AVIATION INDUSTRY AND IMPLICATION FOR ECONOMIC DEVELOPMENT IN

NIGERIA
Abstract

This work is an evaluation of the influence of aviation sector development on economic

development in Nigerian. Over the years, various governments of Nigeria have put in place a series

of policy instruments for the development of the aviation sector as sinews to bolster the desired

growth. But air transport system continues to mirror inefficiency, mismanagement and airline

mishap. This study developed a series of econometrics models including dynamic ordinary

regression equation, cointegration, error correction model and granger causality techniques to

examine the relationship between air transport and economic growth. The analyses suggests a

positive influence of air transport on economic growth, a long run equilibrium relationship and a

causal unidirectional relations from air transport to economic growth. The diagnostic test for the

normality of the model showed that the model functional form is adequate, stable with no serial

correlation. From the analysis, this study recommends a proactive and dynamic cohesive transport

policy that benefits all the stakeholders. Also, the sector must improve on its managerial expertise

guided by adequate transparency and accountability in order to achieve results and develop the

sector to an international standard worthy of emulation.

 CHAPTER ONE

INTRODUCTION

Background to the study.

Aviation has become an integral part of the socioeconomic life of the country. According to

Igbatayo and Igbinedion (2014: 1), the aviation industry can be defined as those activities that

relate directly to transporting people and goods by air from one place to another. The industry

comprises various activities such as airline and transport operations, general aviation aircraft

maintenance, scheduled and chartered flights for passengers and freight, as well as air traffic

control and regulation. It also includes activities directly serving air passengers, such as check-in,

baggage

-handling and on-site retail and catering facilities (OEF, 1999)cited in ( Igbatayo and Igbinedion

2014:3).

It is important to note that the aviation sector is regarded as a strategic industry, not only for its

potential for economic growth but also its crucial role in national development and regional

integration. As put by (OEF 1999), the most important contribution aviation often makes to the

economy is through its impact on the performance of other industries and as a facilitator of their

growth.

The aviation industry is part of transport infrastructure on which many other part of the economy

depends. It contributes to the economic growth, providing better transport link across the economy.

It facilities international trade by providing fast transportation network (Ismail et al 2014: 93).

Statement of the problem.

The aviation industry is a sector in its own right employing aviation workers and providing

livelihood opportunity to service providers in the industry. According to Owopoti (2014: 2), the

industry facilitates productivity growth because of its position as rapidly growing sector that

catalyzes foreign direct investment, tourism and related

industries. This was further emphasised by (Perovic 2013: 57) when he argued that the industry has
a significant benefit in the Nigerian economy, supporting Nigeria GDP of about 4% and job

creation of about 159,000 of Nigerian working force, contribution to tourism industry and foreign

investment in the Nigerian economy. He further notes that the aviation industry supports tourism

and international business by providing the world’s only rapid worldwide transportation network.

However, the Nigerian aviation industry is yet to contribute significantly to economic growth.

Despite the potential of the sector to create employment and spur the development of other

industries, such as the tourism and hospitality sector. The lack of adequate infrastructure and some

other challenges have constrained the aviation industry in Nigeria. This contradictory view is

authors in examining the role of aviation industry in the economic development of Nigeria spurred

interest in researching this topic. Many authors have examined the aviation industry in Nigeria;

while some argued that the implications have been positive, some argued that it has been negative

while some argued that the aviation industry has not had any implication on the economic

development of Nigeria. This study intends to fill this gap in the literature by examining the

aviation industry and its implication for Nigerian economic development. Emphasis will be placed

on the nature of the aviation sector in Nigeria since inception and how it has contributed to

economic development.

Objectives of the study.

The main objective of this study is to examine the implication of aviation industry in the economic

development of Nigeria. In order to achieve this objective, the following are the specific

objectives:

1.) Examine the aviation industry in Nigeria since inception

2.) Explore how the activities of the aviation industry have influenced the economic development

of Nigeria.

3.) Investigate the relationship between aviation industry and economic development.

Research Questions

1.) What is aviation industry?

2.) What is the relationship between aviation industry and economic development?

3.) What is the role of aviation industry in the economic development of a country?

4.) What are the implications of the aviation industry on the economic development of Nigeria.

Significance of the study.

This study is very significant as it provides a unique way of exploring into the factors that can

contribute to the economic development of Nigeria. It has been discovered that little emphasis has

been placed on the implications of aviation industry in economic development and hence,

exploring this topic will add significantly to the literature and further provide ways by which the

industry can be fully maximised in developing the economy.

It will also help student researchers to fully understand the aviation industry and further write on

the topic.

Scope of the study.

This study covers the aviation industry in Nigeria right from inception, and the contributions and

activities of this industry to the economic development of Nigeria.

Research Hypothesis

1.) There is no significant relationship between aviation industry and economic development.

2.) There is significant relationship between aviation industry and economic development.

Limitation of the study.

This study is really limited in terms of gathering materials. The aviation industry is a very strategic

sector of the economy and as such enough materials were not found.

Definition of terms

1.) Aviation industry: this can be defined as those activities that relate directly to transporting

people and goods by air from one location to another (Igbatayo and Igbinedion 2014: 1)

2.) Economy: this refers to a man made organization for the satisfaction of human wants. It is a

system by which people get a living.

3.) Economic development: It can be defined as the development of economic wealth of countries,
regions or communities for the well-being of their inhabitants. From a policy perspective,

economic development can be defined as efforts that seek to improve the economic well-being and

quality of life for a community by creating and/or retaining jobs and supporting or growing

incomes and the tax base (Salmon Valley and Innovation Centre).
 CHAPTER TWO

LITERATURE REVIEW

2.1 Theoretical and Empirical consideration.

Great efficiency and value are obtained when long distances are involved and high value payloads

are moved, although, the time and cost efficiencies obtained decreases as distances traveled is

reduced. Air transport is often worthwhile even for relatively short distances. It also provides a

communication link, which is sometimes vital, between the different groups of people involved

WIE (2011). Hayle (1973) maintained that transport development may not be precondition for

economic development. However, he was quick to acknowledge the fact no industry thrives in the

absence of transport, whether in the key areas of marketing of sourcing raw material, distribution

of products, or movement of members of staff from home to factories. In the same vein Filani

(1986) lend support to Hayle (1973) when he argued that for any economic progress to be achieve

in any country, the aviation industry as an integral part of transport must be developed, this is sine-

qua-non to development. Adefolalu (1977) opined that air transportation has introduced the most

effective method of overcoming the barrier imposed by physical distances and difficult topography

and its speed is far superior to any other mode of transport.

