AM EDITORIAL: Airlines’ Financing Constraints Being Tackled In Nigeria
Airline business is capital intensive in nature and the profitability constraints that local airlines in Nigeria contend with, is a reflection of this fact. An airline needs cash, access to loan with single digit interest rate, good management and good financial planning to be able to survive.
Aircraft acquisition is one of the numerous challenges. The cost of acquiring a brand new medium sized aircraft is very high, beginning with $90 million and the cheapest narrow-body options are 737 family airliners, while wide-body options start around the mid $200 millions. Because of this, airlines are compelled to access credit facilities from financial institutions. Such financiers in many countries, offer long term loan with single digit interest rates that are adjustable. The limited number of aircraft in the fleet of many local Nigeria airlines is partly because of the heavy capital outlay needed to acquire aircraft and the inability of local financiers to offer single digit interest loans to airlines.
The international aviation community has over the years, perceived Nigeria as a high-risk environment for aircraft financing. This perception was influenced by factors such as fluctuating exchange rates, difficulties in aircraft repossession, and challenges in meeting leasing obligations. The difficulty in repossessing aircraft by lessors was part of why international insurers and lessors described Nigeria as high risk region or jurisdiction risk.
With foreign exchange fluctuations, an airline cannot plan well. Unlike in United States and Europe where transactions are made in dollars and euros and so there is relative stability in exchange rate, forex in Nigeria gulps high percentage of operating cost under bulk purchases in terms of volume in USD. When a scheduled airline for instance, sells a ticket and the naira depreciates while the fare remains same dollar rate, the airline ends up buying the dollar at the same rate that ticket was sold and that is a loss. This has been part of what discouraged international financiers and other credit institutions from funding aircraft acquisition for Nigerian airlines.
In an attempt to address this challenge, Nigeria’s Minister of Aviation and Aerospace Development, Mr. Festus Keyamo (SAN) in 2024, reviewed the Cape Town Convention (CTC) so as to meet the conditions that will enable Nigerian airlines lease aircraft at long term and also access credit facility. He ensured signing of the CTC Practice Directions by the federal government, which shot up the country’s rating from 49% to 70.5% by Aviation Working Group (AWG). 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 was also signed. AWG them removed Nigeria from the watchlist and increased its rating to 75.5%.
Airlines are supposed to share the insurance of their aircraft, 30% local and 70% international, but some lessors and aircraft manufacturers would insist on 90% to 100% international and in order to abide by the regulation of the National Insurance Commission (NICON), airlines also undertake the 30% insurance cover locally for the same aircraft.
Local airline operators had expressed uneasiness with double insurance premium payment for leased aircraft. They have been asking that NAICOM consider giving concession and waiver on leased aircraft used in Nigeria, since the lessors insist on full insurance of such aircraft with international insurers before releasing their aircraft to the airlines. The operators requested for waiver of local insurance for these particular aircraft types, while they insure the rest of their fleet with local insurers.
Since Nigeria does not manufacture aircraft and lessors to Nigerian carriers insist on full insurance of their equipment by international insurance companies while NAICOM insists to apply fully, the local content law to the users of such aircraft, this amounted to double insurance of the equipment and has negative impact on their over head cost, according to the airlines. Meanwhile, some local operators were also buying their insurance policy abroad despite the local content law because insurance rate in Nigeria was very high and operators were looking for ways of cutting cost.
To tackle this issue, Minister Keyamo met with Mrs. Jumoke Oduwole, Minister of Industry, Trade, and Investment and also met with Nigeria Insurers Association (NIA) over foreign aircraft financiers and lessors’ demand for international underwriters.
The main issue on the table was how to strike a balance between the demands of international aircraft lessors and financiers who often want the risk to be placed in the international market and the need to promote and protect local insurers vis-a-vis the local content requirements in Nigeria’s laws.
Addressing this issue on a long term scale would require Nigerian insurers trying to reach a compromise with their foreign counterparts on charging a single insurance premium on such aviation insurance risk where local airlines currently pay double premium. Local insurance companies could also strive to own aircraft and lease them to airlines just like their counterparts in other climes.
The cost of aviation fuel has also added to profitability drawbacks for local airlines in Nigeria. A “B737 burns between 3,500 and 4000 litres of fuel per hour” according to Air Peace Chairman, Allen Onyema, and if the aircraft is a wet-leased aircraft, another $6,000 per hour is paid apart from other payments. Meanwhile, revenue from ticket on that flight may not meet these expenses.
Today, most Nigeria airlines still fly aircraft to other continents for Maintenance Repair & Overhaul (MRO) at very high costs. Multiple taxes and charges paid to authorities and other stakeholders are equally part of airlines’ woes in Nigeria. Airports infrastructure constraints urgently require attention too.
After bail-out funds were released to airlines over a decade ago, Nigeria’s financial institutions became reluctant to invest in the aviation sector because of some operators’ failure to comply with terms. Based on measures taken so far by the current administration and transparency in financial dealing between Air Peace and Fidelity bank for instance, financial institutions and lessors have regained confidence and willingness to invest in the sector, even though loans are still being offered to airlines at rate of between 26% and 35%.
Addressing the numerous challenges of Nigeria’s local airlines requires collaboration of both airlines and the various stakeholders. Sustained periodic regulatory financial audit of each airline is equally very vital. AM
