growth in the aviation industry in that time — air traffic has grown by 32% since 2011, according to the International Air Transport Association. A key driver of this growth has been increased globalization which has led to an expansion in airport capacity and a rise in passenger traffic. This has been aided by steady economic expansion since the 2007/2008 financial crisis as well as a rise in low-cost carriers in regions like Europe—since 2009, the market share of low-cost carriers in Europe has grown on average by 1.4 percentage points per annum. Likewise, globalization has aided growth in the air cargo industry. Global export trade volumes have increased by an average of 27% over the last seven years, and air cargo now accounts for 10% of global trade by value. Specifically, the Asian market has experienced the fastest growth amid stronger demand for air travel from an expanding middle class and increased export capacity of many Asian economies. 

The aviation handling business has piggy-backed off the success of the broader aviation industry. One observed theme in the recent growth in aviation (particularly in Asia) is a focus on building new airports rather than expanding old airports. Although this is beneficial for handling companies as it minimizes congestion in crowded airports, it has material cost implications as handling companies often have to apply for licenses to operate in new airports and would then need to replicate the necessary capital equipment required for operations. The preference between building new airports and expanding old airports may differ across regions, and is often a political decision, but plays a notable role in the operations of aviation handling companies in a particular country. 

Technological advancement revolutionizing handling 

Technology has become more pivotal in aviation handling, in line with the broader shift towards mechanization and digitization in air travel. The use of technology has improved safety and efficiency; such as through the introduction of aircraft proximity detectors (APD) which prevent aircrafts from colliding with handling equipment. Passenger handling is one area that has seen notable technology impact, such as through the growth in online check-in facilities. Going forward, analysts expect greater technological penetration in the handling industry as it is highly capital-intensive. In particular, there is a push for more environment-friendly ground handling equipment which may be achieved through electric engines. Furthermore, technological innovations can assist ground handlers in streamlining and coordinating their operations, particularly in more congested airports. 

Nigeria Aviation Handling Industry 

Ground handling in Nigeria dates as far back as the 1940s, Nigeria Airways (operating as West African Airways Corporation at the time) was the sole company engaged in aviation handling for domestic and foreign airlines in the country. Though the airline had the requisite equipment and skilled personnel to effectively deliver on its services, a lack of commercialization, competition and seemingly detrimental governmental management saw the airline slowly begin to underperform in handling services between 1970 and 1980. Driven by this, airlines began to carry out and prioritize in-house aviation handling in place of third-party handling. 

In a bid to jump-start the aviation handling industry from the rut it was in, the Nigerian Government, through the Federal Airports Authority of Nigeria (FAAN), established the Nigerian Aviation Handling Company (NAHCO) in April 1979 as the first specialized handling company in the country. NAHCO was then incorporated as a private limited company in November 1979, with the Federal Government holding 60% equity ownership. 

By 1995, Nigeria’s Ministry of Aviation began a wave of civil aviation reforms to restructure the industry and revive the ailing Nigeria Airways’ operations. Amid this overhaul, Nigeria Airways in 1996 carved out its ground handling business and incorporated it as an independent ground handler called Skypower Aviation Handling Company Limited. By 1999, Skypower was granted operational autonomy from Nigeria Airways Limited, which implied financial and administrative independence for the handling company. NAHCO and Skypower from this point on became the major players in Nigeria’s aviation handling industry, with the two semi-governmental entities operating as a duopoly supported by enabling government regulations such as the Civil Aviation Policy of 2001. By 2005, NAHCO was fully privatized and its shares were listed on the Nigerian Stock Exchange in 2006. 

Amid the enactment of the Nigerian Civil Aviation Authority, established by virtue of the Civil Aviation Act of 2006, the government issued full operating licenses to two handling companies Swissport (the largest handler in the world by revenue) and Precision Aviation Handling Company Limited (PAHCOL) to boost competition in the industry and encourage cheaper, better service provisions by handlers in the country. By 2009, 100% of Skypower was purchased by SIFAX Group through Skyway Aviation Handling Company (SAHCO) and became a wholly owned subsidiary of SAHCO. In October 2018, there was a business combination between Skypower and SAHCO leaving the latter as the surviving entity. In 2018, PAHCOL was forced to shut down operations after controversy surrounding a foreign handler (Menzies Group) operating without a license in the country on behalf of PAHCOL. Swissport is still in operation, mainly offering security services at five major airports in the country. NAHCO and SAHCO are now the premier handling companies in the region and are in heated competition to acquire clients, leading to low service prices and the urge to offer superior services by both companies. 

Duopoly in Nigerian Industry 

The aviation handling industry in Nigeria is currently dominated by two major players: Nigerian aviation handling company (NAHCO) and Skyway aviation handling company limited (SAHCO). With high entry barriers into the industry, it is very difficult for the smaller companies to compete with the two big ones and for new competitors to enter the industry. It is a capital-intensive industry with very costly equipment that has to be imported and are subjected to high import tariffs which also incur significant costs to companies. By owning their own equipment, aviation handlers are able to become more specialized in their operations and ultimately become more efficient. The Managing Director of SAHCO, Basil Agboarumi, has frequently spoken about the possibilities of co-operation between players and the benefits of collaboration to improve efficiency. While no steps have been taken in that direction, collaboration between the major operators in the industry will be beneficial both for the industry and for its customers. 

