Addressing Nigerian Airlines’ Funding Challenge

The depleting number of operating aircraft in Nigeria’s domestic airline industry can be partly traced to the heavy capital outlay needed to acquire aircraft and the inability of local financiers to extend credit facility to the operators, a development that needs urgent attention, writes Chinedu Eze

Operating airline business is capital intensive because to acquire a brand new medium size aircraft could be very high, a development that has compelled airlines to access credit facilities from financial institutions. In many countries, airlines source long term loads with single digit interest rates that are adjustable and some of these loans come from overseas, mostly from import/export banks.

Arik Air was the first privately owned commercial airline that received comprehensive credit facilities to acquire aircraft from different international financial institutions and since then, such opportunities have become elusive because of the perception of Nigerian environment by financiers,  lessors and insurance companies until recently.

Cost of Aircraft

Buying a brand-new Boeing aircraft is a significant financial investment, with prices starting at $89 million and the cheapest narrowbody options are 737 family airliners, while widebody options start around the mid $200 millions.

According Simple Flying, The smaller Airbus, A220-100 has an estimated cost of $81 million, while the larger and more popular A220-300 is listed at $91.5 million. The smallest and rarest of the Airbus A320 family, the A318, is also the cheapest of Airbus’ offerings. The plane, known as the Baby Bus, has a list price of $77.5 million.

The A319 goes for about $92.3 million at list price. However, the new engine option, the A319neo, which thus far has orders for 91 jets, goes for $101.5 million.

Embraer aircraft could go from ERJ145, $21 million to E170, $41 million to E190, which is about $53.5 million. Price of Bombardier aircraft types popular in Nigeria, ranges from CRJ1000, $25 million, CRJ 900, $46.5 million and Q400, $32.2 million.

These are whooping sums of money compared to the current exchange rate of Naira to dollar and investigations show that Nigerian banks are reluctant to lend to Nigerian airlines, despite their outrageous interest rate.

Accessing credit for airlines

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

X-raying the Nigerian situation, he said: “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 also 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.

In a media interaction organised by Airbus in Abuja last year, aviation experts identified fluctuating value of the naira as one of the factors that discourage international financiers and other credit institutions from funding aircraft acquisition for Nigerian airlines.

The then Airbus Africa and Middle East Marketing Manager, Prajyoth Krishna Mirajkar had identified the prevailing challenges with Nigerian carriers then in terms of aircraft leasing and accessing credit facility.

He said that in Nigeria lessors found it difficult to repossess their aircraft easily and this had become a disincentive to leasing aircraft to domestic airlines. This was why lessors, international insurers and others involved in aircraft acquisition business describe Nigeria as high risk

They refer to this as jurisdiction risk. Also, those that would be willing to lease aircraft to airlines in Nigeria did so at outrageous price and most often may not lease aircraft on long term, which is known as dry lease.

Minister’s Intervention

It is the above problem that the Minister of Aviation and Aerospace Development was poised to solve by reviewing the Cape Town Convention and moving to meet the conditions that will enable Nigerian airlines lease aircraft at long term and also access credit facility.

The Minister had signed the Cape Town Convention Practice Direction by the federal government, which shot up the country’s rating from 49 per cent to 70.5 per cent by AWG last month and later signed the Irrevocable De-Registration and Export Request Authorization (IDERA), which would enable government to support a lessor taking his aircraft out of the country when there is infringement in the conditions of leasing the aircraft to a Nigerian carrier.

The Minister may have solved the major problem pointed above by Mirajkar, which prompted Aviation Working Group (AWG) to remove Nigeria from the watchlist and increased its rating to 75.5 per cent.

Expectations

Although Keyamo has facilitated a breakthrough with Cape Town Convention but it depends on individual airlines to push to take advantage of what government has made possible for them. This will include their operations standards, certifications, especially their IATA Operational Safety Audit (IOSA) and their goodwill in their past relationships with lessors and other suppliers.

The Managing Director/CEO of Aero Contractors, Captain Ado Sanusi, told THISDAY in Lagos on Wednesday that it was not yet a tea party because despite the effort made by the Minister of Aviation and Aerospace Development, Keyamo,  by properly domesticating the Cape Town Convention, the lessors, international financiers and others would have to wait and see the implementation of what was agreed on. They would observe whether the Nigerian government is keeping to their own side of the deal; whether airlines are also abiding by the rules, if a lessor wishes to repose his aircraft.

Sanusi emphasised that trust and goodwill have to be built first, so, it will still take some time before airlines would begin to reap the reward of what the government has dome to grow the industry.

“I wish to put this on record and give honour to who it is due. The person that enabled Nigeria to embrace Cape Town Convention was the former Director General of the Nigeria Civil Aviation Authority (NCAA), Dr. Harold Demuren. I must admit that domesticating it was difficult, but the present Minister made it possible and brought in the judiciary, using his experience as a lawyer.

“But trust has to be built and trust is not built in a day. The aviation industry deals with trust. It is not easy to access aircraft and credit facility to acquire aircraft, but little by litte we shall build the needed trust. This will start with the performance of Nigerian airlines with small engine leases, aircraft leasing, repossession. If they see the implementation as smooth, trust will be built. They will know it is not busines as usual. They will appreciate it when they know that no agency of government will be used to deter them from repossessing their aircraft. So, it is a gradual process. They will also like to see how the regulator (NCAA) will assist if they want to reposes their equipment. The next line is for our airlines to assess the leasing market and build trust with lessors and financiers,” he said.

A fortnight ago, NCAA organised a conference in Lagos that dwelt on financing the aviation industry. In the communique the agency issued at the end of the conference, it noted among other things that federal government through the Central Bank of Nigeria (CBN) should address the high interest rates payable by aviation operators on loans, especially the airlines. With the current 30 per cent interest rates payable by the airlines, the industry cannot survive.

The participants also canvassed for the establishment of Special Aviation Development Fund, dedicated for infrastructure development, safety enhancements, and human capacity building for the development of the sector in Nigeria.

The communique also noted that the high operating costs will continue to discourage investors, while prices of tickets will continue to escalate, which is currently the situation, remarking that for Nigerian airline operators to explore all the options of airline finance, which include external finance, bank overdraft, short term loans, trade creditors, they must be credit worthy and comply with industry standards, including the Cape Town Convention.

Government under the Tinubu administration has shown support for Nigerian carriers, but government has to go all the way to continue to support them; so that Nigeria will reap the huge benefit inherent in the country that has the highest number of indigenous travellers in Africa.