‘Why Access to International Financing is Hard for Nigerian Airlines’

Chinedu Eze
An industry expert has given reasons why Nigerian airlines find it difficult to access credit from the international market.

Nigerian airlines in the past did not have the goodwill to attract international financiers to support their businesses with single-digit and long-term loans for aircraft acquisition, lead consultant at ETIMFRI Group, Amos Akpan said.

He recalled that before the 2006 Civil Aviation Act and before the Category 1 rating of Nigerian by the US Federal Aviation Administration (FAA) along with the certification of Nigeria by the International Civil Aviation Organisation (ICAO), the country’s air transport sub-sector could be described as rudderless.

Nigerian carriers benefitted from such credit facility in the past, but not as regular as other airlines in Africa such as Ethiopia Airlines, Kenya Airways and others.
In Nigeria, airlines like the defunct Afrijet had benefited from such credit facility, but the airline that hugely benefitted from international financiers was Arik Air.

According to the Founder of the Airline, Mr. Joseph Arumemi-Ikhide, Arik Air was beneficiary of such credit facility, which the airline effectively serviced because it maintained acceptable international standards when it started flying.
But the aviation economist explained to THISDAY that Nigeria’s financial sector did not develop internationally recommended practices, credit based financial system until recently.

But since the high rating of Nigeria’s safety standard by international aviation regulatory bodies, they have recently commenced building data for credit worthiness.

He noted that this was one of the reasons why Nigerian airlines could not engage on interlining with foreign airlines in addition to the fact that banks may not be able to come up with forex when needed to pay their foreign partners.

“This makes it difficult to synchronize with other operators in climes with developed credit systems. It is an issue of difference in practices based on cultural setting. Leasing aircraft or any aviation plant for business operations requires you satisfy certain regulatory criteria.

“There is the lack of understanding of aviation business by commercial financial institutions in Nigeria. An investor wants to bring in $100 million through a Nigerian airline. The investor requires a guarantee from a Nigerian bank that it will receive all income from operations, process the repatriation of the sum plus interest for a period of 15 years.
“The Nigerian bank will require assets or cash worth $120 million deposited with her as collateral before issuing the guarantee to the foreign investor. Note that the investor has already insured the said $100 million before releasing it,” Akpan explained.

He also explained that the investor would ensure the money does not enter as cash into the local airline, but as leased and purchased productive machines and trained human capital.

This is because the local airlines cannot produce the collateral required by the Nigerian bank that $100m investment cannot come in.
“Financial policies change every four years, which is the life span of an elected government but an investor works with a minimum of 10years for gestation, growth, and rebirth. Secured and stable polity attracts investors in transport and tourism sector.

“If a Nigerian airline has the collateral required by Nigerian bank to guarantee foreign investment it would not need the loan in the first instance. If repatriation of foreign investment funds was a predictable process, Nigerian airline would easily access foreign credit facility,” Akpan said.
He remarked that Nigerian airlines have had a long battle with corporate governance because it has always been a sole proprietor business; even when they go public, “it is more of cosmetic equity structure, where the promoter retains his grip on management.”

“This affects the accountability process. I experienced the stigma improper corporate structure. I went as lead manager with a team to defend a loan application for an airline in 2003.
“After due diligence, the bank team told us our company was a bedroom board setting because the executive powers reside with husband and wife who were chairman and vice chairman respectively. Due diligence will always unveil the existing real equity structure. Foreign investors will always carryout due diligence.

“The solution is that the Nigerian financial institutions have the capacity to build an aviation investment fund under the central bank. Foreign investors should put money in this aviation investment fund. Nigerian airlines should take loan at max 5 per cent interest rate with minimum tenor of 10 years from the aviation investment fund.”