Air cargo growth supports handling industry 

Air cargo accounts for less than 1% of global trade tonnage but up to 35% of world trade by value. There are three types of aircrafts that carry cargo: cargo aircraft, passenger aircraft with cargo allowance and combi aircraft which can be converted from passenger to cargo status. The air cargo market is divided into air freight and air mail which can be domestic or international. Most of Nigeria’s international cargo is transported by sea—over 95% of total trade in Q2’18—and air transport accounts for less than 5% of internationally shipped cargo. Nevertheless, demand for air freight has increased in recent years due to the growth of e-commerce and increased government focus on agriculture—the biggest type of good transported within the country. Due to the perishable nature of the produce, air transport remains the preferred route as it is the most efficient (safest and fastest) mode of transporting cargo & freight in the country. Moreover, alternatives to air cargo (road, rail and maritime) are relatively unattractive due to poor road networks and limited operational waterways. Despite this, road transport remains the most common means of cargo transportation in the country given that it’s the cheapest mode of transportation. 

Factors that shape the Nigerian Aviation Handling Sector 

Nigeria’s ground handling sector is an aviation allied industry. This means the performance of the sub-sector is directly correlated with that of the broader aviation sector and is also majorly influenced by factors affecting the air transportation industry. As such, handlers benefit from a rise in flying frequency as well as an increase in the number of operational carriers – both of which are affected by political, economic, social, technological and environmental factors. 

Stiff policy & political terrain poses impediments for handlers 

Nigeria’s political environment plays a significant role in shaping the aviation sector and that of its support service providers. While the wave of aviation industry reforms and eventual deregulation/privatization in the 80’s and 90’s opened up the aviation sector and allied industries such as ground handling, government policies in the past decade have done little to drive sizeable growth given the challenging operating environment. Most recently, as part of its austerity measures following the 2014 oil price slump, the government-imposed tariffs on imported equipment vital to the aviation handling industry. This has heavily increased operational expenses and made it difficult for handlers to acquire their requisite equipment. 

While the government granted a zero-import duty on aircraft spare parts in 2017, handling companies are reportedly unable to benefit from the duty-free concessions on spare parts. Meanwhile, stakeholders in the handling sector, along with the broader aviation industry, continuously speak of high tax burdens and excessive airport rents and charges levied on the companies by governmental regulatory agencies. Notably, handlers have reported excessive airport tariffs such as cost of ground rent (parking of ground-services infrastructure at airports), handling charges, and apron pass (permits given to vehicles to operate on the tarmac). Nigeria’s political environment can be characterized as somewhat stable and generally has a limited adverse effect on the aviation industry in the past decade. Albeit, analysts note possible volatility during election periods. 

Economic hurdles hinder handlers 

The air transportation sector currently contributes 0.09% (N105 billion) to the Nigerian economy and, according to the IATA’s Regional Vice President for the Middle East and Africa, Muhammad Ali Albakri, provides 651 thousand direct and indirect jobs. This is an underperformance when compared to its peers with the air transportation sector contributing 3.5% and 5.1% to the South African and Kenyan economies respectively. Prior to the 2016 recession, the industry recorded an average 5% growth between 2012 and 2015. However, given that the airline industry is cyclical, the sector contracted 5% y/y in 2016, in line with Nigeria’s -1.6% y/y contraction, and has been struggling to recover since. During the economic contraction, the aviation industry was impacted in three major ways – rising aviation fuel prices, weaker air transport demand and a highly challenging operating terrain. 

Notably, total passenger traffic has been on the descent since 2015, with the figure dipping 8% y/y to 13.4 million passengers in 2017 according to the NBS – lowest level since 2009. Expectedly, this trend has been driven by reduced travelling frequency by international flyers as well as domestic flyers opting for cheaper travel options such as road transport amidst sizable inflationary pressures, higher airline tariffs, and a squeeze on consumer disposable income. Meanwhile, from an operational point, airlines were also subdued by constrained foreign exchange supply, high interest rate environment, rising cost of aviation fuel and higher maintenance costs. 

Driven by the combination of these factors, revenues for air carriers were significantly constrained, with major carrier Arik Air taken over by AMCON (state-owned asset management company) due to its inability to fulfill its obligations. Without a doubt, the aviation handling sector has also borne the brunt of the weaker economy and ailing air carriers. Notably, total aircraft movement reduced 12% y/y to c.214k (2014: 253k) – directly implying a reduction in the number of flights the handling companies service - and total volume of cargo movement declined 16% y/y to 162 million Kg in 2017 according to the NBS. Furthermore, as part of austerity measures adopted during the challenging year, airlines increasingly began to consider self-handling while also re-negotiating for lower ground handling charges – partly inciting the ongoing price war between the two major handlers in the sector. 

Driven by a stronger improvement in economic variables, a recovery in aviation activities has begun to appear, with data from the National Bureau of Statistics showing a 15% and 24% y/y increase in total passenger traffic and air transportation GDP in Q2’18 respectively. Analysts expect sustained rebound in economic activities, moderating inflation, stable exchange rate and foreign exchange supply to continue to drive an increase in both freight traffic and flying frequency through the year, with further upside from announcements of foreign airlines opening new routes in Nigeria as well as some local players acquiring additional aircrafts to their fleet. 

Meanwhile, discussions and approvals made by the Federal Executive Council on re-introducing a national carrier, airport concessions and establishing an aviation leasing company may also serve as near-term catalysts for the aviation and aviation-allied industries. Whilst analysts understand that Nigeria’s detracted mid-term growth prospects cast a shadow on the strength of the aviation sector’s development, analysts believe addressing certain pivotal sectoral impediments (dismal airport infrastructure, high tax burdens, high cost of acquiring aviation fuel, unfavourable policies etc.) will be instrumental in harnessing the significant upside potential of the sector. 

That said, analysts highlight that higher disposable income and increased business and consumer confidence are other direct economic factors that will stimulate air transport demand. Furthermore, the limited capacity of Nigerian airports has also been repeatedly mentioned as a major hindrance to introducing new air routes and increasing air traffic. As such, the potential introduction of new airport terminals across the major airports in the country will be supportive of growth in the aviation and allied services sector. 

