Porous airports, FX rates, raise cost of aviation insurance in Nigeria

Failure to meet internationally stipulated air safety and security standards is continually increasing the premium for aviation insurance in Nigeria.

BusinessDay’s checks show that while more developed countries in Europe and the Americas pay insurance companies less than 0.5percent of the value of an aircraft as annual insurance premium, Nigeria pays as high as 5percent or more, of the same value, depending on the lease condition.

On August 11, 2016, the International Civil Aviation Organisation (ICAO) West and Central Africa, signed a Memorandum of Understanding with the Nigerian Civil Aviation Authority (NCAA) and the Federal Airports Authority of Nigeria (FAAN). All parties agreed to ensure certification of Lagos and Abuja international airports in line with ICAO standards and recommended practice by May 2017.

However, the  NCAA has once again failed to certify the Mutala Muhammed International Airport, (MMIA) Lagos as scheduled.

As part of requirements for ICAO certification, an airport must have operational and perimeter fencing, certified aviation security personnel, state-of-the-art navigational equipment, while the personnel must be regularly trained and retrained.

Other conditions include standard runway and runway strength known as the pavement classification number (PCN) which enables airports and airlines to know if a given aircraft could put undue stress on a runway, non-interference from government, adequate fire tenders, standard instrument landing systems, fuelling, baggage handling, apron and quick response to distress, among others.

“The cost of insuring aircraft is so high in Nigeria because of claim experience. There have been series of aircraft accidents in Nigeria and the environment is also not safe. These are what drive rates.

“We look at different factors before we know how much we want to charge. The rates are not determined by us, the rates are determined by foreign reinsurers who take the bulk of the risks. For an average aircraft in Nigeria, we retain maybe 20 to 30 percent risks, the remaining 70 percent is insured abroad,” Bode Akinboye,  Group Managing Director of Standard Alliance PLC told BusinessDay.

Akinboye explained that most aircraft in Nigeria are on lease and the lessors have global insurance covers with their international insurance companies, but in order to comply with Nigerian laws, airlines still have to pass it through a local insurance company.

“Any insurance company that takes up a business knows that we are in business of risks management. If they cannot carry it, you take it to the international market,” he said.

BusinessDay’s checks show that currently, there are eight indigenous commercial airlines in operation, with a total of 69 aircraft. Out of this number, 32 are wide-bodied aircraft, ranging from the Airbus A330-200 to Boeing 737, 747, 767, 777 and 787, which operate long hauls. Others are Bombardier Dash 8 Q400, CRJ 900, CRJ 1000 and single-aisle short to medium range narrow body jets that operate short hauls.

According to information provided by the airlines, a breakdown of how much the airlines spend on foreign insurance annually, is as follows. Arik Air pays $9.6 million for its 26 aircraft. MedView spends $1.5 million for its five aircraft,  Aero Contractors spends $1.5 million  for its five aircraft.

Air Peace spends $2.7 million for nine aircraft, First Nation $600,000 for two aircraft, Azman $1.2 million for four aircraft, Overland $3.6 million for 12 aircraft and Dana Air  $1.8 million for six aircraft. These insurance covers amount to a total sum of $69.22 million annually.

A Boeing 737-500, which used to go for $120, 000 dollars now attracts $200, 000 monthly. With an exchange range of $305 to a naira, this amounts to a sum of N61million.  For Next Gen aircraft, the lease has risen to $280,000 dollars per month from $160,000  per month. This amounts to N85.4million.

“The cost of aircraft insurance in Nigeria is high because the risks are high, or even higher in our operating environment than what they are in other places, particularly if compared to Europe and the United States.

“Are you going to talk of safety and security infrastructure within and around our airports or even in our country? Most European and US airlines flights into and out of Nigerian airports do secondary security screening on their passengers, carry-on luggage and checked in baggage, irrespective of the primary ones done by FAAN,” John Ojikutu, former Commandant of the Murtala Muhammed International Airport (MMIA) told BusinessDay.

On the safety side, Ojikutu said that only very few Nigerian airlines have the International Air Transport Association (IATA) safety certification needed for any concession on insurance, which is done mainly with foreign insurers, particularly with the Lloyd in the UK.

He recalled that the situation of foreign exchange strains got so bad at a time that some domestic airlines had to insure their aircraft in Russia because of the cost.

“Howmany airlines with records of air accidents have sufficiently paid the victims of their accidents? Has the NCAA been keeping watch over airline operators, including government operators like FAAN and ground handling operators like NAHCO and Sahcol, with inadequate insurance cover?

“How many operators or stakeholders are aware that the Nigeria Civil Aviation Regulation (NCAR) part 18 provides that the international airports are expected to be insured for $250million  and the domestic airports for $100 million? How many ground handling operators are insured for $100million, as provided by the NCAR?,” an operator who craved anonymity asked.

The operator stressed that these are huge sums that not many banks in Nigeria can handle and these are sums that a typical Nigerian operator is incapable of paying. Therefore, there are a lot of insurance defaults and breaches of the national provisions contained in the NCAR, adding that if operators can’t meet up with the national requirements, then they cannot meet the international standards.

Allen Onyema, Chairman, Air Peace airline, said besides the cost of aviation fuel, which constitutes over 40 percent of airline’s operational cost, airline insurance erodes the revenue of airlines.

Onyema noted that insurers designate Nigeria as a high risk environment and therefore, multiply the cost of aircraft insurance, noting that with the low value of the naira against the dollar, it is exorbitant paying foreign insurers to insure aircraft in Nigeria.

“Nigerian airlines pay over five times what other foreign airlines pay for aircraft insurance and aircraft leasing. They consider factors such as environmental risks and insecurity at the airports, amongst others,” he added.

 

IFEOMA OKEKE