How FX Fluctuation, Government Policies Encumber Airlines’ Aircraft Acquisition, Lifespan

Chinedu Eze

It has emerged that factors such as foreign exchange fluctuations, age limited of aircraft set by the federal government and high interest rate are responsible for the short lifespan of Nigerian airlines and their inability to acquire new aircraft. Analysts believe this is why no Nigerian carrier has operated schedule service for up to 30 years since the deregulation of commercial airlines in 1988.

Foreign exchange fluctuation, they said, makes it impossible for airlines, which depend on foreign exchange for spares, maintenance and training, to plan and make financial projections.

Also, high interest rate makes it difficult for airlines to access long-term credit facility for aircraft acquisition and operational funds.

Another major factor, stakeholders said, is the federal government policy that bars airlines from bringing aircraft over 22 years for commercial operation in Nigeria.

This, they stated, impinge on the ability of the airlines to acquire aircraft, as many of the equipment so banned in Nigeria are still relatively new for aircraft, which can operate for over 40 years with proper maintenance.

In an exclusive interview with THISDAY, Chairman/CEO of Omni Blu Aviation (OBA) Limited, an aircraft charter services operator, Akin Olateru said that an airline needs cash, access to loan with single digit interest rate, good management in addition to good financial planning in order to survive.

“But with foreign exchange fluctuation, an airline cannot plan well and this in the long run leads to its demise. There are two things that are critical to the survival of an airline anywhere in the world. One is access to cash. An airline should be able to access loans with single digit interest rate. The second critical element is good management. You can’t run any business without strong management. So that is given.

“But we have one thing that is working against us in this part of the world, currency exchange fluctuation. Currency exchange fluctuation alone will kill your business. If the best aviation consultant does a very beautiful business plan, you come in with the right aircraft, employ the right management team, but that singular factor, currency exchange fluctuation, will kill you. Olateru noted that in the US, they operate aircraft, they buy the aircraft, they pay for insurance, they pay for supplies, they pay salaries, all in dollars. They are not exposed to that currency fluctuation.

“In Europe it is the same thing. All bills are paid in Euro. They are not exposed to that currency fluctuation. You come to Nigeria, 85% of your cost is forex, apart from salaries, ground handling bills and fuel. But the bulk of your purchases in terms of volume are in USD. Now, you sell ticket today as schedule airline, due to the depreciation of the naira, the fare may be equivalent to $50. But tomorrow if you want to make budget on that exchange you find out that the dollar has gone up. You can’t buy at the same rate you sold the ticket,” he explained.

Olateru who is the immediate former Director General, the Nigerian Safety Investigation Bureau (NSIB), recalled when he set up a cargo airline in 2009, did the business plan of the new carrier, but after one year he destroyed the business plan because,  “the currency fluctuation had wiped out the entire profit of that operation. We had to rejig, we had to redesign because it just was not making sense anymore.”

“So, it is one big issue. I don’t know how many good businessmen out there that can run any business at all, any business, and make profit when you don’t have a stable exchange rate. In a country where you have to import, in a country where bulk of your purchases are in forex. Nigeria is an economy where we spend naira, but our economy is denominated in dollars. That is a fact. That is why any time you move that dollar, everything moves, unfortunately,” he said.

He said the impact of dollar in Nigeria’s economy is not just about aviation but affects all the sectors of the nation’s economy.

He, however, remarked that in the past the aviation industry was not well structured and organized as it is today, “because the sector in the past was weak and there were no checks and balances as it exists today with strong aviation agencies that regulate and provide service in the industry.”

On the age of aircraft and the minimum number of aircraft needed to start commercial service in Nigeria, Olateru stressed that to move the industry forward; government should review its policies to spur the industry’s growth.

He said that government came up with a policy, which banned aircraft that are 22 years from being brought into the country for schedule service, but the reality is that at 22, most aircraft are still at their peak of operation with effective maintenance.

“Because of a lot of crashes in the past, government came up with a policy that says aircraft that is 22 years is banned in Nigeria as commercial airplane. To me, let’s evaluate 22-year old aircraft ban. If you ask me, it doesn’t make sense. There are extremely few countries in the world that restrict aircraft in terms of age. We focus on maintenance culture. Proper aircraft maintenance is not reactive but proactive. That is what you do on airplanes. So you don’t wait for things to spoil before you change and stuff like that. There are a lot of checks done over time, every week, every month, per hour, per cycle, depending on the maintenance manual approved,” Olateru, an aircraft engineer said.

He said it would be difficult for an investor who wish to establish an airline in Nigeria to succeed because he is limited by aircraft age; so, he cannot acquire certain aircraft, including some technologically advanced Boeing NG aircraft because some of them were manufactured in 1999 and over 22 years.

“The cheapest Boeing 737 NG aircraft you can get today is between $15 million and above. So NCAA now says bring six aircraft. So, to start an airline and you want to use Boeing 737, you need to come with $15 million times six, just aircraft acquisition alone. Are we really helping the industry? I don’t think so. We are a developing nation. Loans are not available for the operators. Everything is do it yourself . You want to buy a brand new aircraft, right? The US Exim and all the Exim banks in the world will be happy to fund your acquisition up to 85 per cent, you bring 15 per cent. So, you bring your 15 per cent, they are happy to fund 85 per cent. The next question is, give us a bank guarantee for $85 million. Go to our banks in Nigeria today, request for a bank guarantee for $85 million, they will ask you to put $85 million cash in the bank before they can give you the guarantee.”

On aircraft leasing, Olateru said, “When you talk of lease, we have been blacklisted as a nation. Yes, we signed the Cape Town Convention. The idea is to say we can repatriate lessor’s aircraft anytime they want to, but is that the reality on ground? Yes, one or two airlines failed to meet agreements. They have argued that in the past, there has been an issue.

“But do you blacklist a country because of one, two operators? Over there in Europe, one, two operators too do mess up. They don’t blacklist them. So this is where the government needs to step up the game, engage these people. And I think the Minister, I was reading a few days ago, has engaged some decent companies. So, that is the right step. That is a good one in the right direction. We need to rejig some government policies to push our aviation industry forward.”