Nigerian airlines are struggling with payment of insurance premiums for their equipment, aircraft maintenance, and purchase of spares as a result of exchange rate depreciation.
Airlines sell tickets in naira but pay for spares, aircraft maintenance and insurance premiums in dollars. They are facing higher operating costs as the naira has depreciated significantly against the greenback on the official and parallel markets.
The Central Bank of Nigeria had in June floated the naira and directed commercial banks to sell foreign exchange at market-determined rates.
Last year, airlines were able to access dollars at an exchange rate of between N400/$ to N450/$ in the Investors & Exporters’ window. But the current exchange rate of N785/$ makes it difficult for them to carry out their aircraft maintenance and pay for insurance.
George Uriesi, chief operating officer of Ibom Air, in his presentation at the 2023 AviaCargo Chinet Conference in Lagos last week, said the current exchange rate has led to high insurance premiums for the airline.
Uriesi described it as a major challenge to operators as aircraft and other equipment must be appropriately insured by the airlines before being deployed to service.
He said the situation needed urgent government attention, warning that it may lead to the collapse of some carriers.
BusinessDay’s findings show that it cost an airline an average of $500,000 to $1 million to carry out C-check (heavy maintenance) on an aircraft, depending on the age of the aircraft, which is done in 18 months.
When the naira-dollar exchange rate was N400/$, airlines paid between N200 million and N400 million to carry out C-check. But with the current exchange rate of N785/$, airlines have to pay between N393 million and N785 million to carry out C-check on a single aircraft.
Airlines were already paying high insurance premiums due to the country’s perception as a high risk operating environment and the alleged high insurance premium demanded by local insurance firms in Nigeria.
BusinessDay’s findings show that while Nigerian airlines pay 8 percent to 10 percent of the value of an aircraft to insure the aircraft, carriers that operate in Ghana, South Africa and other African countries pay two to three percent.
Also, airlines operating in Europe and the United States pay 0.5 percent to 1 percent to insure the same aircraft.
For instance, airlines operating in Nigeria pay an average of $1 million annually to insure a B737-300 aircraft while those in Ghana or the US pay between $200,000 and $300,000 to insure the same aircraft type.
With the current exchange rate, airlines that paid N400 million to insure a B737-300 aircraft when the exchange rate was N400/$ will now have to pay N785 million to insure the same aircraft.
BusinessDay gathered that because airlines were finding it difficult to pay for insurance, some tried to cut corners – a development that made the Nigeria Civil Aviation Authority issue a stern warning to the airlines. The regulator said non-adherence to Nigerian Civil Aviation Regulations on insurance cover will attract immediate sanctions, which will include the grounding of the specific aircraft and taking enforcement action against any airlines or service providers that defaulted.
Roy Ukpebo Ilegbodu, chief executive officer of Arik Air, had earlier explained to BusinessDay that when an airplane is going for a C-check, depending on the age of that aircraft, there are certain things the manufacturers will look at.
He said: “For instance, an airplane that has flown for 1,000 hours, there are things they expect. So, based on that, the checks will be done. As airlines carry out the checks, you may find out more than what the manufacturers will have recommended.
“You find things like corrosion for airplanes that have operated in our region because of the moisture. When you find corrosion in an airplane, the cost of repair sometimes will double. But the good thing is that Arik’s airplanes are very new; so you will hardly find corrosion in airplanes that are less than 10 years old.”
A source at Air Peace who spoke to BusinessDay on condition of anonymity told BusinessDay described the current situation as tough.
The source said: “Our spares and maintenance are paid in dollars. So it is biting hard on airlines. It is affecting our operating costs. Our operating costs have been increased by this increasing dollar rate.
“We just try to optimise our operations and expand our route network to stay afloat. We cannot operate in a vacuum. At some point, this thing will trickle down and it will affect the fares because we have to stay afloat to sustain our operations.”
The source disclosed that some of the airline’s aircraft were still outside the country on maintenance. “Not all our aircraft are back. We have a good number of our aircraft on ground but some of them are still out and we need to pay in dollars to bring them back. So it is also biting hard on us.”
BusinessDay’s findings show that domestic airlines put together had about 75 aircraft two years ago but they currently do not have up to 35 operating aircraft as many are either ‘Aircraft on Ground’ (unserviceable) or have gone out on maintenance outside Nigeria and have not returned.
Kingsley Ezenwa, head of corporate communications at Dana Air, told BusinessDay that dollars have not been readily available to airlines when needed, stressing the need for a special window or consideration for airlines.
He said: “Aviation is a key driver of any economy but airlines suffer the brunt of this instability and scarcity basically because the airlines pay practically for everything in dollars and charge in naira.
“What this current situation would mean for airlines is an increase in cost of operations because if you have to bring in an aircraft from maintenance abroad or pay for spares, you know what this means considering the present situation. But for us Dana Air, we would continue to try our best to keep operations running and review where necessary as every sector has to find a holistic way out of this commercially while hoping and appealing to the government to take urgent steps to address the situation.”
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