Strong demographics, social structures present room for growth 

Social factors are the areas that involve the shared beliefs and attitudes of the population. These factors include population growth, age, wealth distribution, health consciousness, religious beliefs etc. One of the more significant factors for ground handlers in Nigeria are religious travels and pilgrimages that happen at designated periods every year. Nigeria is a highly religious country, with most of the populace either Muslim or Christian, and many people undergo pilgrimages to their holy lands each year. SAHCO offers handling services on behalf of these pilgrims – classified as Hajj and Christian pilgrimage operations – to ease their spiritual journeys to their holy lands. Historical financials show that both operations contributed c.4% to topline in FY’16 and FY’17. 

Meanwhile, Nigeria’s unique demographic of a fast growing and young population is also supportive of rising growth in air transportation demand. Notably, with an increased number of travel seeking millennials and experiential generation Z entering the consumer class, analysts expect a sustained rise in travel to tourism countries, more so higher intra-African tourism – a trend that is visibly catching on amongst a small part of Nigerian youths. This aspirational generation’s travel choices and decisions are increasingly being fueled by social media platforms – both in terms of travel content influencing consumer decisions as well as a rise in smaller scale tour operators providing more affordable travel options and range. On the other hand, the case for Nigeria’s tourism industry and prospects of higher international tourism remains unexciting with very few tourist destinations and reportedly limited flight options due to insufficient airport infrastructure. Meanwhile, despite the country’s attractive demographics, rising income inequality, and a middle class that has become economically worse-off serve as a deterrent to Nigeria’s airline industry. Precisely, given the rising poverty level in the nation and reducing consumer disposable income, less people are able to afford and likely to engage in air travel. 

Tech at the helm of change across aviation value chain 

Over the years, the global airline industry has extensively employed technological developments to transform and upgrade its operations in order to adequately service the burgeoning number of flyers. This digital evolution has transformed operations across the entire ecosystem – airlines, airports and aviation allied services companies – and has driven improvement in operational efficiency and optimized passenger travel experience in the industry. Particularly in the ground handling sector, technological advancements have helped reduce customer stay time during their journeys and also aviation turnaround time. For instance, according to a 2018 Global Baggage Report by SITA (world leading air transport ICT specialist), the rate of mishandled luggage has dropped by about 70% in the last decade despite a 64% rise in total passengers in the same period. Meanwhile, the annual cost of baggage mishandling in the industry has also reportedly reduced by 46%. This, along with other cost savings recorded in the ground handling industry, has been driven by innovations such as self-service check-in kiosks, online check-in, modernized baggage systems, digital fueling technology, etc. 

Though this global trend has also been witnessed in the Nigerian aviation industry, the pace of development has been seemingly slower – even when compared with other African countries. Analysts believe this is majorly due to a lack of adequate investment in the sector as opposed to a slow rate of technological transfer. Given that the integration of new technologies is a shared strategy that cuts across all major stakeholders, the decrepit nature and suboptimal design of Nigeria’s airport infrastructure and cargo sheds do not support adoption of technological advancements in the ground handling industry. Likewise, whilst the International Air Transport Association (IATA) lays out best practices for the handling sector (IATA Ground Operations Manual and IATA Safety Audit for Ground Operations), analysts believe the broad lack of standardized procedures and technologies for the industry, both on a global and national level, is responsible for the seemingly backward tech status. Analysts see the government’s plans of concessioning some airports as a possible silver lining for investments in the sector, with the private sector parties investing in technology-driven solutions and self-service equipment to increase operational efficiency and capacity while ensuring a more seamless passenger journey. Meanwhile, Nigeria’s major ground handling companies are making provisions to acquire new equipment to support smoother operations. 

An increasingly environmentally conscious landscape 

Nigeria is a country in the tropics with periods of heavy rainfall during the raining season and periods of dry weather during the dry season. Adverse weather conditions have been known to cause delays and make the handling process more arduous than it typically is. Given this, there has been increasing sensitivity towards the environment and its safe keeping, airlines and airports are pushing for environmentally friendly processes and equipment and the handling industry is moving right along with this. Airports are promoting recycling and the use of environmentally friendly alternatives for food consumption and for other purposes. Passenger handling has evolved with the development of e-ticketing and paper consumption is being reduced, cutting back on waste. A rising number of passengers now check-in on their mobile devices and scan a code at terminal gates to board planes, this eliminates the use of paper tickets. 

It also forces handlers to make provisions for mobile scanning of boarding passes in turn pushing the industry forward technologically. For aircraft handling, there is room for ground handling equipment such as the tow cart to become electrically powered or to use cleaner fuels, these developments are already in the works and could reduce the cost of buying fuel. This will also reduce toxic emissions once fully achieved. Equipment manufacturers are investing heavily in research and development to make environmentally friendly equipment readily available to airports, airlines and handlers. Meanwhile, with safety on the ground and in the air becoming more of a priority for airlines and passengers alike, there is a lot of pressure on aviation handlers to carry out their processes with due diligence to prevent accidents on the ground during maintenance and in the air after take-off. While Nigeria has not caught up to the global advancements, analysts believe the increased adoption of technology and environmentally friendly solutions will foreshadow and increasing environmental awareness on the part of ground handlers while enhancing safety in ground handling operations and reduce incidence of accidents. 

Fairly relaxed regulatory environment for ground handlers 

There are international standards of operation to be met by aviation handlers as stipulated by the International Air Transport Association (IATA) in their IATA Airport Handling Manual. While the industry in Nigeria is largely deregulated, most of the challenges in the industry can be attributed to the difficult environment in which there are high tariffs on the import of aviation handling equipment and players are still subjected to high rents. Meanwhile, there are no tax cuts for new airlines operating in Nigeria, which is inconsistent with IATA standards where airlines should be allowed to run for three to five years tax exempt. For handlers, high fees for storage of equipment at airports as well as other unfavorable regulations make the aviation handling industry in the country largely subdued. 

