Burden of Taxes on Airline Operators

Chinedu Eze posits that the taxes, charges and tariffs imposed on airline operators by the federal government and its agencies are outrageous, and responsible for the frequent failure of Nigerian airlines.

There have been points and counterpoints why Nigerian airlines have short life span. Besides Aero Contractors, which was founded in 1959 as oil and gas shuttle service airline, there has not been any airline that has existed for 30 years besides Nigeria Airways Limited (NAL), which was liquidated in 2003, but in other countries, airlines celebrate their 75 years anniversary.

Many of the operators who spoke to THISDAY stated that in many other countries, startup airlines are given tax holiday but in Nigerian you start paying charges during demonstration flights to obtain your Air Operator Certificate. There is no breathing space and those taxes constrict airline finances and erode their capacity to make profit, hence the short life span.

Root cause of failures

The President and CEO of Topbrass Aviation Limited and key member of Airline Operators of Nigeria (AON), Roland Iyayi, gave a lengthy explanation on the taxes paid by airlines and how they have affected their operation and survival. He said that the issue of taxes, fees and charges and their adverse impacts have for so long been either ignored or overlooked in the aviation industry.

According to him, despite the several failures of many airlines in the past decades, “our desk experts have always maintained that these airlines were affected by the so-called ‘one-man ownership syndrome’, lack of proper corporate governance, lack of requisite expertise, wrong types of aircraft, etc. But no one ever mentions the adverse impacts all the obnoxious policies and unilaterally imposed taxes, fees and charges have on the economic wellbeing of domestic airlines.”

He said that even worse, is the focus on increased revenue generation by all the government agencies in the sector, without commensurate value or quality of services and completely at variance with their establishment objective of being not-for-profit, adding that every domestic airline company in the country is exposed to a total of 13.5% in taxes including 5% ticket (charter/cargo) sales charge, 7.5% value added tax (VAT), 1% development tax, even before the applicable corporate taxes, PAYE, pension scheme and others.

“Meanwhile, every single flight is in turn exposed to other fees and charges such as flight clearance, navigation, parking or landing, etc. Other personnel and equipment specific charges such as licensing, training, aircraft certifications, insurance, etc., are also applicable. Then we consider the operational expenses including fuel, maintenance, depreciation and others. When all these are aggregated, we end up with taxes at about 32.7% of domestic airlines’ gross revenues.

“It is instructive to note that the world average of airline profitability is between 1.5 – 2.5% for major carriers with size and scope. Boeing determines that the effects of size and scope kicks into an airline’s operations when it operates a single fleet of a minimum of 50 aircraft. Yet, here in Nigeria, our desk experts pontificate on how an airline should be run profitably, even when they have never established or worked in one in their entire careers. When arguments are proffered to justify some of the obnoxious policies and tax regimes, it is often said for instance, that the 5% TSC is paid by the passengers.

“Seriously? Who provides the capacity for the passengers? Government or private airlines? Whose loss is it when seats are flown empty, considering that these are perishable? Is demand suppressed by an increase in ticket price or not? Why are ticket prices not unbundled in this country?”

Asphyxiating Rotary Wing in Aviation

Iyayi said that having successfully decimated the growth potential of fixed wing airline operations in the country, the focus has now shifted to the rotary wing aircraft for the final stage to “be set for the demise of the domestic industry.”

Experts have confirmed that over 90% of helicopter operations in Nigeria has to do with oil and gas services and if these services are disrupted they will significantly affect crude and gas production.

“The Honourable Minister by fiat, sent out an undated or referenced letter to helicopter operators in the country, mandating that they henceforth pay ‘Landing Levy’ to the coffers of a private company with no infrastructure for such, but to increase revenue generation. The past administration told the industry that it has installed the multilateration surveillance systems in the Niger Delta under the purview of NAMA (Nigerian Airspace Management Agency) for the purpose. What has happened? It is pertinent for some questions to be answered here: What is the Landing Levy for and does it replace the industry standard landing fee? What services are being provided currently and not paid for by helicopters? For the avoidance of doubt and contrary to the Minister’s assertion on national TV, helicopter operations are fully regulated in Nigeria. From licensing to helideck approvals to flight plans and landing fees. This Landing Levy is an arbitrary charge that is not doused in reality and has a chance of crippling the whole industry if not completely cancelled,” he said.

Iyayi also gave example and of a typical helicopter operation, saying, “Escravos is the operational base for Chevron and it hosts a few of their contracted helicopters. The single Bell 407 or light twin Bell 427 helicopter does an average of 70 landings per day. So, at $300 per landing, it comes to $21,000 per aircraft per day. There are usually 4-6 contracted aircraft at any time. So, if we assume 5 helicopters as an average, that would amount to a total of about $105,000 per day for the 5 aircraft. If we then assume a 25-day month, that would amount to a gross earning of $2,625,000.00 as Landing Levy per month, only for the Chevron Escravos operations.

“Meanwhile, Chevron structures its contracts with operators along the lines of a Monthly Standing Charge (MSC), paid to the operator monthly in arrears even when no flights are conducted, and an Hourly Charge (HC) for when actual flights are conducted. The contract cost to Chevron for those 5 helicopters is approximately $1.75m per month. So, in essence, the proposed Landing Levy costs more than the service that supposedly generates the charges. How does this make any sense? Additionally, the manned helidecks and landing sites in the country are licensed by the Nigerian Civil Aviation Authority (NCAA), with annual fees ranging in the millions of naira paid each year to the NCAA to maintain certification,” he said.

