High costs clip Nigerian airlines’ wings

High operating and maintenance costs are asphyxiating domestic airlines, putting pressure on their long-term sustainability.

Nigerian airlines are highly exposed to the foreign exchange as most of their transactions are carried out in dollars. And with the foreign exchange crunch in Nigeria, which has worsened in the last one year, airlines appear to be struggling to keep their planes in the sky.

Cost of operations are high, particularly as aircraft maintenance is done outside Nigeria. Coupled with this is multiple taxation from government agencies, which are affecting airlines’ bottom-lines.

“Foreign exchange issues have a direct ‘negative’ impact on the sustainability of any domestic airline in Nigeria. This FX issue has three direct effects on the domestic airlines,” Seyi Adewale, the chief executive officer of Mainstream Cargo Limited, told BusinessDay.

Adewale explained that, first, airlines need to procure practically all their spare parts and service materials in foreign exchange, noting also that the customs clearing exchanges are pegged to FX using presently high rates approved by the Central Bank of Nigeria (CBN).

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He said airlines equally need the scarce FX to buy or rent new aircraft engines that require urgent replacements due to ‘bird strikes’ and other similar occurrences.

“To further put this in context, if you bring an aircraft tyre at a simple cost of $5,000, you will pay a duty of approximately N4 million. Moreover, there are no duty waivers on aircraft tyres and the current customs exchange rate is N1,587.847 per dollar. Also note that these aircraft tyres wear out frequently and have to be changed as and when due. Also, the Nigeria Civil Aviation Authority (NCAA) inspectors have an eagle eye on them for safety purposes.

“This is why we clamour that our domestic airlines should expand their operations to include at least regional flights in order to earn foreign exchange to fix, in part, the current imbroglio. This strategy could help stabilise their FX needs,” Adewale further said.

Records show that some domestic airlines in Nigeria have active operations for between five and 10 years and subsequently become more or less incapacitated, barely struggling to stay afloat.

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This is attributed to the harsh operating environment in the country. Part of the reasons is also a lack of corporate governance and financial transparency.

BusinessDay’s checks show that in the last 28 years, over 30 airlines have shut down in Nigeria.

Some of the defunct airlines include: ADC Airlines, African International Airways, African Trans Air, Afrijet Airlines, Afrimex, Air Atlantic Cargo, Albarka Air, Al-Dawood Air, Arax Airlines, Barnax Air, Bellview Airlines, Capital Airlines, Central Airlines, Chanchangi Airlines, Chrome Air Service, Dasab Airlines, Earth Airlines, EAS Airlines, and Easy Link Aviation.

Others are: First Nation Airways, Freedom Air Services, GAS Air Nigeria, Hamzair, Harco Air Services, Intercontinental Airlines, Kabo Air, Meridian Airlines, Nicon Airways, Nigeria Airways, Okada Air, Pan African Airlines, Skypower Express Airways, Sosoliso Airlines, Trans-Air Services, Triax Airlines, UAS Cargo, Virgin Nigeria, and Wings Aviation.

Alex Nwuba, president, Aircraft Owners and Pilots Association of Nigeria/former chief executive officer, Associated Airlines, told BusinessDay that the economy has driven the exchange rate to a point where the sector has a naira revenue and a dollar expense, with the dollar segment rising consistently.

Nwuba said whether it is just buying parts or leasing aircraft, airlines pay in dollars.

“You sign a lease for $500,000 and at the end of the day, you expect to pay back N10 million. Soon, the airlines will pay back N30 million or N40 million. Where is that income going to come from to pay and service those obligations? So, the foreign exchange problem is what you would call an economic problem.”

According to Nwuba, one of the reasons why airlines have failed over time is lack of corporate governance.

He said airlines run by one man are great if they have the right boards that are independent to give their appropriate advice to the management.

He said airlines that have shut down in the past suffered the one-man overwhelming influence without relying on professional experience.

“In an industry where jet fuel burns in millions per hour, the regulator must look into the issue of the corporate governance and the way airlines are run -the same way it happens for financial institutions. We cannot just allow anything to go because that has always been the killer of the airlines even when the economy was better,” Nwuba said.

BusinessDay’s checks show that since the establishment of the Nigeria Civil Aviation Authority (NCAA) in 2000, domestic airlines on the register of the authority have reduced from over 40 to 13 today.

Some airline operators have been accused of diverting funds realised from ticket sales to other businesses. When aircraft maintenance is due, they struggle to pay the cost, which ranges from $600,000 to $1.5 million, depending on the type and age of the aircraft.

Olumide Ohunayo, industry analyst and director of research at Zenith Travels, told BusinessDay that to ensure airlines are sustainable, there is a need to do work on the regulations that would reduce the interest rate for the economy.

“Of what use will you have aircraft when you don’t have passengers with the purchasing power to fly. Today, airfare is reflecting the state of the economy. Cost of aviation fuel, the cost of operations, the high cost of power, among others, are high. If all these costs put together make the tickets very high and passengers are not flying, then you see there is a need to tackle the economy as a whole,” Ohunayo said.

John Ojikutu, industry expert and the CEO of Centurion Aviation Security and Safety Consult, said that the business plans of most Nigerian airlines have critical issues that should have been detected by the NCAA before their licence approvals.

Ojikutu said most of the business plans are recycled from those of the previous operators that used older airplanes.

“How many of them have operational bases that were used to determine their passenger projections, or are there operational bases approved for them by the NCAA? Did they consider the rate of the rise in the value of the dollars and fuel in the last five years in their business plans before and projected these for five years after?”