The International Air Transport Association (IATA) commissioned Oxford Economics (2012) to

estimate the economic and social benefits of aviation in over 80 countries worldwide. The analysis

includes the traditional economic footprint of the industry, measured by aviation’s contribution to

gross domestic product (GDP), jobs, and the tax revenues generated by the sector and its supply

chain. However, the economic value created by the industry goes beyond the value captured by

these measures. Therefore, the study also investigates the positive impacts of the connectivity

provided by air transport services. The connections made between cities and markets produce an

important infrastructure asset that facilitates activities that enhance a nation’s productivity. More

specifically, air transport enables foreign direct investment (FDI), business cluster development,

specialization, and other spillover effects. The analysis produced by Oxford Economics is one of
the first attempts to estimate these benefits of connectivity (Perovic, 2013). According to a report

by Air Transport Action Group (ATAG), aviation plays a vital role in facilitating economic

growth, particularly in developing countries. Aviation is indispensable for tourism, which is a

major engine of economic growth, Globally, 51% of international tourists travel by air.

Connectivity contributes to improved productivity by encouraging investment and innovation;

improving business operations and efficiency; and allowing companies to attract high quality

employees.

The air transport sector (Aviation) makes a substantial contribution to Nigerian public finance

account. This is achieved through corporate tax paid by companies, income tax paid by all their

employees, social security payments (employers and employees contributions), and the revenue

generation through aviation sector taxes. All these provide an indication that taxes paid by the

aviation sector’s supply chain and taxes raised through induced spending channels contribute to

total revenue in Nigeria (Oxford Economics, 2012). The impact of the air transport sector was

analyzed by Nwaogbe, Wokili, Omoke and Asiegbu (2013), they reported that the air transport

sector has contributed immensely to the economic development of Nigeria and the entire globe in

two other ways. Firstly, through the taxes levied on Gross Value Added i.e. the sum of profits and

wages. Secondly, through its lump sum investment and its use of higher advanced technology

systems for its operations and maintenance. Stephens, Ikeogu and Ukpere (2014) carried out a

study on the contribution of aviation industry on the Nigerian economy. It showed that the

domestic air transport industry is fast growing when we measure demand for its services.

Adeniji (1993) opine that passengers who travel regularly demand consistency of service.

Consistency of services in the form of computerized reservation system, corporate identification,

computerized check in, through check in to final destination, frequent flyer tracking, branded or

business lounges and above all recognition. Adeniyi (1998), explain that transport stimulates and

enhances the productive uses of human and material resources and hence economic development of

any society. Oyede (1995) examined the activities of agencies in the Nigerian air transport sector.
His interest centered on Nigerian Aviation Handling Company (NAHCO). Oyede maintained that

the outstanding activities and responsibilities of NAHCO are the provision of assistance to foreign

airlines in form of loading and unloading of both cargo and passengers.

Some researchers have examined the connection between high technology employment in a region

and whether the region is served by a hub airport. For instance Button (2006) pointed out that in

United States and Europe; more than 40% of air travels are for business purposes. The remaining

trips are either for leisure or for visiting friends and relatives. Hummels (2006) found that the

elasticity of air shipping costs, with respect to distance declined from 0.43% to 0.045% in 2004.

That is doubling distance shipped cause a 43% increase in air shipping costs in 1974, but 4.5%

increase in air shipping costs in 2004. Furthermore, Aizenman (2004) and Schaur (2006) retain the

position that air shipping is more reliable and fast to handle international demand volatility. This is

because air shipment takes hours rather than weeks. Air transport shipping provides real option of

smooth demand shocks for organizations or firms. An efficient air transport system and shipping

modes helps in quality improvement of the air transport system and also elevate international and

domestic trade, business and economic growth of a nation.

Lima and Verables (2001) observed that a 10% increase in transport costs reduces trade volume by

20%. Furthermore, recent studies have observed that a 10% increase in time reduces bilateral trade

volume between 5% and 8% (Hausman, Lee and Subramanian, 2005; Djankov, Migiel, Qian,

Roland and Zhuravskaya, 2005). Obviously, aviation is fully superior to other shipping modes of

transport especially, in the area of fastness or time saving. However, high cost of transportation is

associated with air transportation. But, Swan (2007) observed that since 1970, both price and

production cost for air travel have been declining at about 1% annually.

Ugboaja (2013) conducted a study on the sustainability assessment of Nigerian transport policy.

The paper used a Survey research method. The data analyses revealed that the overall mean score

was 2.22 which is lower than the expected value of 3.00 on a five point Likert scale. Therefore, it

was concluded that the extent to which the Transport Policy enhances Social Sustainability in
Nigeria was below the average. Which is an indication, that the policy had little or no influence in

reducing the negative social impact emanating from Nigeria’s Transport system. Nwaogbe, Wokili,

Omoke and Asiegbu (2013), carried out a descriptive analysis of the impact of air transport on

economic development in Nigeria. The study find that air transport sector supports gross domestic

product and the employment of Nigerians through four different routes: direct route, indirect route,

induced route and catalytic route.

Isaac (2013), examined the role of airport infrastructural development on socio-economic

development of Nigeria. The study utilized a descriptive survey method. The result reveals that,

there is a correlation between airport infrastructure development and socio-economic development

of the country. The study conclude that, for any proper achievements to be achieve in aviation

sector, government must step up its contribution, regulation and due process must be followed in

awarding of contract and making decision that relates to the development of aviation. Akanbi,

Bamidele and Dunni (2013) employed an OLS regression technique to investigate empirically the

impact of transportation infrastructure improvement on economic growth in Nigeria. They found

that transport output and investment made on transport infrastructure in Nigeria is positive and

significant on growth. In a similar development, Oyesiku, Adegbemi and Folawewo (2013) using

OLS regression technique, they conducted a research on the impact of public sector investment in

transport on economic growth. The data for the study spanned 1977 to 2009. The outcome of the

estimated result showed that transportation impacted negatively on economic growth in Nigeria.