The major law governing the Aviation industry in Nigeria is the Civil Aviation Act 2006, and it was the passage of this act that made the Nigerian Civil Aviation Authority (first established in 1999) become the primary autonomous regulatory body for aviation in Nigeria. Notably, the regulation supports the ground handling sector with the sector being designated as an essential service provider pursuant to provisions of the constitution, and the act also empowers the NCAA to issue licenses for ground handling operations. Furthermore, the air transport regulations also allow for self-handling operations by domestic airlines after obtaining approval from the NCAA. 

However, foreign airlines are not allowed to engage in self-handling and are required to use the services of registered Nigerian handling companies. Overall, analysts would consider regulations guiding operations for the ground handling sector in Nigeria as relatively less stringent when compared to the global landscape, with companies facing less scrutiny in an industry with no consensus set of standards and processes. Part of this is somewhat reflected in recent news that an unregistered ground handling company reportedly carried out handling operations for a flight under the license of another handler while making use of equipment of an airline unauthorized to carry out third party handling. In line with the practice across other major airports, analysts believe very clearly defined operational procedures and standards should be issued and implemented across airports in Nigeria. 

Threat of New Entry – LOW 

The threat of entry into the aviation handling industry in Nigeria is relatively low as the cost of entry is high. The ground handling business is a capital intensive one with high fixed costs and capital requirements. Equipment is purchased at high costs with high tariffs on the imports. For ground handling services, airlines still shop for high quality service while taking into account prices. 

Threat of Substitutes – LOW 

For international airlines, there are no substitutes for patronizing domestic ground handlers in accordance with the Civil Aviation Act. There are also limited number of substitute companies, with the two major players accounting for majority of the industry. All the processes carried out by the handlers are specialized and require the know-how to effectively carry out the procedures. For domestic airlines, whilst some allied aviation services are easier to carry-out, such as passenger handling, other services such as ramp and on-ramp services are more specialized and most airlines in Nigeria contract this to third party ground handling companies. 

Bargaining power of suppliers – HIGH 

Equipment used to carry out handling processes are very expensive, specialized and procured from international sources. The bargaining power of the supplier is high as these international sources set the prices of equipment and ultimately have the upper hand in negotiations as there is high and increasing demand for the equipment. Meanwhile, labor regulations in the country also give power to unions, who are the suppliers of labor (workforce), with the Air Transport Services Senior Staff Association of Nigeria (ATSSSAN) and National Union of Air Transport Employees (NUATE) regarded as very active unions that have embarked on multiple strikes in the past to defend welfare issues of their members. 

Bargaining power of Buyers – MODERATE 

The airlines and airports in Nigeria don’t have many options to choose from, this allows them limited bargaining power, giving the handling companies an edge in this country. However, recent price war between the two major aviation handling companies has given the buyers of services an upper hand and the luxury of getting affordable prices. 

Competitive Rivalry – HIGH 

Whilst there are only two major players in the industry in Nigeria, there is a lot of competition between them to service the carriers in the Nigerian airports. Meanwhile, the limited capacity across most Nigerian airports and also slower growth in the industry in recent time has exacerbated competitive rivalry. 

Peer Comparison Analysis 

Fighting for leadership at two ends of the industry 

Skyway Aviation Handling Company Limited (SAHCO) and Nigerian Aviation Handling Company PLC (NAHCO) are the top two leading players in Nigeria’s ground handling industry holding nearly 100% market share in the space. NAHCO has a longer history as an independent company in the industry than SAHCO, with operations dating back to 1979, compared to 1999 when the latter was granted operational autonomy. Both companies have a shared history of previously being government-owned entities before eventual privatization of the companies in 2005 (NAHCO) and 2009 (SAHCO). 

While historical data for SAHCO is limited, NAHCO has been listed on the Nigerian Stock Exchange since 2006 (a year following privatization). In terms of growth, SAHCO has grown at a much faster rate than NAHCO in the past five years. Notably, compounded annual growth rate (CAGR) for SAHCO comes to 4.4% between and 2013 and 2017, while NAHCO’s topline CAGR has remained near flat in the period at -0.5%. Looking at FY’17 financials specifically, growth across the ground handling sector was stifled due to tough market conditions with both handlers’ revenue printing marginally below the prior year. Specifically, SAHCO’s revenue in FY’17 came in at N4.86 billion (FY’16: N4.90 billion) while NAHCO in the same period recorded N7.93 billion (2016: N7.96 billion) in sales. 

For the major sub-segments in the aviation handling (Ground Handling and Air Cargo Handling), NAHCO holds the larger share of the ground handling sector, reportedly accounting for about 60% of domestic and international airlines. Meanwhile, SAHCO covers most of the rest of the industry while other third-party handlers cater for a very minor share of the industry. Specifically, analysts note that NAHCO holds an even higher advantage in terms of International operations given its strategic relationships – company owned jointly by top foreign airlines; Lufthansa, Air France and KLM (shareholders of the company). 

Amidst this, revenue CAGR from NAHCO’s ground handling sector has grown 9.8% in the past four years vs. a 5% decline for SAHCO. As of last reporting, SAHCO is currently engaged in either part or full ground handling for about 19 airlines in Nigeria, while NAHCO handles 35 airlines in the country (as at FY’17). Notably, while SAHCO handles approximately 560 flights per week, NAHCO reported a pro-rated figure of over 750 flights per week (as at FY’17). Meanwhile, the latter also reported six additional airlines it provides some handling service to in 2018 (Max Air, MedView (Hajj Ops), FlyNas, Air Peace, Aero World and Rwandair). As at FY’17, ground handling contributed 42% to SAHCO’s topline at N2.1 billion, however the service accounted for the majority of NAHCO’s turnover at 56%, N4.5 billion. 

