The Central Bank of Nigeria (CBN) recently announced it had paid $64.44 million which they stated is the verified “backlogs” of foreign airline funds which were trapped in Nigeria. This is in addition to the $136 million previously disbursed. However, The International Air Transport Association (IATA) insist that $700 million remains blocked in Nigeria.
The issue of blocked funds has been raging for years and intensified leading to the exit of Emirates and Etihad from Nigeria in November 2022.
What are trapped funds?
Foreign airlines in Nigeria typically sell tickets in local currency, the Naira, despite most costs being in foreign currencies like dollars for services such as air navigation and ground handling. Trapped funds occur when forex isn’t available to repatriate proceeds from local ticket sales, due to regulatory or economic constraints, hindering capital movement and requiring negotiation and adherence to international agreements.
Why do airlines need to repatriate their funds?
The airline industry is a dollarised industry which means the majority of the fixed costs are in USD, e.g. lease and aircraft purchase costs, maintenance, training, and insurance. Airlines are typically part of a complex route and business network with profits centralised for maximum optimisation. All parts of the revenue centres need to contribute to the whole. Whilst route cross-subsidisation occurs, it is not usually intended as a long-term option for commercially focused airlines.
The impact of currency devaluation
A ticket sold at the end of 2021 would have been priced at NGN 411 per USD. In contrast, a ticket sold at the end of 2022 would have fetched NGN 448 per USD. As of February 2nd, 2024, the exchange rate stands at NGN 1400 per USD. This means that a $1000 ticket sold in 2021 would have generated NGN 411,000. However, if you were to convert that NGN 411,000 in 2024, you would only receive $293.57. This translates to a significant difference compared to the original $1000, representing a $706.42 loss per seat due to the exchange rate fluctuation. Imagine incurring a 70.6% forex loss per seat sold at that price!
Are trapped funds a new phenomenon?
Trapped funds are not a new phenomenon and it is not limited to Nigeria alone. Other countries have taken several measures to mitigate or reduce issues related to airline trapped funds, such as:
1. Clear regulations: Establish transparent rules for fund repatriation, offering clarity and predictability for foreign airlines.
2. Currency stability: Maintain stable currency conditions to minimise exchange rate risks, providing certainty for fund repatriation.
3. Open dialogue: Foster ongoing communication between regulatory bodies and foreign airlines to address concerns and find mutually beneficial solutions.
4. International agreements: Adhere to international treaties facilitating fund repatriation, ensuring a consistent and reliable framework for foreign businesses.
5. Flexible policies: Implement adaptable policies that can respond to changing economic conditions, maintaining stability while accommodating necessary adjustments.
What can an airline do?
If a foreign airline faces the challenge of trapped funds, it can take some of these steps to address the situation:
1. Engage in dialogue: Initiate communication with relevant regulatory authorities to understand the reasons behind the fund trapping and seek clarification on applicable regulations.
2. Work with authorities: Collaborate with the local regulatory authorities to find mutually agreeable solutions, possibly through negotiations or by providing additional documentation to meet regulatory requirements.
3. Legal advice: Seek legal advice to understand the legal framework and explore potential legal avenues to resolve the issue. Engaging local legal experts can provide insights into available options.
4. Diplomatic channels: If the issue persists, the airline can involve diplomatic channels through its country’s embassy or consulate to address the matter at a governmental level.
5. Industry associations: Leverage industry associations and organisations that represent the airline sector to seek support and advocacy. These groups may have experience in dealing with such situations.
6. Media awareness: If diplomatic and regulatory efforts prove ineffective, raising awareness through media channels can sometimes put pressure on authorities to address the issue.
What options do airlines have to alleviate the impact of trapped funds?
1. Alter sales currency: Airlines can sell tickets in more transferable currencies to avoid trapped funds in local currency.
2. Local payment currency: Airlines can pay local suppliers and services in local currency to reduce the need for currency transfers.
3. Inventory blocking: Airlines can block sales of lower-cost inventory to increase revenue per seat and mitigate forex costs.
4. Price increase: Airlines may increase ticket prices to hedge against future forex losses, preserving the fair value.
5. Website sales: Airlines can sell tickets on international websites to receive payments in the currency of their major costs and avoid forex issues locally.
What is the impact on Nigeria of not resolving trapped funds?
Trapped funds negatively affect air fares, reducing passenger numbers and service provider income. Disrupted local ticket sales harm travel agents’ earnings. Airlines cutting schedules or leaving Nigeria reduces connectivity, increasing journey times. Inability to repatriate forex hampers investment, leading to economic decline, unemployment, and increased business failures in aviation and beyond.
Sindy Foster; Principal Managing Partner: Avaero Capital Partners
Avaero Capital Partner provides advisory and consultancy services for airline businesses in Africa, Latin America and the Caribbean. www.avaerocapital.com