According to Oluwakoya and Olufemi (2013), the aftermath of the deregulation and liberalization

policy has increased air line services at the air terminals of Nigeria. The study utilizes primary and

secondary data. The regression result revealed that reforms in aviation sector, have improve service

delivery of the air line operators in Nigeria. Ikpechukwu and Urael (2012) investigated the impact

of quality of transport infrastructure on the economy. They apply Pearson correlation coefficient (r)

to test the hypothesis of the study. The study revealed a positive correlation quality of transport and

economic growth in Nigeria. Ladan (2012), opined that Nigeria air transport is bedeviled by a
coherent transport policy, bad management, decaying facilities, loose security, closure of airport,

intermittent air crashes and a host of other factors.

2.2 Impact Of Air Transport On Economy

The air transport sector has contributed immensely to the economic development of Nigeria and

the entire globe in two other ways. Firstly, through the taxes levied on Gross Value Added (recall

that it is equal to the sum of profits and wages). The aviation sector helps to support the

government in terms of revenue generation, and the public services that are needed for movement

of goods and services all over the world. Secondly, through its lumpsum investment and its use of

higher advanced technology systems for its operations and maintenance. The aviation sector

generates more Gross Value Added per employee in the economy as a whole, raising the overall

productivity of the economy. The air transport sector comprises of two different operational

activity, they are:

2.1Airlines

The airlines responsibility is to transport passengers and freight from one geographical location to

another, there by rendering efficient interaction of a country with the international world. This also

helps in economic investment through tourism and trade (Oxford Economics, 2012).

2.2Ground-Based Infrastructure

The ground-based infrastructure of the aviation industry includes all airport facilities. The services

provided for the airline and their aircraft starting from the entry-gate of the airport to the out-gate,

the services provided for the passengers on-site at airports [such as baggage handling, ticketing and

retail and catering services], together with essential services provided off-site [such as air

navigation and air regulation].

The air transport or aviation sector supports Gross Domestic Product and the employment of

Nigerians through four different routes. They are:

2.2.1Direct Route

This is the operation/production output and employment of the companies that are under the

aviation sector.

2.2.2Indirect Route
This is transformation output and employment supported through the aviation sector‟s Nigerian

based supply chain, such as the travelling agencies etc.

2.2.3Induced Route

This is the employment and output supported by the spending of those directly or indirectly

employed in the aviation sector.

2.2.4Catalytic Route

This includes the spillover benefits that are associated with the aviation sector. Some of these

include the activities supported by the spending of foreign visitors travelling to Nigeria via air, and

the level of trade directly enabled by the transportation of merchandise (Oxford Economics, 2012).

TABLE 3.1: AVIATION’S CONTRIBUTION OF OUTPUT AND JOBS TO NIGERIA

Direct Indirect Induced Total % of Whole
Economy
Contribution to GDP Contribution Contribution to Contribution to Contribution to
(NGN to GDP GDP GDP
Billion) GDP
(NGN (NGN (NGN
(NGN Billion) Billion) Billion)
Billion)
Airlines 29 17 11 58 0.2%
Airports and 29 16 16 61 0.2%
Ground Services
Total 58 34 27 119 0.4%
Catalytic (Tourism) 40 24 15 78 0.3%

Total including 98 57 42 197 0.6%

Catalytic
Contribution to
employee (000s)
Airlines 7 33 21 61 0.1%
Airports and 37 31 30 97 0.2%
Ground Services
Total 44 64 51 159 0.3%
Catalytic 64 37 29 130 0.2%
(tourism)
Total including 108 101 80 289 0.5%
Catalytic
Source: IATA, ACI, Nigerian National Bureau of Statistics, Oxford Economics 2012
From the table above, it shows that the economic contribution of the aviation sector for each of the

four routes express the contributions in GDP form and employment in billion naira and as well

there percentage of whole economy. Furthermore, the table analyzed the contribution of the various

areas of air transport sector through these routes; Direct, Indirect, Induced and Total % of whole

economy Contribution to GDP (NGN billion). Airlines contributed 29, 17, 11, 58, and 0.2%;

Airports and Ground Services contributed 29, 16, 16, 61, and

0.2%; then total of 58, 34, 27, 119, and 0.4%; Catalytic (tourism) also contributed 40, 24, 15, 78,
and 0.3%. The total including catalytic are 98, 57, 42, 197, and 0.6%. While the contributions to

employment (000s) are

Airlines 7, 33, 21, 61, and 0.1%; Airports and Ground Services contributed 37, 31, 30, 97, and

0.2%. The total

for airlines, airports and ground services are 44, 64, 51, 159, and 0.3%; Catalytic (tourism)

contributions are 64,

37, 29, 130, and 0.2%; for the total including catalytic are 108, 101, 80, 289, and 0.5% (Oxford

Economics,

2012).

These airlines industries operating in Nigeria, directly contributed around NGN 29 billion to the

Nigerian economy (GDP). The sector contributes indirectly another NGN 17 billion through the

output it supports down its supply chain. A further NGN 11 billion comes from the spending of the

employees of the airlines and their supply chains. Overall, these airlines contribute over NGN 58

billion to the economy and support 61,000 jobs in Nigeria. The Aviation‟s ground-based

infrastructure employs 37,000 people and supports through its supply chain a further 31,000 jobs.

These indirectly supported jobs include, for instance, construction workers building or maintaining

facilities at airports and other ancillary services. A further 30,000 jobs are supported by the

spending of those employed by the aviation industry‟s ground-based infrastructure and its supply

chain. The ground-based infrastructure directly contributes NGN 29 billion to the Nigerian

economy (GDP). It contributes indirectly another NGN 16 billion through the output it supports

down its supply chain. A further NGN 16 billion comes through the spending of those who work in

ground-based facilities and its supply chain ((Oxford Economics, 2012).

Murtala Muhammed International Airport is Nigeria‟s principal airport with the highest aviation

operations and largest productivity output. As a hub airport for intercontinental passenger traffic,

Murtala Muhammed International can offer Nigerian residents and businesses a better offer in
terms of access to their various destinations, at a higher frequency and at lower price in terms of

fare charges. With such hub and spoke network, its benefits are to enhance the country‟s various

connectivity in terms of air transport system, which in the other way round contributes to high

global, and nations‟ overall international trade and economic levels of productivity and Gross

Domestic Product of Nigeria (Nwaogbe Obioma, 2013).