In the cargo handling sub-segment however, NAHCO and SAHCO appear to have a much closer split of market share with strong growth recorded in the sub-segment for SAHCO. Specifically, SAHCO’s cargo handling revenue rose at a compounded rate of 9.3% between 2013 and 2017 while NAHCO’s revenue in the segment declined substantially by 11.2% in the same period. SAHCO has put a major focus on improving its service delivery in the cargo handling business, notably the company refurbished its Lagos warehouse, equipped with state-of-the-art facilities in 2015 and an over 100,000 square meters capacity, and also has invested in warehouses and cargo sheds in Kano, Abuja and Port Harcourt. Most recently, SAHCO inspected the new Bayelsa Cargo International Airport to determine where its cargo warehouse will be situated in the airport. 

Meanwhile, SAHCO also works closely with DHL, one of the largest logistics companies in the world, the company handles all of DHL air cargo in Nigeria and also rents them an office space. Using data from the National Bureau of Statistics, total volume of cargo movement recorded in 2017 was 161.8 million Kg, with SAHCO and NAHCO reporting total cargo volume of 57.6 and 56.5 million Kg respectively in the same period. Notably, while cargo handling accounts for about 52% of SAHCO’s headline revenue figure (N2.5 billion), it contributes 37% of NAHCO’s topline (N3.0 billion). Overall, operationally it appears SAHCO has an upper hand in the cargo handling segment while NAHCO is currently more relevant in the passenger/aviation handling business. NAHCO has a relatively larger base than SAHCO, employing 1,700 employees (SAHCO: 1,400). 

SAHCO leads in profitability with stronger operating margins 

Using available historical financial statements, SAHCO is more profitable across all earnings lines when compared to its closest counterpart, NAHCO, despite the company’s smaller operational scale. Notably, between 2013 and 2017, SAHCO recorded an average 50% gross margin (FY’17: 45%), while NAHCO reported average gross margin of 36% in the same period (9M’18: 33%). Supported by the aforementioned, average PBT margin for SAHCO between 2013 and 2016 (excluding the significant decline in recession plagued 2017) printed at 11% (FY’17: 3%) - above 10% recorded by NAHCO in the same period. That said, while NAHCO’s PBT margins have remained relatively around the same levels in the past few years, SAHCO’s margins have moderated consistently, down from 18% in FY’13 to 14% in FY’16. Majorly driven by this, SAHCO’s bottom line has remained relatively flat in the past four years (-0.47% CAGR) despite its rising topline. 

Despite a more stable PBT margin, NAHCO’s bottom line has also similarly stayed at the same levels since 2014 constrained by the weaker topline. Following the significant decline in profits in 2017 (operating profit declined 69% and 34% y/y for SAHCO and NAHCO respectively), earnings appear to be recovering so far in 2018 supported by the broad economic improvement in the economy and moderating inflation. Specifically, NAHCO reported a 120% y/y rise as at 9M’18 with the strongest growth recorded in ground handling. 

Differing growth strategies, similar prospects 

Analysts expect SAHCO and NAHCO will continue to chase dominance across the two segments in the aviation handling sector, cargo and ground handling respectively. This strategy was largely evident in FY’17 results where NAHCO grew its aircraft handling segment by 12% - by offering more competitive rates for its service amid a “price war” between the two competitors – while cargo handling revenue moderated 20% y/y. In a directly opposite direction, SAHCO’s aircraft handling revenue moderated 24% while cargo revenue rose 28% y/y amid a stronger drive for agro-allied export cargo. Notwithstanding the differing strategies, there is a lot of room for expansion for both companies in the underdeveloped segments, benefiting from an improvement in the business environment and stronger activity. 

Investment Thesis 

Nigeria’s underdeveloped aviation sector provides huge upside 

While the Nigerian aviation sector has experienced notable growth since the 1991 liberalization, significant potential for expansion persists in the industry both in Nigeria as well as across the African continent given the dismal level of current air travel passengers relative to the size of the population and economy – Africa accounts for only 2.2% of global passenger traffic as at 2017 despite accounting for 17% to global population. Total passenger traffic in Nigeria has declined 4% since 2010, coming to 13.4 million as at 2017, (7.4% of Nigeria’s population), paling in comparison to the 19% growth recorded in South Africa (to 41.5 million passengers). 2016 Data from the International Air Transport Association (IATA) estimated Nigeria’s propensity to fly (total passengers/population) at below 0.1, while South Africa and Egypt came to about 0.4 and 0.3 respectively. 

Similarly, GDP growth in Nigeria’s aviation industry has printed just in line with the broader economy at an average 3% rate in the past five years despite the impressive demographic profile of the country – 2.5% annual population growth rate and a rapid urbanization rate. Analysts believe growth in the aviation sector has been constrained by deteriorating per capita income in the country given the high correlation between living standards and travel frequency. While these realities cast a gloomy shadow on the real potential the industry can harness, analysts believe the implementation of structural economic reforms and government policies will help support a more inclusive growth in the economy, drive stronger business activity, improve living standards and propel income growth in the mid-long term. 

Thus, as per capita income recovers, and Nigeria’s middle class begins to grow again, analysts expect the eventual rise in discretionary income to support demand for travel, culminating in stronger growth for the aviation and aviation allied sector. Consistent with this economic growth, analysts expect growth in trade, foreign direct investments, tourism and migration to also power growth in air passenger traffic in Nigeria. Notably, the IATA forecasts a 4.6% CAGR over the next two decades for the African continent, with an additional 199 million passengers added to the total market (334 million by 2037) in the time period – Nigerian flyers contributing a notable portion to this (2037F: 35 million). 