Existing charges

The President of Topbrass Aviation Limited also observed that the helideck/radio/fire fighting crews for the helideck are also certified with different fees payable to the NCAA.

“How do you then charge for operating to a location you have licensed and bear no cost of maintaining? Each landing at those locations are paid as per flight plan charges to NAMA. Obviously from the foregoing, it is evident that the intention here is to bleed domestic airlines and helicopter operators to oblivion. The Honourable Minister should be informed that having a KPI focused on increasing government IGR is at variance with the objective of the establishment Acts and inimical to the growth of the domestic industry.

“Ironically, the increased revenue drive the Honourable Minister so longs for could be better achieved through a holistic restructuring of the tax regime of the industry, by lowering, simplifying and consolidating same to increase the traveling population by air. The rationale apparently is that the oil companies would pay for the introduction of this new “Landing Levy”. Whoever the smart Alec is, who thinks that multinational corporations will simply increase their costs just because of a say so is highly delusional,” he said.

Iyayi also explained that multinational oil corporations work within a structured framework to a budget and when costs increase abominably, a simple cost-benefit analysis is all they need to pull the plug, and they usually do without recourse or remorse, adding that with the unfolding saga, “we should prep for a massive layoff soon in the sector.”

THISDAY also learnt that oil and gas companies, which did not see the justification of additional levy on helicopter operators that provide services to them, have indicated their support for the operators, saying that even if it would stop oil and gas production for few days; they would support whatever decision the helicopter companies may take to resist their exploitation through that levy.

Rationale for the $300 levy

The Managing Director and CEO of Aero Contractors, Captain Ado Sanusi, has wondered the rationale behind the levy, taking cognizance that the helicopter operators have been paying their obligatory taxes and charges in their operation.

“My position is clear, you do not charge for services you do not render. They say each landing on the platform you have to pay $300. Who built the platforms? FAAN (Federal Airports Authority of Nigeria) has no input or contribution in building the platform. So what is Naebi Dynamics providing? What are the services of Naebi Dynamics? They are providing no services. If they are providing no services for the helidecks, then why would they charge $300? What is the basis of charging $300? I still don’t understand why they would charge for landing on the platform or is it because you want to tax? Why don’t you go ahead and say for each barrel that we sell you want to take $200. For doing nothing, why don’t you take it from each barrel?”

Sanusi pointed out the impact of the charges and said, “For me in aviation it doesn’t make sense to charge for services you did not provide. What will be the impact, let us say the Federal Government agrees and keeps the charge, it means the cost of production of one barrel of crude oil will increase. So, we are shooting ourselves in the foot at the end of the day because no one would want to absorb the cost, it would go to the masses.

“Cost of petrol, kerosene, jet A1, grease will increase because the operators will transfer it to the oil and gas companies who in turn will transfer it to the cost of drilling the barrel of crude. You are not helping the economy by doing that,” he said.

The Aero boss also remarked that the operators are already paying taxes which they know why they exist, contrary to Naebi Dynamics charge.

“Remember, this aircraft when it is due for C check the operator will pay to NCAA. When the pilots are due for simulator refresher and they have to renew their licence, the operators will pay NCAA. The operator will pay for radio licence in the helicopter cockpit, the operator will pay all NAMA charges, the moment you file a flight plan. So, what added value have Naebi Dynamics put on the services NAMA or NCAA is providing? I am totally against charging for something you have not provided for. Naturally, in the civilised environment, when you are increasing the tax in aviation you sensitise the operators ahead of time, you tell them the reason. You tell them what you want to use the money for,” he said.

Meeting the Minister

An industry insider who also operates helicopter company, told THISDAY that the operators were waiting for the Minister to clarify what he intended to do “because the memo that has been circulated has no date and I have never seen any official document that came out from the government on the issue. So, we are waiting to discuss that with the Minister. Until then, we have nothing to say. We don’t know what the levy is; it is not documented or gazzetted in anyway. All the helicopter companies are fully regulated by the NCAA and everything we do, we pay for. Anytime we take off or land, there is a payment with NAMA, NCAA, FAAN.
We are waiting to discuss this with the Minister to know what it is all about. It has no provision under the law and we don’t know where it is coming from.”

Official documentation
The operator said that the notice about the levy that has been circulated as an official letter did not look like something coming from the office of the Minister because it was not dated and signed as it should.
“So, we can’t quote the letter. We don’t recognsie NAEBi because we don’t know who the person is. We deal with NCAA, FAAN, NAMA and the Ministry of Aviation. We don’t know any other organisation,” he said.
Effect on operation
On the effect of the levy on helicopter operation, he said, “It is obvious this levy can’t stand because it stands to kill aviation industry in Nigeria. There is no basis for it and we can’t even contemplate it. If the government wants to develop the industry according to their mantra, this is completely the opposite. It is not done anywhere in the world. There is no basis for it. Everything we do now is paid for.
“The 2022 Nigeria Civil Aviation Regulations, which was launched last year, increased some of our fees by 1,000 per cent. What used to go for N300,000 is now N3.6m. Certificate of Airworthiness (CoA) used to be N300,000 and it is now N3.6m. likewise all the charges. This was done last year.
“And we are being asked to pay another levy. I don’t think the government has the full fact. We are ready to dialogue with the government to show that we don’t know where it is coming from. How can we pay for services that are not provided for? This can’t even stand. We trust the Minister would give us the audience and he would listen to good reasoning,” he said.
It is hoped that the Ministry of Aviation and Aerospace Development will make out time and dialogue with the operators because not doing so may lead to the disruption of oil and gas operations in Nigeria.