2.3 Catalytic Nature Of Air Transport To The Nation

The air transport industry‟s most important economic contribution is through its impact on the

performance of other industries and as a facilitator of their growth. It affects the performance of the

world economy, improving the efficiency of other industries across the whole spectrum of

economic activity – referred to as catalytic or “spin-off” benefits.

2.3.1Air Transport Facilitates World Trade

Air transport helps countries participate in the global market by increasing access to main markets

and allowing globalisation of production. Air transport also encourages countries to specialize in

activities in which they have a comparative advantage and to trade with countries producing other

goods and services.

2.3.2Air Transport Is Indispensable To Tourism, Particularly For Remote And Island

Destinations

Tourism directly supports jobs in airlines and airports, and expense of visitors arriving by air

creates a substantial number of jobs in the tourism industry.

2.3.3Air Transport Boosts Productivity Across The Global Economy

Improved transport links expand the market in which companies operate. As a result, companies

are better able to exploit economies of scale thereby reducing costs, and to specialize in areas of

comparative advantage. By opening up markets, air services expose companies to stiffer

competition, encouraging them to become more efficient.

2.3.4 Air Transport Improves The Efficiency Of The Supply Chain

For example, many industries use air transport to shorten delivery, as part of their just-in-time
delivery systems, enabling them to deliver products to clients quickly and reliably and to reduce

costs.

2.3.5 Air Transport Is An Enabler Of Investment Both Into And Out Of Countries And

Regions

Viable air transport links is one of the key considerations that influence where international

companies choose to invest.

2.3.6 Air Transport Can Act As A Spur To Innovation

By encouraging effective networking and collaboration between companies located in different

parts of the globe. A good transport infrastructure can also encourage greater spending on research

and development by companies. For example, increasing the size of potential markets allows the

fixed costs of innovation to be spread over larger sales.

2.3.7 Air Transport Provides Consumer Welfare Benefits To Individuals

In terms of the increased availability of travel connections, and for local airport communities must

be taken into account when considering environmental impacts on, for example, air quality, noise

and congestion in the vicinity of airports. There is a clear distinction between these „catalytic‟

impacts and the direct, indirect and induced economic impacts of air transport. In simple terms, the

economic value of the direct, indirect and induced effects is related to the total revenues of the air

transport industry, whereas the catalytic impacts are “spin-off”‟ effects on other industries (ATAG,

2005).

2.4 Consumer Benefits For Passengers And Shippers

According to Oxford Economics (2012), visiting family and friends to shipping high value

products, 8.3 million passengers and 181,000 tonnes of freight travelled to, from and within

Nigeria. More than 15,200 scheduled international flights depart Nigeria annually, destined for 32

airports in 30 countries. Domestically, more than 66,800 flights make over 7.5 million seats

available to passengers, destined to 18 airports. Air passengers resident in Nigeria comprise

approximately 4.2 million of the passenger total. For the 8.3 million passenger flights in total,
passengers pay NGN 866 billion (inclusive of tax), with Nigerian residents paying around NGN

438 billion. This expenditure is likely to significantly understate the value passengers actually

attach to the flights they use. Calculations by Oxford Economics suggest the value of the benefit to

travelers from flying, in excess of their expenditure, is worth NGN 785 billion a year (NGN 397

billion for Nigerian residents). Air transport is crucial for the distribution of high value to weight

products. Air freight may only account for 0.5% of the tonnage of global trade with the rest of the

world, but in value terms it makes up around 34.6% of the total freights. Shippers pay airlines

NGN 89 billion annually to carry 181,000 tonnes of freight to, from and within Nigeria. The

benefit to shippers, in excess of this expenditure, is estimated as NGN 37 billion. Based on the

share of exports in total merchandise trade, Nigerian shippers receive nearly 60% of this benefit

(NGN 22 billion).

2.5 Significant Social Benefits Of Air Transport

There are various significant benefits of air transport operation in the world, they are

2.5.1 Air transport improves quality of life by broadening people‟s leisure and cultural

experiences. It provides a wide choice of holiday destinations around the world and an affordable

means to visit distant friends and relatives.

2.5.2 Air transport helps to improve living standards and alleviate poverty, for instance, through

tourism.

2.5.3 Air transport may provide the only transportation means in remote areas, thus promoting

social inclusion.

2.5.4 Air transport contributes to sustainable development. By facilitating tourism and trade, it

generates economic growth, provides jobs, increases revenues from taxes, and fosters the

conservation of protected areas.

2.5.5 The air transport network facilitates the delivery of emergency and humanitarian aid relief

anywhere on earth, and ensures the swift delivery of medical supplies and organs for

transplantation (ATAG, 2005).

2.6 Impact Of Air Transport On Business Operations In The Globe

Air transport enables companies to service and meet clients, and promotes the efficient

organisation of production.
2.6.1 Servicing And Meeting Customers

Air services allow better contact and more effective communication between buyers and sellers,

which contributes to companies making new sales and to meeting the needs of their existing

customers.

2.6.2 Production Efficiency

Some 50% of businesses rely on air services for production efficiency. Passenger services enable

managers to visit overseas sites and other sub-sections of their business in other countries, enable a

choice of the best suppliers from a range of competitors, facilitate the spread of new production

techniques and make it easier for companies to attract high quality employees. The global supply

chain is becoming increasingly dependent on the rapid and reliable movement of high-value low-

weight goods such as computer parts (ATAG, 2005).

Air transportation facilitates such movements by:

1 Providing Fast And Reliable Delivery Of High-Value Products

Especially relevant to modern-dynamic industries, such as the pharmaceutical/ biotechnology and

telecommunication equipment sectors;

2 Increasing The Range Of Product Markets

The development of e-business helps companies identify low-cost suppliers and air transport helps

connect buyers and suppliers;

2.1 Improving Companies’ Handling Of Returns And Complaints

For example, allowing a quick turnaround of repairs or delivery of replacement parts

2.2 Facilitating The Development Of E-Commerce

Enabling, for example, companies to transport online shopping orders quickly and reliably between

countries, allowing products to be stored in large warehouses reducing retail and distribution costs.

2.3 Facilitating Improved Stock Management And Production Techniques

Reducing companies‟ storage costs, losses due to stock outages and disruption caused by failure of

machinery on production lines; and

2.4 Facilitating The Development Of The Express Carrier Industry

Which provides guaranteed, rapid, door-to-door delivery services and increasingly offers logistics

support for companies (ATAG, 2005).