Nonetheless, in the near term analysts anticipate a recovery in the aviation sector, as economic activity and business confidence in Nigeria further strengthen following the cyclical downturn experienced during the 2016 economic recession. Given that the aviation handling industry is a direct recipient of this rebound, analysts believe SAHCO – one of the top two players in the industry – is well positioned to capitalize on this expansion and as such analysts expect stronger earnings growth from 2018. Notably, with Q2’18 GDP data showing a 24% y/y jump in Aviation sector GDP, NAHCO posted a 25% y/y revenue rise in its 9M’18 results while SAHCO reportedly posted a 37% y/y rise in revenue in its 9M’18 results. 

Strategically positioned to drive cargo growth 

Amid the construction of its ultra-modern import and export cargo warehouse, procurement of cutting-edge handling equipment, globally recognized certifications, and investments in manpower training, SAHCO has cemented its place in the Nigerian cargo handling business and has consistently and significantly grown its market share in the cargo handling segment – with value share rising from 25% in 2013 to 44% in 2017. Specifically, SAHCO was able to extend its sophisticated cargo services to new clients such as AirFrance-KLM, Allied Air and Ethiopian Airlines.

 The company currently offers cargo handling services in Lagos, Kano, Abuja and Port-Harcourt, major ports in each region of the country. SAHCO has strategically positioned itself in the stronger margin business – as gross margin in the cargo handling business (c.60%) is markedly stronger than that of the ground handling sub-segment (c.45%). Analysts expect the company to continue to post impressive growth in cargo handling – up 38% y/y in 9M’18 – driven by continued market share expansion and stronger growth in the air cargo industry. Particularly, a more supportive economic and trade (e-commerce especially) backdrop for Nigeria will support air freight volumes in the coming years even as stronger development across non-oil industries drives more two-directional trade flows for the country. 

SAHCO has also espoused optimism on the potential and traction recorded in Nigeria’s perishable cargo export industry – buoyed by the country’s agriculture production capability and the government’s export diversification drive via policies such as the development of Economic Free Trade and Export Processing Zones. Analysts also recall that the Presidential Enabling Business Environment Council in 2017 enacted new guidelines to reduce documentation required to import and export goods, thus shortening the time required to facilitate trade – a move to improve ease of doing business. 

A shift in Nigeria’s structure (i.e. more non-oil export flows) will also support cargo route diversification as air cargo currently accounts for less than 5% of Nigeria’s trade by value (below 35% for global trade, according to IATA), given that most of the country’s trade is dominated by either crude or refined oil. SAHCO has stated its plans to invest further in the cargo industry, indicated by recent inspection of Bayelsa’s new cargo airport for potential investment. SAHCO is estimated to have handled 36% of total air cargo volumes (using NBS data). 

Infrastructure investments to support aviation expansion 

Supported by additional infrastructure investments in the aviation industry, analysts expect growth in the aviation sector to be buttressed by a substantial increase in Nigeria’s airport capacity. Given the current infrastructural deficit in the industry, Nigeria must invest in modern aviation infrastructure to adequately cater for and benefit from the expected growth in air passenger traffic. Notably, despite having about 26 operational airports, 32% of aircraft movement is from the Murtala Mohammed Airports (MMA) in Lagos – nonetheless ranked as part of the top 10 worst airports in the world in 2017 (according to Sleeping in Airports). 

This is majorly given that most of the airports in the country are highly manual in nature and lack modernized equipment, functional and adequate airport infrastructure, good and efficient airport staff service, security, hygiene, aircraft maintenance facility etc. Meanwhile, many airlines operating in Nigeria – particularly those at the Lagos airports – have noted the lack of sufficient airport capacity as a factor that has limited their expansion rate, in terms of number or flights and fleet. Particularly, in 2017, about 62% of scheduled domestic flights were either delayed or cancelled – partly due to operational and infrastructural constraints across airports. 

In fact, stakeholders in the airline industry have identified over-capacity for airlines operating on the domestic scene, highlighting the difficulty in operating more than one aircraft on some major domestic routes in the country given slow traffic in and out of the airports amid limited capacity. The Nigerian Federal Government appears to be taking some necessary steps to address the deficit, also reiterating its commitment to make the country a regional aviation hub. Analysts highlight the recent commissioning of the new Port Harcourt International Terminal and construction of new terminals at the Nnamdi Azikiwe International Airport (expected to open in 2018) and Murtala Muhammed International Airport Lagos. 

The FG has also reiterated plans to concession some of these airports/terminals for about 20-30 years, with the private sector participation expected to drive better efficiency in the industry. Meanwhile, the Lagos State Government is also on the hunt for investors to fund its proposed $450 million Lekki International Airport in Lagos. Unlike the passenger airports, less traction has been recorded for cargo airports in Nigeria, with only four functional cargo airports in the country, some of which are already at capacity. 

While the Bayelsa International Cargo Airport was reportedly recently completed (September 2018), analysts recall that in 2013 the FG had designated 13 airports as perishable cargo airports, most of which are yet to take-off. Should the government provide the required funding for these projects, analysts highlight the potential near term boost for increased cargo activity from the Akure and Owerri cargo airports where major construction has been ongoing. 

Markedly underserved on route options amid low foreign presence 

The Nigerian aviation sector recorded a significant number of international airline exits in the heat of the 2016 economic recession amid severe foreign currency illiquidity that left airline revenues trapped in the economy. Specifically, media sources report that no fewer than 14 airlines withdrew their services from the country – including heavyweight player United Airlines, and others such as Iberia and Air Gambia. While it is unclear how many of these airlines may have re-entered the country, analysts note that air transport data from the NBS showed that international aircraft movement as at H1’18 remained 19% lower than H1’15 levels. 

