Airlines’ new funding model adapts to the rising cost

Airlines and private jet operators have adopted a new aircraft ownership model where private individuals now buy aircraft for airlines and jet operators having valid Air Operating Certificate (AOC), and revenues from seats are shared between the airlines and the aircraft owners.

BusinessDay’s checks show that this is the new strategy adopted by airlines and private jet operators who do not have funds to buy new aircraft to increase their fleet.

Concerns have however been raised over the new ownership model, as aircraft owners could easily hide under the model to launder money, according to some aviation experts.

But Sindy Foster, principal managing partner, Avaero Capital Partners, says she thinks Nigeria’s aviation sector is starting to see something very dangerous happening as the source of these funds is a potential problem.

“I have long wondered if we are seeing money laundering activities happening in aviation in Nigeria. Is money from anyone, via any means ok? Isn’t this part of the problem Nigeria is facing generally? Should it be encouraged or should more be done to ensure good corporate governance and transparency?” Foster asks.

The model is similar to a ‘wet lease’ arrangement, where a person agrees to provide an aircraft and at least one crew member. Ordinarily, the parties entering into a wet lease arrangement are certificated air carriers such as airlines operating under 14 CFR Part 121 and charter operators conducting operations under 14 CFR Part 135.

With the new model adopted by Nigerian carriers, individuals with no business in aviation either buy the aircraft or fund the airline to get these aircraft, and proceeds from this arrangement are shared between the individuals and the airlines. In most cases, individuals get a major chunk of the proceeds.

Experts say this arrangement may help increase the number of aircraft in a fleet and could be the easiest means for individuals to put money into ‘untraceable’ investments to avoid being identified.

Aero Contractors recently acquired two B737s, expected to boost her profile and earn her needed revenues.

Checks show that the planes belong to some individuals who are entitled to almost 95 percent of the revenue made on any of her flights operated using these planes.

“These men are entitled to earnings from 165 seats of the 180 seats in the airplane, meaning that Aero Contractors as an airline enjoys only 18 seats out of the entire seating,” a source discloses.

Also, on these aircraft are the presence of foreign crew (Estonians), making passengers ask if the planes were wet-leased from Estonia.

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However, Aero Contractors says it took delivery of the two Airbus 320 from Heston Airline based in Lithuania, but further discloses that two planes were leased by House of Five A’s.

Further checks show that House of Five A’s company is incorporated in Abuja, Nigeria, and registered on October 26, 2015, but its current status is unknown.

A source, who craves anonymity, says some private jet operators have on their fleet aircraft belonging to unknown persons and the Nigeria Civil Aviation Authority (NCAA) does little or no background checks on the ownership of the planes.

Experts say the trend is new; instead of going through the AOC process, private individuals just buy aircraft and put under someone with AOC, even for portfolio AOC holders.

Arik Air has a similar trend to Aero Contractors among other private jet operators.

But Sam Adurogboye, public relations officer, NCAA, tells BusinessDay that it is not the person that owns the aircraft that matters to the NCAA but the airworthiness of the aircraft.

“NCAA has the details of all the aircraft operating in Nigeria. A comprehensive audit must have been carried out on the aircraft. You can own an airline without buying a single plane. It is cheaper to lease an aircraft than buy one.

“If you buy an aircraft, you will pay for maintenance and insurance costs, but if you lease, the owner of the aircraft will bear the costs. So, if operators now lease aircraft instead of buying, it is not out of place,” Adurogboye states.

Ibrahim Mshelia, the owner of West Link Airlines Nigeria and Mish Aviation Flying School, notes that he personally sees nothing wrong with any rich person buying or paying the cost of leasing an aircraft to be operated by an AOC holder.

Mshelia says the agreement of how much the AOC holder should get is between the two parties, saying, “If you are a smarter businessman, you get better benefits. If you are desperate, you also accept the hard term till your head is over water then you renegotiate.”

The deal with Aero is another model but unknown and new to the Nigerian environment, but it doesn’t mean it is a fraud or it is wrong, as they met all economic and safety requirements for the NCAA to approve it, he states.

Daniel Young, an aviation analyst, says the sector is suddenly awakening to the realities of the source of funding.

“Someone converts public funds to private money he cannot take to the banks for fear of being caught but decides to push the stash through an airline operator to conduit it via the purchase of aircraft for a business. Does it make a legitimate business model?” Young asks.

“The aviation sector in Nigeria has a spot and react policy and that is what dampens creativity in the sector. Why do we always have to wait until something happens before we begin to address it? What is wrong with pre-empting the event and providing for it? This issue we are treating with kid-glove will get to the point where the real owners of these aircraft might begin to insist they must provide their own aircraft conductors,” he states.