2.7 Aviation Tax Contribution To Nigeria

The air transport sector (Aviation) makes a substantial contribution to Nigerian public finance

account. When you estimate the corporation tax paid by companies under the aviation sector, the

income tax paid by all their employees, social security payments (both employer and employee

contributions), and the revenue generation through aviation sector taxes, these estimates reflect the

direct tax payments of the aviation sector. All these provide an indication that taxes paid by the

aviation sector‟s supply chain and taxes raised through induced spending channels. They do not

include increases in the overall Nigerian tax base driven by aviation‟s contribution to investment

and productivity growth in the wider economy (Oxford Economics, 2012).

TABLE 3.2 AVIATION CONTRIBUTIONS TO NIGERIA

TAX NGN billion NGN billion

Taxes on Aviation Sector‟s GVA 8.5
Corporation Tax 1.4
Income and SS 7.1
Value Added Tax (VAT) 17.0
Aviation Sector‟s direct tax contribution 25.5
Tax generated through the aviation sector‟s 16.0

indirect and induced impact

Total tax attributable to the aviation sector‟s 41.6

Economic foot print

Source: IATA Nigerian National Bureau of Statistics, Oxford Economics.

The table above show that the aviation sector contributed over NGN 8.5 billion in taxes through

corporation tax and the income and social security contributions (both employee and employer

contributions). Air passengers paid a further NGN 17.0 billion in VAT on domestic and

international flights originating in Nigeria, bringing the total tax contribution to NGN 25.5 billion.

This contribution is likely to increase further, if there is more aviation infrastructural development,

and if the sector recovers a good number of difficult years that many firms operating in it suffered

losses. Very indicatively, it is estimated that a further NGN 16.0 billion of government revenue is

raised via taxation through the indirect (NGN 8.9 billion) and induced (NGN 7.1 billion) route
(Oxford Economics, 2012).

Investments By The Aviation Sector

Apart from the transformative effects of aviation sector on the wider economy, air transport services

– the airlines, airports and ancillary services, such as air traffic control – form a capital intensive

sector that invests heavily in aircraft systems and other advanced technology (Oxford

Economics,2012).

TABLE 3.3 INVESTMENTS BY THE AVIATION SECTOR

Investment as % Value for Output
Air transport Services 58.4
Nigerian Economy 26.5
Source: IATA, ACI, Oxford Economics.

TABLE 3.4 LABOUR PRODUCTIVITY IN THE AVIATION SECTOR

Productivity GVA for Employee

Air transport Services NGN 3,549,000
Nigerian Economy NGN 527, 000
Source: IATA, ACI, Oxford Economics.

The TABLE 3.3 explains the investment intensity of the aviation sector, as measured by its

investment as a proportion of GVA. Investment in air transport services is equal to 58.4%, which is

over twice that of the Nigeria economy average.

Productivity as the conventional approach to analyzing the sources of economic growth has been to

focus on increases in the quality and the quality of the inputs used to produce outputs. Gross

Domestic Product is the most commonly used measure for the productivity. GDP is the sum of all

goods and services produced within Nigeria borders, measured as the number of workers times the

output, or production, per worker. Growth in GDP will come from three sources; Changes in

population, growth of the labour force, and growth in productivity.

Table 3.4 provides an indication of the productivity of the aviation sector versus the rest of the

economy. Measured as GVA per employee, the productivity of air transport services (the airlines

and the ground-based infrastructure excluding retail and catering services at airports) is estimated at

NGN 3.5 million. This is nearly 7 times higher than the average productivity for the economy as a

whole (NGN 527,000). This high level of productivity implies that, where the resources currently
employed in the aviation sector is redeployed elsewhere in the economy, and then this would be

accompanied by a fall in overall output and income. For example, if productivity in the aviation

sector was the same as the average productivity for the economy as a whole, then the level of

Nigerian GDP would be around 0.11% lower than it is (about NGN 36 billion in current prices)

(Oxford Economics,2012).
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Source of data

This study depends completely on time series data for the analysis. The source of the historical data

is the Central bank of Nigeria statistical bulletin volume 23 (2012). The generating process of the

time series data was examined. In other words, the test for the order of integration was performed by

using standard tests for unit root such as the Augmented Dickey-Fuller (ADF) and Phillips-Perron

(PP) tests, but Harris and Sollis (2003) have argued that these tests are not generally reliable in

small samples, and this is because of their poor size and power properties. Put differently, they tend

to over-reject the null hypothesis when it is true and under-reject it

when it is false. Because of this, this study also applied Elliott Rosenberg, Stock optimal point

(ERS) (1996) unit root test to address these problems and also the problem of sensitivity of unit root

testing to choice of lag. They propose a new information criterion, the modified information criteria

(MIC). The distinction between the MIC and the standard information criteria such as the Akaike

and the Schwartz Bayesian criteria is that the former takes into account the fact that the bias in the

sum of the autoregressive coefficients is highly dependent on the number of lags. In addition the

Kwiatkowski, Phillips, Schmidt and Shin (KPSS) (1992) unit root test was utilized to test for the

null hypothesis of the ADF and PP unit root tests. This was to ascertain the stationary level of the

null hypothesis. The ADF model for the unit root test is expressed as:

This was to ascertain the stationary level of the null hypothesis. The ADF model for the unit root test is expressed
as:

 
∆Yt = 0 + 1Yt-1 +

∆Yt =  0 +  1Yt-1 +
i1
p

 
i1
Yi + et...............................................................1
Yi + δt + et.......................................................2

Given the unit root equation, the null hypothesis is that the coefficient statistically equal to zero that

is α = 0. If there is no unit root, the series Yt-1 will be stationary at the level or integrated of order

zero expressed as I(0). The presence of unit root as a result of first differencing of the series will

give stationary level, that is first order of integration denoted as I(1). Where Yt is a process of

autoregressive AR(1), it represent the time series and its linear time trend. Change (∆) is the first

difference operator and α 0 is the constant, p is the optimum number of lags in dependent variable, e

is the white noise. The method of analysis adopted in this study is analytical

The study developed analytical techniques such as dynamic ordinary least square (DOLS)

cointegration, Granger causality and error correction model (ECM). This study covers the period

1980 – 2012. While the DOLS model was used to test the individual impact of each independent

variable on the dependent variable, the cointegration model was adopted to determine the long run

equilibrium relationship of the variables, the ECM technique is to correct any drift in the long run

equilibrium relationship. The causality test attempt to identify the causal direction of the variables in

the model. The functional form of the OLS model of this study is specified as follow:

GDP=F(AT, ES, AR, MG, GFCF)………………………………3

The stochastic form of the model above is provided in equation 2 below
GDPt  a0  a1 ATt  a2 ESt  a3 ARt  a4 MGt  a5GFCFt  GDPt (1)  e1.4
GDP = gross domestic product at market prices

AT = air transport service GDP at market prices, which is a proxy for aviation sector output

GFCF= gross fixed capital formation representing investment in the host nation.