Nonetheless, analysts anticipate the re-introduction of more international airlines into the Nigerian airspace in the near to medium term. First, the Nigerian government reportedly cleared the backlog of dollars owed to international airlines earlier in 2018 – mildly restoring confidence in foreign currency availability in the country. Also, analysts expect the upgrade of airport facility and infrastructure investment to drive increased foreign airline presence in Nigeria, noting that a number of airlines have discontinued operations across airports due to dilapidated facilities (Emirates withdrew services at Abuja airport in 2017 due to a rundown runway). 

Analysts also note the potential boost from higher international ratings on Nigerian airports – post infrastructure development – given that it is standard procedure for airlines to consider airport ratings before designating their routes or choosing what aircrafts to fly to destinations. Notably, following the recent opening of Ghana’s state-of-the-art terminal at the Kotoka International Airport, UAE-based airline, Emirates conducted a historic one-off flight using its flagship double-decker A380 aircraft, the world’s largest commercial passenger jet, to the Ghanaian airport. Furthermore, the recent signing of the Single African Air Transport Market (SAATM) agreement, an African Union treaty signed by about 26 countries that allows for open skies without restrictions for member states’ airlines, is expected to increase Intra-Africa connectivity and travel. That said, stakeholders in the industry have expressed that the benefits from the SAATM would be even more significant for Nigeria if it had a national carrier. Analysts note that Federal authorities recently suspended plans to launch a new national carrier, Nigeria Air amid reported investor apathy for the project. 

Lower air tariffs to boost air travel demand 

Cheaper air fares have been proven to drive stronger air travel demand, particularly in countries where income levels are growing at a slower pace. Amid the currency devaluation and high operating costs that characterize the Nigerian environment, flight tickets have surged significantly in the past few years. According to a Flight Price Index by Kiwi.com in 2017, Nigeria ranked 57th out of 80 countries for countries with best value air ticket prices – deteriorating from 42nd in 2016 – with an average cost/100 km of $20.23, above $7.25 and $11.64 for South Africa and Kenya respectively. In the near term, analysts expect the implementation of the recently signed executive order for the removal of Value Added Tax on domestic air transportation to directly support a moderation in air tariffs on domestic flights which should potentially improve air travel demand. 

Meanwhile, while the emergence of low cost carriers (LCCs) have helped increase the option of cheaper airfares on a global level, many industry experts have espoused that the LCC business model maybe unviable in Nigeria given the high structural operational costs in the business. In the longer the eventual implementation of government plans to remove bottlenecks – particularly dealing with the high cost of fueling and aircraft maintenance – as well as infrastructure improvements will be more relevant to reduce the cost of air travel in Nigeria. 

Risks and Mitigants 

Economic Risk 

Recent GDP growth figures point to slowing economic growth as the Nigerian economy struggles to accelerate after recovering from recession. The Nigerian economy grew at an average pace of 5.6% y/y between 2010 and 2015 but posted growth of 1.0% y/y in 2017. A weak economy would negatively impact the demand for air travel, lower airport infrastructure growth, and increase pressure on airline profitability. All of these would adversely impact the long-term earnings capacity of aviation handlers. 

Mitigant: Nigeria’s economy has performed below potential in recent times, and the mix of a large youth population, abundant resources, and a strong entrepreneurship drive provide a platform for long-term growth. Government efforts to further diversify economic output and exports, as well as improve infrastructure and the ease of doing business all hold the potential to trigger accelerated economic growth in Nigeria. 

Foreign exchange risk 

Most macroeconomic levers indicate that Nigeria’s economy will be resilient post-2016 recession but the exchange rate remains vulnerable to depreciations. Between 2000 and 2017, the naira depreciated 6% per year against the dollar as the official exchange rate rose from N105/$1 to N306/$1. In addition, despite stable exchange rates across Nigeria’s existing FX markets, recent depletion of external reserves—down from $42.06 billion at the end of October to $47.66 billion at the end of May — shows the pressure on the domestic currency. Moreover, developing economies’ exchange rates are volatile in the long-run, and aviation handling firms such as SAHCO remain directly vulnerable to potential FX volatility and depreciation as they import their equipment, and indirectly vulnerable, through airlines whose primary input (Jet fuel) is imported. 

Mitigant: The long-term trajectory of the exchange rate is tied to Nigeria’s economic performance which continues to have a high potential, pending policies to unlock rapid growth. Moreover, Nigeria’s status as an oil exporter ensures the availability of dollar receipts to defend the currency in the international market. 

Competition 

The duopolistic structure of Nigeria’s aviation handling industry means that the two dominant players are often entangled in intense competition, oftentimes engaging in price cuts to attract customers. This “beggar thy neighbour” approach somewhat constrains the industry’s earnings potential and imposes the importance of marketing and promotional efforts to ensure competitiveness. 

Mitigant: SAHCO’s management is focused on delivering the best quality of service in their industry in accordance with global best practices to be able to compete with any company worldwide. This commitment along with their attractive service rates, stronghold on the cargo handling sector of the industry and their increasing client base will position them to conquer the industry in Nigeria. 

Safety 

Collisions between ground handling equipment and aircrafts have been a relatively common hazard in Nigeria. The most recent were: a collision between SAHCO’s passenger step and an Arik aircraft at the MMA2 airport in Lagos and the technical issue that caused another Arik Aircraft to be grounded at the Sam Mbakwe Airport in Owerri, both earlier this year. Hazards such as collision of equipment with aircrafts cause damage to the equipment and aircraft which cost a lot to repair or replace. It also disrupts the entire travel process for passengers who want to get to their destinations on time. Hazards such as this negatively affect customer confidence in the handler. 

Mitigant: SAHCO has training programs certified by the IATA that focus on safety in ground handling operations. It really comes down to employee proficiency and these training programs teach the employees how to operate equipment optimally and also how to react in hazardous situations. 