AR = agricultural sector GDP at market prices

MG = manufacture sector GDP at market prices

ES = electricity sector GDP at market prices GDP(-1) = Lagged GDP by previous year.

The GFCF which is a proxy for investment in this study is expected to impact positively on

economic growth. In other words the level of Nigeria’s investment is expected to increase
economic growth, e is the error term which capture other variables that can explain GDP but

were not included in this study

t= the subscript t represent time series data

3.2 The cointegration test procedure

This study shall proceed further to apply the Johansen cointegration test. The cointegration of two

or more series indicates the presence of long run equilibrium relationship. The systems approach

developed by Johansen and Juselius (1990), Johansen (1991, 1995) can be applied to a set of

variables containing possible mixture of I(0), I(1) and I(2) (Perasan et al 2001). The estimation

procedure assumes a vector autoregressive (VAR) base cointegration test (Johansen 1991) of order

p which is given as Yt = A1yt-1 +…..+ Apyt-p + Bxt + et……………….. 5

Where yt is a - vector of xt non-stationary I(1) variables, is a d -vector of deterministic variables, and

et is a vector of innovations.

With the presence of cointegrating equations, it becomes necessary for equation 1 to be modified

into a dynamic structural model. Because of the obvious reasons that long run information may be

lost or a drift in the long run relationship, it suggests the need to employ the vector error correction

model (VECM). A vector error correction (VEC) model is a restricted VAR designed for use with

nonstationary series that are known to be cointegrated. The VECM has cointegration relations built

into the specification so that it restricts the long-run behavior of the endogenous variables to

converge to their cointegrating relationships while allowing for short- run adjustment dynamics. The

cointegration term is known as the error correction term since the deviation from long-run

equilibrium is corrected gradually through a series of partial short-run adjustments. A Vector Error

Correction Model (VECM) is a restricted Vector Autoregressive (VAR) model designed for use

with nonstationary series that are known to be cointegrated. The purpose of the VECM is to indicate

the speed of adjustment from the short-run equilibrium to the long-run equilibrium state. The greater

the coefficient of the parameter, the higher the speed of adjustment of the model from the short-run

to the long run state will be. The dynamic log linear VECM
 The Granger causality test model

The OLS reveals the correlation between variables but does not help in determining the direction of

the relationship Dominnick and Derrick (2001). According to Granger (1969), is said to ‘Granger-

cause” X if and only if X is better predicted by using the past values of Y then by not doing so with

the past values of X being used in either case. In short, if a scalar Y can help to forecast another

scalar X, then we say that Y Granger- causes X. If Y causes X and X does not cause Y, it is said that

unidirectional causality exists from Y to X. If Y causes X and X causes Y, it is said to be a feedback

effect or a bilateral relationship exist between X and Y. Essentially, Granger’s definition of

causality is framed in terms of predictability. The Pairwise Granger causality equation is of the

form:

ATt  X 1   yiATt 1   FDGDPt 1   1t.................................................................................................................... 9

GDPt  X 2   1GDPt 1   yiATt 1   2t.................................................................................................................... 10

Where

H01: AT does not Granger cause GDP H02: GDP does not Granger cause AT

Where M1 and M2 are constants and E1t and E2t is the stochastic term A Wald F-test was used to test

the following hypotheses

 CHAPTER FOUR

PRESENTATION OF ESTIMATED RESULTS AND DISCUSSION

Table 4.1: Results of unit root test using Augmented Dickey Fuller (ADF), Phillip Peron (PP)
and Elliott- Rothenberg – Stock point optimal (ERS) unit root statistics tests.
Table 4.1 Unit Root test
Augmented Dickey Fuller Unit Root Test (A) Phillips –Perron Unit Root Test
(B)
Variables ADF T-Stat Order of PP PP T-stat @5% Order of integration
Critical @5% integration Critical
value value
GDP -4.89 -3.57 I(1) -4.90 -3.56 I(1)
AT -6.42 -3.58 I(2) -15.61 -3.57 I(2)
AR -4.90 -3.57 I(1) -4.90 -3.56 I(1)
ES -6.19 -3.57 I(1) -31.58 -3.56 I(1)
MG -5.76 -3.58 I(2) -6.19 -3.57 I(2)
GFCF -5.28 -3.57 I(1) -5.11 -3.56 I(1)
Elliot Rothenberg Stock Point –Optimal (ERS) Kwiatkowski, Phillips, Schmidt and Shin (KPSS) unit Root
unit Root Test Test
(C) (D)
Variables ERS T-Stat Order of KPSS T- Asymptotic Order of Null
Critical @5% integration Stat Critical integration Hypothesis
value value@5%
GDP 116.49 5.72 I(1) 0.12 0.146 I(1) stationary
AT 8.70 5.72 I(1) 0.17 0.146 I(1) stationary
AR 9.10 5.72 I(1) 0.98 0.146 I(1) stationary
ES 158.74 5.72 I(1) 0.42 0.146 I(1) stationary
MG 8.94 5.72 I(1) 0.19 0.146 I(1) stationary
GFCF 5.02 5.72 I(1) 0.85 0.146 I(1) stationary
* Significant at @ 5 per cent. Author’s Computation

4.1. Interpretation of ADF, PP and ERS unit root statistic test

The result of the Augmented Dickey-Fuller (ADF), Phillip Peron (PP), Elliott- Rothenberg –

Stock point optimal (ERS) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) (1992) unit

root statistics tests are depicted in table 4.1

(A,B,C and D) respectively above. All variables are non stationery at the level, but after first and

second differencing at 5 per cent level of significance, the variables became stationery in

ADF (table 4.1A) and PP (table 4.1B) unit root tests respectively. Included in the equation is

trend and intercept, a maximum lag length of 1 was adopted and the Schwarz information

criterion (SIC) was employed in the computation of the ADF unit root test. With respect to

the PP unit root test result, the newey west bandwidth, trend and intercept as well as the

estimation method of Bartlett Kernel were utilized. Similarly, the ERS (table 4.1C) unit root
 test applied Bartlett Kernel spectral estimation method and the newey –west bandwidth. The

result showed that the computed t- critical values are superior to the t- statistic at 5 per cent

level of significance. This is an indication that the variables are integrated of order one I(1).

The variables are significant at 5 per cent level. The result of KPSS (table 4.1D) reveals that

the null hypothesis is stationary and integrated of order one - I(1) at 5 per cent level, thus the

null hypothesis cannot be rejected, thus the KPSS test result further confirm that the ADF and

PP unit root statistic test results are stationary. Certainly the data are genuine and not

spuriously related.

Table 4.2: Estimated ordinary least square regression line.

Dependent Variable GDP
Independent Variables Coefficient t-statistics
AT 1975.63 2.72*
ES 0.0003 5.94*
MG -13.56 -1.66
AR -21.74 -2.74*
GFCF 0.63 0.75
GDP(-1) 0.93 5.84*
C 1386532 2.72
R 2 0.89
R-2 0.86
F-statistics 31.35
DW 2.33
* = Significant at @ 5 per cent. Author’s Computation

4.2 Interpretation of the Regression Line

Table 4.2 above reveals the estimated OLS regression line. The dependent variable is GDP

whereas other variables (AT, ES, MG, AR, and GFCF) are independent variables. The

adjusted coefficient of determination (R2) is 0.86; it represents goodness of fit for the

regression line. It is an indication that 86 per cent of the change in GDP is the joint

responsibility of the independent variables in the regression line, hence only about 14 per cent

of the change or variation in GDP is unaccounted for by other variables (error term) outside

the regression line. Equally, the F-statistics supports a good fit. The Durbin Watson (DW)

statistic test result is a measure of the serial correlation. The DW statistic test result of 2.33
does not support the presence of serial correlation in the model. From the coefficients of the

regression line in table 4.2 above reveals that AT is signed positive (1975.63). This is an

indication that air transport (AT) is directly related to GDP. A one per cent increase in GDP

will increase GDP by 1975.63 per cent. This is an indication that AT impact positively on

GDP. This finding does not support the work of Amba and Danladi (2013) and Ugboaja

(2013) but is in consonance with Shufen and Yanjun (2011). The result also showed that AT is

statistically significant at 5 percent. This is because the calculated t-Statistic value of 2.78 is

greater than the t-table distribution value of 2.04. This outcome was anticipated for this study.

The coefficient of the regression line revealed that gross fixed capital formation (GFCF) is

signed positive (0.63). This is an indication that GFCF has an increasing influence on the

behavior of GDP, but the result is statistically insignificant at 5 per cent level. The regression

result show that the coefficient of electricity supply (ES) although was signed positive

(0.0003) but had a slow positive impact on the growth behavior of GDP. This is an indication

of the critical need to improve on the mega watt of electricity in Nigeria. The result was

statistically significant at 5 per cent level. The contribution of agriculture (AR) to the growth

of GDP as depicted by the estimated dynamic regression line suggests a negative effect. This

simply concludes that AR has a decreasing effect on GDP. However, the result shows that AR

is statistically significant at 5 per cent level. The manufacturing sector contribution to GDP

show a decreasing effect as coefficient is signed negative. Similarly, the result is statistically

insignificant at 5 per cent level. The dynamic regression result show that the gross domestic

product (GDP(-1)) lagged previous year (one year) is signed positive and statistically

significant at 5 per cent level.

4.3 The Johansen Cointegration Result.

Table 4.3 and 4.4 below represents the result of Johansen co-integration test of two

likelihood ratio test statistics: that is the trace statistic and the Maximum Eigen-value which

are commonly used to determine the number of co-integrating vectors. The result suggests
 that AT, AR, ES and MG demonstrate a positive relationship with GDP. In other words, the

Johnasen co-integration test reveals that there are at least four co integrating vectors in the

series. This is an indication of the presence of long-run equilibrium relationship. Table 4.3

shows the result of the trace statistics. The trace statistics for null hypothesis of no co-

integration relationship is rejected at 5% level. Table 4.4 represents Maximum Eigen value

statistic test. It is confirmed from the Maximum-Eigen statistic test that the null hypothesis

is rejected at 5% level. This implies that the results of the unrestricted co-integration rank

test confirmed a long run significant relationship between GDP and all its determinants.

This outcome has been established by Mehmood, Younas and Shahid (2014).

Table 4.3 Johansen cointegration

Unrestricted cointegration rank test (trace) Statistics
H0 HA Trace statistic Critical value (5%)
r≤0 r˃0 144.2061* 40.07757
r≤1 r˃1 75.26017* 33.87687
r≤2 r˃2 72.58946* 27.58434
r≤3 r˃3 34.00982* 21.13162
r≤4 r˃4 10.08144 14.26460
r≤5 r˃5 0.114382 3.841466
Trace test shows 4 cointegrating equation @ 0.05 level. Author’s Computation
* Significant at @ 5 per cent
 Table 4.4 Johansen cointegration
Unrestricted cointegration rank test (Maximum Eigenvalue) statistics
H0 HA Trace statistic Critical value (5%)
r≤0 r˃0 144.2061* 40.07757
r≤1 r˃1 75.26017* 33.87687
r≤2 r˃2 72.58946* 27.58434
r≤3 r˃3 34.00982* 21.13162
r≤4 r˃4 10.08144 14.26460
r≤5 r˃5 0.114382 3.841466
Maximum-eigenvalue test shows 4 cointegrating equation @ 0.05 level.
* Significant at @ 5 per cent. Author’s Computation.