Financial performance review 

Following the acquisition in 2009, SAHCO officially started operations as a private entity in 2010, offering both Ground Handling and cargo warehousing solutions to domestic and international clients. In 2013, SAHCO recorded a topline of N4.1 billion, with Ground Handling accounting for N2.4 billion (59%) and Cargo Handling, N1.6 billion (40%), with the rest being accounted for by Equipment Rental and other smaller business segments. EBIT printed at N910 million, translating to a 22% operating margin in the period. In line with passenger traffic and cargo movement, revenue rose consistently over the following years to N4.9 billion in 2016, with Ground Handling rising 9% to N2.6 billion and the Cargo business rising 11% to N1.8 billion. Notably, the Ground Handling Business grew slower than the Cargo business due to stiff competition in that space, even as one of SAHCO’s largest customers (Arik Air) reduced the scale of their operations towards the tail end of the period under review. 

However, driven by warehouse upgrades as well as some internal restructuring, EBIT margin moderated marginally over the period to 18% in 2016 (N889 million EBIT). According to management, the drop in margins was anticipated as topline was not expected to grow fast enough in the short term to cover for the additional investment into the warehouses and personnel. However, they believe the upgrades would yield longer term results as it would position them as the go-to company for cargo solutions, giving them the leverage to capture new clients. That said, some benefits began accruing in 2017, when the company signed on two new Cargo clients – Allied Air and Ethiopia Air – translating to a 28% y/y rise in Cargo revenue to N2.3 billion (48% of topline) in 2017. 

Revenue from the Ground Handling business, however, fell 24% y/y to N2.0 billion in 2017 (41% of topline), with management attributing the fall to the partial closure of the Abuja International Airport in 2017 as well as the loss of business from a major client (United Airlines), who closed their operations in Nigeria within the year. Driven by the drop in Ground Handling revenue, SAHCO recorded a 1% y/y moderation in revenue to N4.9 billion – the first since 2013. Given that SAHCO’s cost structure is weighted towards fixed over variable costs and with the company taking on higher personnel costs in the period, EBIT fell to N277 billion in 2017, whilst EBIT margin shrunk 12ppts to 6%. 

Given that SAHCO’s debt balance is relatively tame, Interest expense has been mild, with the company averaging a N199 million interest expense over the past 5 years, and maintaining an above 3x interest cover in the period (except for 2015 and 2017 where EBIT was pressured). Notably, this is in line with its closest competitor. Prior to 2015, the Aviation Handling industry enjoyed pioneer tax status. 

Thus, the company paid no tax and in fact, enjoyed tax credits in 2013 and 2014, leading PAT to come close to or surpass EBIT. However, even upon the expiry of the pioneer status, the company continued to record tax credits, drawing down on unutilized capital allowances except in 2015 where SAHCO recorded a N212 million tax expense which led to a loss after tax of N70 million – the only loss in the five-year period under review. Overall, the company averaged a PAT margin of 12% in the period. 

Earnings Forecasts 

Following the rehabilitation of the Nnamdi Azikiwe International Airport, analysts expect activity to pick up in the Aviation sector this year, with a trickle-down effect to the Aviation Handling subsector. So far, the Aviation sector GDP is up 24% y/y. Furthermore, with management indicating that Arik Air’s operations (A major Ground Handling client) have been on the rise, analysts anticipate a 5.9% growth in Ground Handling Revenue to N2.1 billion in 2018. Post-2018, analysts expect Ground Handling topline to grow at a CAGR of 4% to N2.5 billion in 2022 driven by sustained improvement in the broader economy in general and the aviation sector specifically. 

On the cargo side, whilst management has not signed any major clients this year, analysts forecast a 15% y/y rise in revenue to N2.7 billion in 2018, driven by improvements in the broader sector and management’s new strategy which includes referring clients to their cargo customers, with the aim of increasing SAHCO’s topline. Management is optimistic about this new strategy, and going forward, analysts expect this, combined with sustained macro improvements to drive a 10% post 2018 topline CAGR to N3.9 billion in 2022. Overall, analysts expect SAHCO’s topline to grow 11% this year to N5.4 billion and then a further 8% annually to N7.3 billion in 2022. Given that much of SAHCO’s costs are fixed in nature and 2017 EBIT was depressed, analysts forecast a 198% y/y jump in EBIT to N827 million this year, translating to an EBIT margin of 15%. With revenue expected to grow consistently over the next 5 years, analysts see EBIT margin improving to an 18% average from 2019 to 2022. 

Below the EBIT line, analysts expect PBT to jump to N747 million this year, driven by a reduced interest expense, given that SAHCO paid off a loan to Guaranty Trust Bank (GTB) early in January. Whilst the company replaced the loan later in the year, analysts expect the interest-free period between the lapse of the GTB loan and the refinancing to drive down finance costs for the year. Between 2019 and 2023, analysts expect PBT to further rise at a CAGR of 18% to N1.4 billion as EBIT continues to rise and Interest expense further moderates. Meanwhile, in the absence of tax credit this year, analysts project a slower, albeit significant increase in PAT to N643 million and a continued rise to N1.2 billion in 2022. 

Valuation 

Analysts value SAHCO at N5.03 using a Discounted Cash Flow Method based on earnings from its Ground Handling and Cargo business. Their model also includes income from the commercial property rentals but excludes any potential revenue to be gotten from the proposed national carrier as well as SAHCO’s expansion plans. Key assumptions underlying their DCF valuation is a beta of 0.50, a risk-free rate assumption of 14.60%, a risk premium of 5.50%, a weighted average cost of debt of 19.0% and a debt-equity split of 30:70. This translates to a weighted average cost of capital of 17.0%.

Reporting for EasyKobo on Thursday , 15 November 2018 in Lagos, Nigeria

Source: Vetiva Capital Management Limited