Table 4.5: The Vector Error correction model result

Variables Coefficient statistic
LAT(-1) 4557.89 2.41* R2 = 95
LAR(-1) 22.64 2.60* R-2 = 91
LES(-1) -5.80 2.25* F stat. = 23.44
LMG(-1) -25.55 -2.81*
LGFCF(-1) -0.95 -1.34
VECM -0.41 1.61
C 38223.35 0.22
* Significant at @ 5 per cent. Author’s Computation

4.4 Analysis of Vector Error Correction Result

With the presence of cointegration, it is required that vector error correction

model be applied to determine the dynamic relationship. The vector error

correction term ensure that the deviation from long-run equilibrium is corrected

gradually through a series of partial short-run adjustments. The table 4.5 above

depicts the result of the VECM. The lag length is ‘2’ which is established on the

basis of SIC and AIC. The cointegration vector confirms the expected positive

relationship between air transport and economic growth. The coefficient of air

transport indicates that an increase of 1 per cent in AT will lead to 4557.89 per

cent increase in GDP. The result is statistically significant at 5 per cent level. The

coefficient of VECM -0.41 is signed negative. This was anticipated. The VECM

value measures the gradual speed of adjustment of the short run dynamic model

back to long run equilibrium position. The VECM gradual speed of adjustment is

41 per cent. This means that a total of 41 per cent of the previous year drift from

long run equilibrium was corrected by the dynamic short run model. The
 feedback effect (41 per cent) cannot be said to be very slow, hence the feedback

effect is gradual and moderate, but statistically insignificant at 5 per cent level.

Table 4.6:Granger
Causality test Result
Sample: 1981 2012.
Lags: 7
Null Hypothesis Observations F-Statistics Probability
AT does not Granger cause GDP 24 4.13752 0.2216
GDP does not Granger cause AT 1.19889 0.0918
* Significant at @ 5 per cent. Author’s Computation

4.6: Interpretation of Granger Causality Result

Table 4.6 above is the estimated result of Granger causality test. The optimal lag length is 7

based on the SIC and AIC. From the table, it is evident that air transport Granger cause gross

domestic product. But gross domestic product does not granger cause air transport. This is an

indication of a unidirectional causality from air transport to gross domestic product without a

feedback mechanism. Obviously, the outcome of this work show that increase in aviation

activity spur economic growth. The hypothesis that air transport does not granger cause gross

domestic product is rejected at 5 per cent level of significance. This relationship has been

established by Onikosi (2012) and Mukka and Terde (2012). However, the work of Mehmood,

Younas and Shahid (2014) does not support this direction of causality.

Table 4.7 Diagnostic estimated test of the dynamic ordinary regression line

Diagnostic Test
Functional Form Stability Test Autocorrelation
Jacque-Bera AIC Ramsey RESET CUSUM DW Breusch-Godfrey White Heteroscesdasticity
Normality test
1 2.64 31.29 1.33 Stable 2.33 1.14 1.57
(0.29) (0.12) (0.34) (0.22)

Author’s Computation.

Explanation of the Diagnostic test Results

The regression line for this paper was subjected to a diagnostic test. Table 4.7 depicted the

estimated result of the diagnostic test. The coefficient of the Jarque – Bera statistics s how that

the study does not have any bases to reject the hypothesis that true error terms in the air

transportation and economic growth are normally distributed. In other words, the residual
normality assumption was adequate and not violated which in essence implies the functional

normality of the regression line for this study. The coefficient of the Breusch-Godfrey LM

was estimated with one (1) lag length. The LM test result is an indication of the absence of

serial correlation in the regression line. In the same direction, ARCH LM or the

Heteroskedasticity statistic was estimated with two (2) lag lengths. The statistic values of

ARCH LM conform to absence of serial correlation. Following the computation of the

Ramsey RESET test statistic, it was obvious that the functional form of the regression line

was adequately specified and as such robust for policy making and analysis. The recursive

residual test, also known as cumulative sum (CUSUM) was conducted to determine the

stability of the regression line parameters. The CUSUM was plotted against the break points.

The plot of the CUSUM statistics in figure 1 below is within the critical bounds. Whenever

the CUSUM qualify within the range of the critical bounds at 5 per cent significant level, it

suggests that the null hypothesis which states that all coefficients in the regression line

equation are stable cannot be rejected. Since the plot of the CUSUM did not diverge from the

critical region, it implies that the variance is stable and the estimated regression line

coefficients or parameters are equally stable.

Figure 1: Recursive CUSUM estimation test

15

10

-5

-10

-15
88 90 92 94 96 98 00 02 04 06 08 10 12
 CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATION

5.1 Conclusion

This study has investigated the influence of air transport sector development on

economic growth in Nigerian between 1981 and 2012. The study examined the

contribution of air transport to gross domestic product in Nigerian. Series of works

have been done in this regard with divergence of contributions. The absence of

consensus amongst the authors has generated this present article. Over the years, the

governments of Nigeria have put in place a series of policy measures for the

development of the aviation sector in order to kick start the desired level of growth that

will impact on the economy. Despite the improvement, the aviation sector mirrors

inefficiency, mismanagement and airline mishap. In order to effectively analyze air

transport sector in relation to the economy, this study employed a series of

econometrics models including a dynamic ordinary regression line equation,

cointegration, error correction and granger causality techniques. The analyses showed

that the dynamic regression and error correction tests results supports a positive impact

of air transport on economic growth in Nigeria given the period under review. The

cointegration test revealed a long run equilibrium relationship between gross domestic

product and air transport. The causality test result showed a unidirectional causality

that run from air transport to economic growth. Earlier on, the time series properties of

the data collated from Central Bank of Nigeria statistical bulletin volume 22 are

investigated using Augmented Dickey-Fuller (ADF), Phillip Peron (PP), Elliott-

Rothenberg – Stock point optimal (ERS) and Kwiatkowski, Phillips, Schmidt and Shin

(KPSS). The outcome of the estimated unit root test revealed that the data are

stationary and integrated of I(1) and I(2) given the ADF and PP tests. The ERS showed
that all the variables are integrated of order one I(1). Similarly, the KPSS result

suggests I(1) and the series is stationary as the null hypothesis cannot be rejected. The

diagnostic test for the normality of the model revealed that the model has a functional

form, stable and free of any serious autocorrelation or serial correlation. The

implication of this study is that a more cohesive transport policy that benefits all the

sub units in the transport sector should be pursued vigorously; else development in the

transport sector will plummet given the experience of Malaysia air transport disaster

that nosedive recently. Also, the Federal Government should ensure that air

transportation is well managed in line with best practices and high standard,

accountability and transparency, guided by innovative sophisticated expertise in order

to achieve results and develop the sector to international standards.

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